All the knowledge is in the connections

Are we nearly there yet?

Anyone waking up to an Xbox console under the Christmas tree this year is now the proud owner of the world’s most powerful computer from the year 20001. The last 20 years have seen huge developments in technology and computing power, which when applied to science are having extraordinary results. A project to sequence the human genome by 2000 cost billions of dollars; today, a full sequence costs as little as $2002

Technology and sequencing have also played a crucial role in the development of the Covid-19 vaccines, contributing to the accelerated speed of development which sets the vaccines apart from their predecessors. In 1921, the first dose of the BCG vaccine against tuberculosis was given to a human 13 years after work started to develop it3. It would take a further three years for mass production to begin. Almost 100 years later, and the Covid-19 vaccines have sped through the design process to mass roll-out in under a year. Once the genetic information of the virus had been sequenced and published, Pfizer/BioNTech had manufactured its first candidate vaccine after 42 days and injected it into a patient after only 63 days4.

Are we nearly there yet?

With vaccines bringing hope that lockdowns may soon be a thing of the past, attention is turning to the year ahead as we all wonder: what comes next? Sadly, we cannot wave goodbye to the legacy of 2020 just yet as many unresolved issues remain high on investors’ agendas, such as the increased levels of unemployment, which have led to record levels of government debt. The Fed, ECB, BoJ and BoE own financial assets that now equal 54.3% of their countries’ combined GDP. In 2018, that figure was 10%5. But rather than dwelling on the negatives and trying to predict the range of macroeconomic outcomes that may (or may not) be around the corner, we are looking ahead to the positive trends that will outlive the pandemic. 

The “tech-celeration” across every sector shows no sign of abating. This was of course up and running long before the pandemic and we have discussed before how it reached breakneck speed over the last year. For example, in the six weeks to 24 April, there was a 70% increase in the number of UK companies opening websites compared with the preceding six weeks6

The need for investment will continue in the months and years ahead. As Microsoft CEO Satya Nadella said: “the next decade of economic performance for every business will be defined by the speed of their digital transformation7. Those that do not keep up may quickly find themselves left behind, by both changing consumer behaviour (across developed nations, of those that tried online shopping for the first time during the pandemic, around 75% said they plan to continue shopping online8) and the pace of development in the underlying technology itself. “Huang’s Law” describes how silicon chips that power artificial intelligence more than double in performance every two years9. The specific speed is being hotly debated by computer scientists but one thing they all agree on is that it is increasing rapidly. The potential implications are far reaching and are as difficult for us to imagine as it would have been for a scientist in 1921 to imagine the Xbox. Companies which help others make sense of this new world will be well-placed. In its latest results, consultancy firm Accenture reported that it is no longer just Chief Technology Officers that are spending on IT driving strong growth in its digital, cloud and cyber-security businesses. 

The rapid development of vaccines has shown the compounding benefit of investing over the long term: without the technological advances over the past decades, chances are we would still be waiting for a vaccine. We have long made the case that the same is true for companies. Those that have made innovation part of ‘business as usual’ will be best placed in times of difficulty. Roche has been one of the top spenders on research and development in the healthcare sector since 2005 and as non-urgent medical care took a backseat during 2020, the company was able to offset a reduction in standard diagnostics tests with testing products for Covid-19 that did not exist in January this year10. In an industry that really has been turned on its head by the pandemic, freight forwarder Kuehne + Nagel’s investment in IT infrastructure has enabled it to gain market share and increase its lead over competitors. 

All the knowledge is in the connections11

The tremendous advances in technology only tell one side of the vaccine story. None of the developments would have been possible without brilliant scientists and willing volunteers proving that, in successful projects, the human connections are often as important as the technological ones. This recognition is another trend that has been pushed into the limelight during the past year. Many businesses recognise that, in addition to the investments they have made in technology, it is their people that are giving them a competitive edge.

Turning back to Accenture, a big part of its strength lies in its people and the company puts a great deal of effort into attracting and retaining its employees. The firm has been recognised on Fortune’s 100 “Best Companies to Work For” list for eleven consecutive years12. US retailer Tractor Supply has made significant investments in its data platforms so it can tailor products to match customers’ needs but on a recent call, the CEO spent more time discussing the importance of culture and the benefits gained from looking after staff well during the past year. Meanwhile, manufacturer of connectors and sensors Amphenol has some of the best technology in its industry but again, its CEO knows that it’s the employees that are the real asset: “most companies run themselves by a system… we run ourselves by a culture13.

This focus on people extends far beyond the boundaries of individual companies as attention turns to the impact companies have on all their stakeholders, not just shareholders. This principle is a central factor in our stewardship work which we discuss in the accompanying report. In a similar vein, governments are starting to question the value of GDP as a measure of success, given its focus is purely financial. Scotland, Iceland and New Zealand have signed up to the Wellbeing Economy Governments partnership which targets ecological and human well-being as well as economic growth and they are already in discussion about budgeting and tourism through this new framework14.

In the middle of difficulty lies opportunity15

As with the vaccines, some companies are using the connections between technology, data and people to solve some of society’s biggest problems. “It may not seem so at first, but all of this data can be valuable for us.” These are the words of the Vice President of Applied Advanced Analytics at dialysis company Fresenius Medical Care. In addition to traditional healthcare data, such as that from more than 1.9 million dialysis patients and 1.7 billion laboratory tests, the company is using weather forecasts, demographic data and traffic data16 to improve treatment for people with kidney disease (by ensuring dialysis appointments do not clash with important baseball games, or an incoming blizzard).

This is just one example of the vast changes taking place across the healthcare sector. The combination
of innovative technology, data and people is coming into its own and leading to positive change, both in the delivery of care and in making better clinical decisions. 

The pandemic starkly highlighted the cracks in healthcare systems and the impact of social factors on health outcomes. Technology and data are key to addressing this and to shifting the entire healthcare sector from a reactive one, where people are treated when they are sick, to a proactive one that focuses on trying to keep people well. Insurance provider UnitedHealth is a leader in this field: its Level2 digital therapeutic programme, which supports type-2 diabetics by combining medical technology and virtual coaching, saw 50% of patients achieve a reduction in medicine use. 

It is not just the healthcare sector where technology and data are improving lives. Information services company Experian is using its industry-leading data depository and analytics tools to improve financial inclusion and economic opportunities for all. In education, online learning can be a useful substitute for face-to-face learning (as recent lockdowns have proved) and can provide education for those who may otherwise be unable to access it. Alphabet’s Google Classroom currently has 100 million users around the world17 and Microsoft’s LinkedIn Learning education platform is connecting people to provide retraining opportunities for those affected by the unemployment crisis18.

But it is worth remembering that the relationship between technology, data and people is not always plain sailing. We have previously highlighted the risks that some jobs and sectors face from automation and these have not gone away. Similarly, big questions remain about the use of data and privacy and these are unlikely to be settled any time soon. Such risks remind us of the importance of our valuation discipline and not getting carried away with the opportunities. 

On to the next…

The world still faces many problems beyond the pandemic that would benefit from the combination of technology, data, and people. The race against climate change is a case in point: the COP26 talks later this year will require the best of diplomacy if they are to stand a chance of making any progress. At the same time, we need innovation in technology to reduce carbon emissions. This logic could be applied to other issues that will soon require global attention, such as antibiotic resistance and the need to feed a rapidly growing global population. These are areas where we continue to look for investment ideas, but we do not want to compromise our quality of business and track record requirements or diverge from our valuation discipline.

As we look to the year ahead for our own business, again we are focusing on the opportunities. The team has done a brilliant job, maintaining our culture of curiosity, openness and collaboration in these challenging times. We are particularly grateful to our superb support and administrative colleagues who allow us to remain focused on your investments. We are incredibly excited to be moving to our new office at Riverside House and to rekindle face-to-face connections with you and with each other. But whether we are working remotely or all together, one trend that will never change at Veritas is our focus on delivering returns ahead of inflation for our clients.

Voting activities

We continue to believe shareholder voting is an important way of communicating with companies. 

In line with our principle of focusing on materiality, each voting decision is taken on a case-by-case basis by our investment managers, based on independent judgement, analysis, and the outcome of engagements with companies. As we aim to only invest in well-run companies which have strong management teams and governance structures, we typically expect to vote with the board recommendations. Further, we consider ourselves active, rather than activist, shareholders and hope there will never be a time when we need to report multiple examples of voting against companies. That said, there have been cases this year when we felt it necessary to vote against certain proposals. When we do vote against proposals, we always write to the company to explain our decision and hopefully start a dialogue.

Issue case study – auditor tenure

Once again, several of our abstentions have centred on the issue of auditor tenure. We take our responsibility for auditor appointment seriously, especially given several recent high-profile failures, most notably the recent issues with Wirecard in Germany. Best practice in Europe is to re-tender after 10 years and change auditor firm every 20 years. However, in the US indefinite tenure is common and we have been speaking to some of our US companies to understand their reluctance to change audit firm and to ensure that, as far as possible, other safeguards are in place. 

One such company is ADP (Automatic Data Processing). While overall ADP’s governance arrangements are strong, long auditor tenure was one of the topics we raised in our introductory letter when we first became shareholders in March. We were pleased that this letter not only led to a call with the Investor Relations team and the Assistant Corporate Secretary but was also discussed by the Audit Committee. The Committee ultimately decided not to put the audit out to tender, but the Chair offered us a call to explain the decision. She ran through the checks and balances they use to ensure the quality of the audit work remains high, such as carrying out an annual appraisal of the audit firm using a detailed scorecard and obtaining independent audit quality oversight by the PCAOB (The Public Company Accounting Oversight Board).

We had a similar meeting with the Chair of the Audit Committee at Avery Dennison and discussed the issue with management at several other companies. While in each case, they provided some reassurance that the Audit Committees are very aware of the issues and have appropriate mitigating controls in place, we still disagree on principle with the reappointment of long-tenured auditors and so chose to abstain on these votes.

Issue case study – shareholder proposals on proxy access

When it comes to shareholder proposals, we take the same approach as we do to company proposals: decisions are taken on a case-by-case basis particularly as voting for shareholder proposals often means voting against company management. Shareholder proposals we supported this year at the AGM’s of Amphenol and LabCorp amongst others requested a change in the share ownership threshold needed to call a special meeting. This is another area in which there is a stark difference between practices in Europe and in the US. In Europe, usually only a 5% holding is required to call a special meeting whereas in the US shareholders often cannot call special meetings at all or the ownership threshold is high (usually 25% or more). For some of the largest companies, this means needing to hold billions of dollars-worth of shares to be able to call a meeting. The rights in Europe generally do not result in multiple extra meetings and as the proposals were calling for the threshold to be dropped to 10-15% (still a higher threshold than in Europe), we chose to support measures that potentially give shareholders greater rights.

Written by Philippa Bliss , Catriona Hoare Catriona Hoare

on behalf of the investment team

  1. 16/xbox-series-x-tech/ ↩︎
  2. The Economist Espresso via Email, 23 December 2020 ↩︎
  3. ↩︎
  4. ↩︎
  5. JP Morgan “2020 in Numbers – When History is not a Guide” ↩︎
  6. ↩︎
  7. ↩︎
  8. ↩︎
  9. ↩︎
  10. ↩︎
  11. David Rumelhart, American psychologist and computer scientist ↩︎
  12. ↩︎
  13. id1474539157?i=1000449631569 ↩︎
  14. ↩︎
  15. Albert Einstein ↩︎
  16. renal-it/therapy-data-management-system-tdms/ ↩︎
  17. ↩︎
  18. ↩︎
  19. ↩︎
  20. Microsoft has pledged to be carbon negative by 2030, and by 2050 to remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975 ↩︎
  21. These include Avery Dennison, Fresenius Medical Care, Microsoft, Novartis and Unilever ↩︎
  22. TCFD stands for Taskforce for Climate-related Financial Disclosures  ↩︎