The Cutting Edge: Not Just for Tech Companies Anymore
The new US administration’s immigration policy may have angered some technology-sector executives, but the Trump administration has signaled an intention to put technology at the heart of its economic roadmap. There is already plenty of evidence, however, that technology-driven innovation is affecting a wide range of sectors, from automotive to defense. Here Franklin Equity Group’s Matt Moberg and Serena Perin Vinton explain why identifying innovation is central to their investment approach.
Having our global headquarters in the midst of California’s Silicon Valley gives us a particular insight into the development of the technology sector. But it is increasingly clear to us that the influence of technology stretches across more than just a single sector. We’re seeing the convergence of technology with other sectors to drive innovation.
This convergence trend seems to us to have been born out of necessity. Many industries have found that they must innovate, partly because the growth environment has been slow, so productivity gains have become increasingly more important. These industries have been adopting technology to eke out incremental growth or productivity to drive earnings growth.
In the financials sector, for example, we’ve witnessed a revolution in the area of payments as well as the growth of “fintech” companies, which use technology to make financial services more efficient for end-users.
Elsewhere, the rise of artificial intelligence is now permeating multiple sectors. The automotive industry, in our view, is a sector that is innovating at an incredible pace. Cars—particularly self-driving vehicles—are becoming more connected, which helps with efficiency and safety, and they’re requiring more sophisticated software, sensors and, naturally, connectors.
We believe the evolution of the automotive industry represents true innovation, and it’s happening far faster than we had ever anticipated. Self-driving trucks, for example, could soon be a mainstay on the highway, transporting their cargo across the country. A proliferation of self-driving trucks could disrupt a variety of older sectors. They are most disruptive to labor as the necessity of a driver is eliminated, thus reducing costs. Not only do self-driving trucks lower labor costs, but also potentially increase driving efficiency, which would reduce fuel costs. We could also potentially see increases in safety and lower insurance costs.
Our investment approach is to look at companies that are targeting and supporting the progression and innovation in the automotive market, such as semiconductor developers or connector, sensor and switch manufacturers.
Outside of the automotive area, we favor industrials in general, as the sector has traditionally offered long-duration growth. It’s also quite a diverse sector, with several sub-segments such as commercial aerospace, defense and transportation, and generally enjoys large barriers to entry.
Many factors are spurring growth in a great number of these businesses. The US defense industry, for example, has seen relatively little investment over the last eight years. But we expect President Donald Trump’s administration to likely increase defense spending in a variety of places, not only on traditional areas such as aircraft carriers and submarines, but also on advances that could end up benefiting consumers worldwide.