George Saffaye, BNY Mellon IM
Saffaye is on a team that manages the firm’s global equity strategy, which invests in companies addressing mobility, such as autonomous and electric vehicle makers and their suppliers, as well as mobile ride-hailing services. The top three holdings are optical product maker Lumentum (5.26%), On Semiconductor (4.92%) and auto components maker Lear (4.49%).
Saffeye told FSA during a recent trip to Hong Kong that a major concern when investing in early-stage technology is whether the companies are willing to continue investing in research and development. The concern has come to the forefront in 2018 with the return of market volatility and talk about slowing global growth.
But he does not believe negative sentiment will lead to innovative mobility companies reducing R&D expenditure.
“These companies cannot afford to lose their competitiveness at the early stage,” he said. “If you rationalise the business now, other companies that are well capitalised will continue to move on and to become more dominant.”
In addition, he said a positive is that many companies are holding a high cash level on the balance sheet, mainly due to the tax reform in the US. “The reform has encouraged tech companies to either do share buybacks or expand through acquisition and reinvesting.
Timeline for growth
The risk of picking a winner is high because autonomous and electric vehicles, and smart city facilities remain largely in an infancy stage, leaving room for various upgrades and competing innovations to gain traction.
“Electric vehicles are in the early stage of being deployed and technically, there are no true autonomous vehicles available for sale yet at this point.”
To help address the challenge, in the investment process his team establishes a timeline that forecasts how each company will likely monetize its innovative technology. The timeline is typically 18-24 months and it is used to evaluate if a company is growing revenue in line with the forecast as well as helping to determining upside of the stock price, he said.
Sell signals for this strategy are rather simple, he noted. “Either the companies have sluggish growth in their mobility innovation business segment or a faster-than-expected stock price increase reaching the internal price target. Either can signal a sell-off.”
Although the strategy does not hold a bias toward small or large-scale companies to include in the investible universe, Saffaye noted that the under-researched small and mid-cap companies are favoured because they may have been overlooked by outside analysts and researchers.
Additionally, higher potential returns tend to result if the team recognises the next leading innovator before the market does.
However, he said the strategy cannot avoid including the mega-cap companies that have been dominant in the space because of their massive influence and fast growth.