25 February 2020
Amati was founded in January 2010, in the wake of the Great Financial Crisis, with assets of just over £20m under management. The decade since has been a remarkable one in so many ways, a coming of age both for Amati as a business, which now manages £600m, and for the age of digital technology, the origins of which lie at the start of an industrial revolution which can be thought of as dating from the first commercial personal computer in 1971. Being a fund manager requires us to understand the present in order to think intensely about the future. So, reflecting on the sweep of the past requires pausing for a different mode of thought.
Let’s start with some contrasts. Ten years ago many investors had been so traumatised by the 2008 crash that there was a huge reluctance to take stock market risk again. Investors were easily spooked. Quantitative easing and ultra-low interest rates –the monetary policy antidotes to the crisis –were new measures greeted with much suspicion. Capital was scarce, and many of the large fund raisings on the stock market were financial rescues of one kind or another. The best stocks traded at an earnings-yield (earnings per share divided by share price) below 10%; most did not. 20% or higher was not unusual.
Investors have made such phenomenal gains from stock markets over the last decade that today a new acronym, FOMO –the Fear of Missing Out –has entered industry parlance. And rightly so, as anyone who has relied solely on cash deposits over the last decade has impaired their financial position greatly. The highest rated stocks now trade at an earnings yield below 3%, with 10% or higher the territory of those heavily out of favour. It would be wrong to conclude from this that it is now too late to invest in the stock market, because no-one can say when this trend will end or reverse. But it would be right to conclude that we should only invest in the stock market fully mindful of the risks of doing so, understanding that returns over the next decade are unlikely to match those over the last ten years. The main problem with FOMO is that people forget that markets can go down.
Inflation, the spectre which haunted late 20thCentury Britain, features as the dog which didn’t bark over the course of the last decade. Where did it go? Simplistically perhaps, we can say that it has gone into the prices of “risky” assets –above all, equities and real assets such as property. These price increases don’t get directly measured in the RPI or CPI indices, as the rise in asset prices is broadly offset by the decline in interest rates and mortgage payments.
Above all, the last decade has been a golden age for growth investors. The economist Carlota Perez has analysed the sequence of industrial revolutions over the last couple of centuries. She describes two broad phases for each, punctuated by a crisis. The first is the Installation Phase, which has two sub-phases of Irruption and Frenzy. The second is the Deployment Phase, which also has two sub-phases of Synergy (which she calls the golden age) and Maturity. This has provided a good road map for the revolution based around digital technology.
On Carlota Perez’ road map, the sub-phase of Maturity comes next, and it would not be unreasonable to believe that it has already started. It will be characterised by an increase in regulations, an adjustment of the global tax system to accommodate new trading patterns, a better understanding of the problems that the new technologies bring as well as the possibilities that they open up, a period when it becomes harder to start new companies and easier to grow those already dominant.
Road maps are of course overly simplistic. In the real world there are thousands of tributaries from an industrial revolution, some of which will go on to power the next one. What is the next one likely to be based on? Perhaps it will be based on cell biology, in particular our power to edit DNA. If this proves correct, then we are already 20 years in, and possibly a new Deployment Phase is nearly ready to start.
Investment in decarbonisation has been a feature of the last decade, as is evident in the wind farms now found around the UK. But broadly only the easiest steps towards decarbonisation have been taken so far, mostly those involving intermittent electricity generation from wind and sun. Few big decisions on the replacement of existing energy infrastructure or the scaling of new technologies have been taken. Both take at least 30 years to do. For those developing new technologies this is frustrating. It has been a lonely place to be. Recently, however, we have noticed a significant uptick in the level of investor interest in such technologies. This sector above all is dependent on smart policy making by governments. We hope it will find growing representation in our portfolios over the next decade.
In 2019 more than 80% of global power consumption was still derived from fossil fuels. It is easy to forget the degree to which oil and gas still matters in geopolitics, and therefore the degree to which a shortage still causes a crisis. Amati started life in the same year as the Arab Spring, which briefly raised hopes of the democratisation of the Middle East. According to the EIA, at that point the US imported 22% of its energy consumed. Ten years on, the EIA predicts that in 2020 the US will become a net energy exporter for the first time since the 1950s. How does this matter to us? When the Twin Towers were brought down in 2001 the US was dependent on Saudi Arabia for oil. Under the Obama administration energy independence was the strategic goal, enabled by oil and gas produced from shale. Under Trump, a new strategy has emerged, energy dominance. In this landscape it is OPEC which acts to curb supply when prices fall, whilst the US continues to increase domestic production. Ten years on from the Arab Spring, the US appears to have little strategic interest left in the Middle East beyond asserting its dominance over Iran, leaving the ruins of Syria and Yemen for the birds.
Energy dominance perhaps explains why the US administration has turned its back on decarbonisation. The need for industrial nations to satisfy energy demand with fossil fuel has created much of the worst violence in the world since the end of WWII, and it was a growing understanding of this which led Amati to help found the human rights charity Clean Trade in 2018 and to develop and adopt Clean Trade principles for investing in the energy sector from 2017. It is to be hoped that moves to decarbonisation, when they get serious, will bring with them a more peaceful and humane dynamic in the coming decades.
Come to mention it, a peaceful and humane dynamic is something we aspire to at Amati as we manage funds through the challenges that the next ten years will bring. Many thanks to you, our investors, for your trust and for being part of Amati’s journey thus far.