A Journey Through Technology Investing Over Time - IBKR Campus (2024)

Where does an investor start on his or her journey when trying to identify technological trends? In this episode, Alexander Gunz of Heptagon Capital explains his methodologies when searching for tends that are set to become tomorrow’s next big thing, and how to invest in them.

Summary – IBKR Podcasts Ep. 155

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to today’s episode. My guest today is Alexander Gunz, who is a fund manager for Heptagon Capital in London. Welcome, Alex.

Alexander Gunz

Hi. Thanks so much for having me, Andrew.

Andrew Wilkinson

You’re very welcome, Alex. Let me give the audience a bit of background. I started following Alex’s work several years ago. We worked on a webinar together here at Interactive Brokers and I signed up for his occasional newsletter. And it’s one of those newsletters that I’d get in my inbox every, I don’t know, week or couple of weeks and I always make a point of reading it. Alex is a great writer, but he’s also very good at spotting investments in technology and looking at trends. That’s what I find really incisive. So, Alex, in a nutshell, tell us about your role of Heptagon Capital and about your investing premise.

Alexander Gunz

Well, thanks, initially, Andrew for the very flattering words and hopefully I won’t disappoint any of your listeners by everything I have to say. Just by way of background, I have a career of almost 27 years in finance. I’ve been at Heptagon Capital for over 13 and Heptagon itself, we were founded in 2005 and manage and advise on over $13 billion of assets.

And I have an amazing role at Heptagon in the sense that I run a global equity fund there which has a thematic bias. So effectively, I was given a blank sheet of paper when I started at the organization and the angle was simply to develop a fund or strategy that was very simple but very differentiated.

And our strategy is called future trends and the angle is very, very simple. We try and identify long-term trends that we believe are going to grow in importance broadly, regardless of what happens to GDP, where governments and regulators, if they’re present in that field, are tailwinds rather than headwinds for the sector or the industry.

And then what we try and do is marry both a top-down view of the world, hence all the writing that I produce with the bottom-up, more fundamental stock picking approach.

Andrew Wilkinson

Go back in time and give us an example of a successful investment. How does that investment process work? What is the investing journey? What does that look like?

Alexander Gunz

It’s a wonderful question and I guess it can be answered or approached in many, many different ways. I suppose two framing observations would be the following. Anyone who has studied or has an awareness about basic economics will be familiar with the idea of allocating scarce resource efficiently, and I think almost every listener to this session will be aware that we have a broadly growing population and shrinking available resource on the planet.

And therefore, the role of what we try and do is to try and identify ways of solving this problem. And we’ve argued very consistently that technology is an enabler. It is a means to an end to help solve this problem. So, I think really what we try and do is we identify different verticals, if you will, different areas where we can see technology serving as an enabler. We believe or we want to try and find those areas where there is a very long runway ahead, so a lot of opportunity. And then that’s almost the easy and inverted commerce part of the process. The much harder bit is identifying businesses that can benefit from those trends. And I think to give our listeners one case study, dare I say it, I’d almost like to highlight something very basic fundamental and obvious.

We’ve been invested right since day one in this strategy, but where we’re still incredibly excited. And it’s the following. Think about it like this. When you go and buy your morning coffee or you want a new pair of jeans or something, the majority of people you know in your circle will be tapping with a piece of plastic. They will be using their iPhone or their iWatch in order to complete that payment. And that’s great and it’s totally normal in London, in New York, in many other cities and countries around the world.

But I think the key point that we would like to highlight is that when you think about the volume, and I’m stressing that word volume, rather than the value of all transactions that are conducted globally, only about 25% of them are done digitally today, so that’s quite remarkable. Think about that.

3 in 4 payments by volume are still done using cash at present. And whilst MasterCard and Visa might be names totally familiar to everyone listening to this call, we think businesses such as those are still in very early innings. We first wrote about this trend back in 2013. We were investors in this trend in 2016 and it’s incredibly interesting. Whenever you listen to or you meet with any of the large players in this field, it’s abundantly obvious to me anyway that there is still a long runway ahead. A lot of it is about reducing friction and also from a sustainability point of view, it is about accelerating financial inclusion.

Andrew Wilkinson

One of the things that I’m pressed about with your newsletter and some of the content that you provide is you really dig down on an everyday basis, you go and visit people. What does that journey look like? How do you get involved in that and what does it involve?

Alexander Gunz

Well, it’s another great question and I think the way I’d frame an answer to that would be as follows, Andrew. In the sense that, look, our strategy, we’re investing for the long-term. It’s also a concentrated portfolio with very low turnover.

So we don’t need to spend a lot of time constantly searching for brand new ideas or additions. We don’t tend to get too excited about quarterly results or about numbers. And the reason for highlighting those points is that it frees up a lot of time to actually do that fundamental sort of “kicking the tires” research. And I guess some of it dates back to my background as an undergraduate student. I studied liberal arts/philosophy and it was a very important part of my degree.

And really this idea of an unexamined life is an incredibly important one. You never stop learning, and therefore a lot of what we do, as you kindly referenced, is actually being out there, spending time, meeting businesses within any given ecosystem, attending conferences. And really as much as anything, trying to identify not just the winners of today, which will be the winners into the future, but also the next generation of winners as well.

So whenever I tend to do a business trip and I’ve been to the US three times in the last year, it will ideally be to see a combination of businesses that we already own and invest in we know well, other businesses within that ecosystem, and also private businesses, as well.

Andrew Wilkinson

So it’s easier for you than it is for a regular investor or somebody who’s just a part time investor. How would you advise somebody to keep up with what’s happening in the investing world from that perspective?

Alexander Gunz

The simplest answer to that question, Andrew, is to number one be incredibly curious. Number two to try and take your information from a range of different sources. And I guess the way we’ve always tried to do things here at Heptagon Capital is to try and create products, create strategies that are simplified yet differentiated, And so, reading in a world of say Substack or whatever it might be. Reading interesting content on channels like Substack or LinkedIn from people who have a diverse range of opinions I think is probably the healthiest approach that a retail investor could take.

Andrew Wilkinson

Alex, you gave the example of 3/4 of payments not currently done digitally. Tell us about some of the other ordinary yet brilliant technologies that might just be around the corner that you’ve learned about.

Alexander Gunz

It depends how long we’ve got in terms of answering that question. But maybe just to call out a couple of others, Andrew, where we’re still, to my mind, in an incredibly early innings is that I think everyone listening to this conversation between us will be fully aware of how climate change is occurring. For the last few years, and probably in 2024 too, we will see the warmest year on record.

Clearly there are a whole range of ways in which this problem can be tackled, but I think when we have done the work on and invested in a couple of renewable businesses, the fact or the statistic I keep coming back to is that 10% of all electricity generated globally comes from renewable sources today.

So in other words, again, there is a huge runway ahead. And I think what’s really interesting is you’ve almost got two different factors driving the transition, if you will, from fossil fuels to renewable.

Number one is the green environmental imperative and number two is this idea of energy independence.

And I think whether it is war on Europe’s borders in Ukraine or a sort of increasing global concern, at least in the West, about the rise of China, the idea of moving to energy independence is something which we think is not going to go away anytime soon.

So that would be one trend I’d call out. and just to mention a second totally different one, Andrew, for the benefit of your listeners and this is the trend about diabetes and obesity.

I think in the last year what’s really changed is just how much the awareness of anti-obesity drugs like Ozempic and Wegovy has sort of become developed in the in the public mind, in the public consciousness.

It would be fair to highlight that we first identified and wrote about this trend as early as 2012. We first started investing in it in 2016 and just to frame how excited we are about the opportunity, again, when you look at the runway ahead, I think the figure is somewhere between only 10 and 15% of people who suffer from diabetes are in good control of their condition today.

And when you think about obesity, it is fewer than 5% of people who are managing the obesity challenge with prescription drugs today. So we think that the benefits in terms of people living longer, reducing the cost burden on health services could be significant as this trend accelerates going forward.

Andrew Wilkinson

Tell us about some of the mind-blowing technology that you’ve come across from month to month.

Alexander Gunz

We continue to be mind blown by many things. And whilst we’ve avoided talking about AI so far, which in some ways is quite refreshing, I’ll come on to that in half a moment. But I think one other area that we are consistently interested in and excited about is food innovation.

And this in some ways comes back to the idea of efficient allocation of scarce resources. How do we feed a growing, urbanizing, increasingly wealthy population? And just to call out a couple of examples, when I was in California last month, I met a business there that is basically growing fish, growing salmon from a cellular base in a laboratory. Super exciting.

And actually later on this week in in the United Kingdom, I’m going to be travelling to see a vertical farm. So effectively a warehouse where you are growing vegetables and herbs under ultraviolet light. And this is coming at this problem of how do you feed a growing population? And indeed, how you feed that population sustainably from two very different angles?

But I think given that eating is so fundamental to what we do as humans, and there are also investment opportunities in that field, we can’t help but be excited by some of the developments going on.

Andrew Wilkinson

What about say over the rest of this current decade, the 2020s? What technological innovation are you most excited about in that time?

Alexander Gunz

I think, Andrew, perhaps what you’re asking by another way there and it’s almost a segue to what I alluded to earlier on and it is the presence of artificial intelligence. And whilst it is an incredibly overused term, think about it as follows. Every listener I’m sure will be familiar with ChatGPT. And for those who don’t know what the GPT stands for, it is an acronym for Generative Pre-trained Transformer. Now, without going into the detail of what that means, I would say forget that technical term. The way you need to think about GPT is actually with the following acronym. Think of AI as being a General-Purpose Technology.

And we’ve had a number of these in the lifetime of sort of modern humans, if you will. Starting with steam, the industrial revolution, then electricity, then telecommunications, and obviously much more recently, the Internet.

And I think with all of these developments, they seemed incredibly novel on day one. There was a lot of resistance and skepticism, but now they are so ubiquitous, so integrated and we almost could not do without them. Now a couple of other observations here.

The advent of any General-Purpose Technology is almost certainly not going to be linear. Bill Gates, I believe made a very famous observation once that nearly everyone tends to overestimate the potential of a technology in the near term but underestimate its potential in the longer term. I think that’s super important.

The other observation I’d make and again why one almost needs to have a sort of decade-long view on a topic like this would be as follows. If you wind the clock back to let’s say the late 1990s, nearly everyone in the world of telephony, at least here in Europe, had a Nokia mobile handset. Maybe in the states it was a Motorola one. And these were handsets with buttons on. They may have had an aerial on the top.

And if you had shown someone in 1999 and said imagine the iPhone, I have an iPhone 14 and show them an iPhone 14. And this is a very sleek, lovely, designed bit of technology. There are no buttons on there, as you know. There’s no aerial. It’s a big screen.

And we could be doing this podcast now, even with live video via a pair of iPhones, and there would be 0 latency, and somebody 25 years ago would not have been able to get their head around that. They would have said this is magic, it’s impossible.

And I almost think that if we as humans, let alone investors, try and project the ways in which we will be using AI in a generations time, I think that it’s almost impossible to do that, but it will occur in life changing ways.

Andrew Wilkinson

I want to turn now to how technology changes industries. It’s not always about a widget or an app or even a self-driving car, but it can be about the way that we carry on our lives.

How is technology making the environment better, Alex?

Alexander Gunz

Well, that’s a great point, Andrew. And it comes back to my earlier observation about how we have always argued that technology is an enabler. It’s a means to an end.

And actually, I was at a conference in fact earlier this morning here in London where I was hearing the argument about why we need to move data from an on-premise solution to a cloud-based solution. And again, when you think about the investment opportunity, everyone’s heard me say a couple of times, it’s all about long runways ahead.

And only about 20% of all workloads have been moved into a cloud environment. And your carbon emissions as a business from operating in a cloud environment relative to on premise, all other things being equal, and bear in mind, I’m not a technology guy, you’re looking at a carbon emissions reduction of up to 80%. And that’s pretty major.

So that’s a great example of the empowering, environmental benefits of a technology. Just to mention a couple of other really quick ones, which I think are super interesting. We talked about food innovation earlier on. We talked about renewable energy.

So in the world of food innovation, think about it like this. Historically, if you were a farmer, you would catch your fish, a salmon farmer, let’s say. You would catch your fish based on look and feel. Now we’ve sort of moved from look and feel to information and fact. Today many fish will have little RFID sensors embedded in them. You can analyze, predict when is the optimal time to harvest your salmon, if you’re farming it commercially, based on prior seasons, based on the mix of protein content, let’s say, and fat content, and that’s a great advantage. You have better quality fish, you have lower wastage, lower mortality rates.

And then to give the example of where technology is helping in a field like renewable energy, think about it like this. Put a wind turbine up somewhere. That’s great. It’s a hardware sale. But actually, what does the wind turbine do? Well, it generates power based on how the wind is blowing.

So if you have a bit of predictive software that says, hey, today the wind is blowing from the north at 10 miles an hour, you need to set your gearbox at speed X. That’s great. And then tomorrow the wind’s flowing from the South at 20 miles an hour. You need to set your gearbox to speed Y. And this is the exact time when you make the switch from X to Y.

Again, that’s a great example of technology being an enabler, helping drive efficiencies both for the owner of the wind turbine and for the environment as a whole. And that’s the sort of thing we get quite excited about.

Andrew Wilkinson

Now, technology, yes, is very exciting. Let me ask you though, Alex.

Are you optimistic or pessimistic about the current trends in technology? Are there any dangers or pitfalls within particular segments we need to be concerned by?

Alexander Gunz

I mean, I think that probably any fund manager running astrategy that’s premised on future trends is likely to be an optimist, Andrew, almost by definition. And as we’ve said, we are believers in technology as being an enabler, it’s an empowerer, it’s something which is able to create solutions to quite intractable problems.

I think the two things I’d highlight is number one. Being wary of unintended consequences. There is a tradeoff. There’s always been a tradeoff, I think between more efficiency, more productivity and more surveillance or loss of privacy. And particularly with AI, if we had more time, we could talk about the whole ethics debate around that. That would be point one.

Point two, and this is something we talk about regularly in our conversations with our investors about technology, about future trends, is that it’s really important to be able to separate hype from reality.

There are certain segments or there have been certain segments that we have always been very wary of. An example would be the Metaverse. To call one out. Another example would be hydrogen, where we think those trends are perhaps almost sort of too early to invest in at this stage. And we would need to see a little bit more substance before being fully comfortable.

Andrew Wilkinson

My guest for this episode has been author and fund manager at Heptagon Capital, Alex Gunz. Alex, thank you very much for joining me today.

Alexander Gunz

An absolute pleasure, Andrew. Delighted to have been on the program.

Andrew Wilkinson

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