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TaLES THE Mark Yusko’s strategy for investing in disruption

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5

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Summer 2021

On the thematic trail

The future of chips

The final turn

Meet the techspert

Which investment themes are driving innovation?

How Apple’s ARMbased M1 chip has shaken the industry

Applying Neil Howe’s generational theory to investing

Beth Kindig on finding tech microtrends

“Innovation is about the

creation of new knowledge” Mark Yusko, p.34 Brainy Bull is recreated in Dubai for Century Financial Consultancy by White Fox Publishing, Creative Zone Creative City, Fujairah, UAE License No: 621/2010

Creative City Media Free Zone

CENTURY FINANCIAL is an intermediary services provider.

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. Nothing in the material included within BRAINY BULL magazine constitutes a recommendation by CENTURY FINANCIAL, the author or THE CROWN & CO that any particular investment, trade, security, transaction or investment strategy is suitable for any specific person.

CENTURY FINANCIAL and THE CROWN & CO do not endorse or offer opinion on any trading strategies mentioned or used by commentators within BRAINY BULL magazine. Their trading strategies do not guarantee any return and CENTURY FINANCIAL and THE CROWN & CO shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

BRAINY BULL — Issue 05

isruption is a term frequently bandied around by experts and commentators across the financial spectrum. It is, after all, just a fact of business. A similar such term is innovation. And not without good reason. For a truly innovative technology not only has the power to level the playing field, but to completely change the game. With such upheaval comes great opportunity for investment, and the chance of outsized returns. The past decade has been typified by the excessive growth of a number of such innovative companies — the Apples and Amazons of this world — which have become synonymous with progress and have taken huge chunks of the market in the process. But, there are plenty of other thematic investment opportunities within the universe of disruptive innovation for the longer-term investor hoping to foster an expanding portfolio.

This is the focus of this issue of Brainy Bull. In our lead feature, A new investment world (p.16), we explore some of the most intriguing themes on the investment horizon — from automation to decentralised finance — and look at what impact they will likely have on the long-term investment landscape.

We had the pleasure of speaking to Mark Yusko (p.34), CEO and CIO of Morgan Creek Capital Management, one of the great innovative investors of our time. He extolled the virtues of an important lesson that has helped him generate incredible wealth throughout his investing career — find innovation and get in early.

For this issue, we also spent time with other great thinkers, including Neil Howe (p.52), director of demography at Hedgeye, who has made it his life’s work to analyse and understand the patterns that dictate our lives and, in turn, the cycles that affect investments. Beth Kindig (p.58), expert tech analyst and founder of the I/O Fund, also joined us to share her thoughts and experiences being at the forefront of innovative tech investing.

The thematic investment landscape is vast and, for the uninitiated, can seem impossible to navigate. We hope this issue provides a map of some of the landmarks within this world.

All the best, The Brainy Bull team

@Century_Fin info@century.ae

3

CONTENTS

IN FOCUS:

SUMMER 2021

Updates

Reports

People

Insights

up to 08 Keep speed with…

megatrends 16 MThearket world of thematic

in 34 Investing innovation

trials 58 Technology Beth Kindig explains

Plant-based food and drink, lithium, healthcare innovation and more

investing is a big place.

Brainy Bull maps some of the leading landmarks the chips 44 Warehendown

How Apple’s ARM-based M1 chip disrupted the semiconductor industry

Mark Yusko explains the importance of getting in early on innovation of change 52 TNeilhe pace Howe is an authority on the cycles dictating our lives — and investments

how she identifies tech microtrends to beat momentum the wave 62 Riding What’s behind the rising popularity of SPACs? five 66 Taking With investor and market researcher Lyn Alden

16

44

The moments that moved markets The most striking images from behind the headlines

NEGE V D ES ERT, I S R AEL

A view of Israel’s 121-megawatt Ashalim Solar Thermal Power Station, one of the largest renewable energy projects in the world. The solar energy plant uses advanced solar technologies. Thousands of small mirrors surrounding the tower are concentrated on to a boiler mounted to the top of the structure. This produces steam used to generate electricity. The plant is made up of more than 50,000 computer-controlled heliostats, according to BrightSource Energy, one of the companies that helped to build it.

EMMANUEL D UNAND/AFP V IA GE T T Y I MAGES

“ E VERY nEW TECHnOLOGY STaRTS AT THE FRInGE...”

34

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BRAINY OPTO BULL —— Issue Issue 11 05

BRAINY BULL — Issue 05

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IN FOCUS: The moments that moved markets

UPDATES

LOND ON, UK

RE Y K JAVIK , I C E L A N D

O DE NWA LD, G E R MA N Y

A view of the stage at Riot Games’ VALORANT Champions Tour 2021 in Reykjavik, which took place between 24 and 31 May. Only 10 teams out of more than 2,000 qualified for the esports event, which had a $600,000 prize pool. Grand View Research expects the global esports market to reach $6.82bn by 2027 as streaming platforms such as Twitch propel esports into the mainstream.

How much is the natural world worth?

Earlier this year, the Natural Capital Investment Alliance launched an initiative to raise $10bn by 2022 to fund preservation of natural capital and help promote nature as an investment opportunity. Sustainable investing has grown significantly, with ESG funds attracting a record $55.84bn in the first quarter of 2021, according to ETFGI.

C OL IN YO UN G-WO L FF/ R I OT G A MES I NC.

Ai-Da, the world’s first AI robot performance artist, who can draw, paint and sculpt, is pictured alongside one of her self portraits during an exhibition in London.

The increasing adoption of AI and robotics technologies has supported one of the biggest investment trends in recent years.

This has fuelled the popularity of funds such as the Global X Robotics & Artificial Intelligence ETF and Ark Autonomous Technology & Robotics ETF. GLYN K I RK /GE T T Y I MAGES

R A I M U ND LI NK E /GE T T Y IMAGES

VIA G E T T Y I MAG ES

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BRAINY BULL — Issue 05

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Updates:

UPDATES

one of the biggest battlegrounds in the plant-based revolution”

←A member of staff restocks vegan, dairyfree produce at a Planet Organic health food store in the UK.

Plant power Investors are feeding the meat alternative thematic trend as companies look to innovate products for a changing global diet ONE OF THE biggest shifts in consumer behaviours in recent years has been the plant-based rebellion.

According to the International Food Information Council’s 2021 Food & Health Survey, one in four of the 1,014 respondents in the US are eating more meat alternatives than they were a year ago. It also found that there had been a 19% year-over-year increase in people consuming plant-based protein, with many seeing meat as having the greatest detrimental impact on the environment of all food sources.

As the trend moves into the mainstream, investors’ appetites for the market have grown. The world’s 8

first vegan fund, the US Vegan Climate ETF [VEGN], was launched in September 2019 and has risen 59.3% since then to have $57.1m in net assets as of 30 June.

The fund has holdings in stocks such as Beyond Meat [BYND], which has one of the most prominent seats at the meat alternative table — its products were in 52,000 retailers across more than 80 international markets by December 2020. In comparison, its rival Impossible Foods, is in just five.

The growing demand for plantbased alternatives has prompted many established food retailers and

manufacturers, including Kraft Heinz [KHC], Tyson Foods [TSN] and Kroger [KR], to expand their offerings in the space. But what areas of the market are seeing the most interest?

Food for thought Emergen Research forecasts the global plant-based food and beverage market to be valued at $32.29bn by 2027, as companies increasingly look for clever ways to innovate recipes.

In the past year alone, Kraft launched a vegan mayonnaise, Tyson Foods rebranded its Raised & Rooted range to offer completely vegan products, and Kroger added more than 500 meatless items to its plant-based brand Simple Truth.

However, it’s not just the food market that plants are disrupting, but beverages too. Specifically, dairy products. In fact, the dairy market has gone on to become one of the biggest battlegrounds in the plant-based revolution.

Global dairy alternatives saw $16.9bn in sales in 2020, according to BRAINY BULL — Issue 05

Digging deeper At the agricultural level, new technologies in robotics and the cloud are changing the future

Images: © Getty images

PLANT-BASED MARKET

data from Euromonitor International as reported in Bloomberg. This accounts for 12% of total milk sales — and the plant-based milk aisle is only getting more crowded.

One of the biggest brands in the space is Oatly [OTLY], which went public on 20 May with a market capitalisation close to $10bn. The stock has since climbed 21.1% to trade at $24.46 by the end of June.

While Oatly commands a significant market share in western Europe, Euromonitor research suggests that it doesn’t even register among the top brands in the US, which include products made by manufacturers such as Danone [BN. PA] and Blue Diamond Growers.

↖Ariel view of soybeans being harvested at Fartura Farm in Brazil — the second largest soy producer in the world.

BRAINY BULL — Issue 05

of farming so that it can keep up with spiralling demand. Benson Hill’s revolutionary crop design platform is just one example of how machine learning and genetics can improve plant growth. The company is expected to begin trading on the New York Stock Exchange in the third quarter of 2021 under the ticker BHIL, following its recent merger with special purpose acquisition company Star Peak Corp II. The combined entity will have an estimated market cap of $1.35bn.

As an investment trend, the plantbased market has the capacity to increase rapidly if more consumers seek out more environmentally conscious meals. Will Hayllar, global managing partner at OC&C, expects a “shakeout” of the market over the next three to four years as many brands struggle to achieve scale.

The fact that a lot of alternative milk brands are significantly more expensive than dairy products is what’s fuelling the industry amid these early stages of growth, he says.

“You’ve seen that quite a lot in sectors where an alternative solution is growing up… they tend to have an insurgent, disruptive brand positioning that… resonates with early adopters,” Hayllar told the Financial Times in May. b

$32.3bn

“ The dairy market has gone on to become

January — July 2021

forecasted value of the plantbased food and beverage market by 2027 �

19% year-over-year increase in plantbased meat consumption in 2021 �

$16.9bn

sales of global dairy alternatives in 2020 � 9

UPDATES

b Charging ahead

PRECIOUS METALS

Batteries not yet included

Whether or not lithium wins the race to power the EVs of the future, the technology has an array of additional useful applications for lithium-ion batteries. It is thought that half of all lithium mined is currently used for the production of rechargeable batteries.

SolarEdge Technologies [SEDG], an Israel-based supplier of rooftop solar components, has plans to scale its lithium-ion battery production in the current fiscal year.

There’s little debate as to whether electric vehicles will be the future of transport. But there is disagreement about how they’ll be fuelled COMPARED TO THE more commonplace battery-powered electric vehicles (EVs), those that run on hydrogen can be lighter and have a greater range thanks to hydrogen’s superior energy-to-weight ratio. It is also quicker to refuel a hydrogenpowered EV than it is to charge lithium-ion batteries.

Unlike lithium-ion batteries, fuel cells don’t need to be plugged into a charging station. Refuelling hydrogenpowered cars does use electricity, but AFC Energy [AFC.L] and Plug Power [PLUG] have shown that it’s possible to charge fuel cells with zero emissions.

The declining costs of renewable energy are what led Andy Marsh, CEO of Plug Power, to make a commitment

to building the first US green hydrogen network with a goal to reach 500 tons a day in capacity by 2025, he said during the company’s fourth quarter earnings on call in February. In the fuel cell space, Statista data shows that Plug Power had the highest market value in November 2020, followed by Ballard Power [BLDP], Bloom Energy [BE] and FuelCell Energy [FCEL].

Tesla [TSLA] CEO Elon Musk has previously taken to Twitter to describe fuel cells as “fool sells”. But the truth

is, hydrogen is a viable alternative to lithium-ion batteries, and, in all likelihood, both could co-exist.

The lithium-ion battery market is expected to be valued at more than $122bn by 2026, growing at a compound annual growth rate (CAGR) of 16%, MarketWatch reports. The publication also notes that the market for hydrogen fuel cells is likely to be considerably smaller in five years’ time, valued at $4.4bn, growing at a CAGR of 14.8%.

←Electric forklifts being demonstrated at the 18th Yantai International Equipment Manufacturing Exposition.

“ Hydrogen is a viable alternative to lithium-ion batteries, and, in all likelihood, both could co-exist”

$122bn

forecasted value of the lithium-ion battery market by 2026 �

$4.4bn

10

Images: Getty Images

forecasted value of hydrogen fuel cells by 2026 � BRAINY BULL — Issue 05

In its fourth quarter 2020 earnings call in February, SolarEdge CEO Zvi Lando said 2021 would be “a year of growth, new product releases and development of our solar and non-solar businesses”.

The two mainstream ways to power solar storage are lead-acid batteries and lithium-ion batteries.

Although the latter has an upfront cost, it is more cost-effective.

Lithium-ion batteries have a life cycle that is two to three times that of leadacid batteries.

Heavy lifting Lithium-ion batteries are also increasingly being used in the construction, warehousing and agriculture industries. They can power forklifts, for example.

Being lightweight, lithiumion batteries enable increased performance and enhanced capabilities. In the case of forklifts, they can enable higher and faster lifting, and the lifting of heavier loads.

The batteries also allow the forklifts to be more compact. This makes it easier to navigate the smaller spaces and narrow aisles in warehouses. The German material handling equipment provider Jungheinrich [JUN3.DE] is one company that is selling lithiumion powered forklifts. Chinese EV maker BYD [002594] also sells lithium-based forklifts, but they run on slightly heavier lithium iron phosphate batteries.

Another German company — battery manufacturer VARTA [VAR1.

DE] — is working with French robotics BRAINY BULL — Issue 05

↙A worker handles car batteries at a factory for Xinwangda Electric Vehicle Battery Co. firm Naïo Technologies to power agriculture and weeding robots. The two joined forces last year to develop remote charging stations that robots can take themselves to when they need charging.

This increases efficiency and cuts down on human interaction. The first pilot programme hopes to show that it can increase a robot’s autonomy by a third.

EnerSys [ENS] is also developing lithium-ion battery solutions, designed for heavy-duty operations. As a relatively new entrant into the market, the company announced in its fourth quarter 2021 earnings call in May that its fiscal 2022 capital expenditure will be $100m.

Most of this will go towards lithium and battery development.

While lithium-ion batteries are still one of the most used in EVs, significant improvements and ongoing innovations in fuel-cell technology could give way to a whole new range of power. b

VIRTUAL REALITY

THE MATURING DIGITAL METAVERSE Nascent augmented and virtual reality technologies could be helping to build the foundations of a new digital world IF YOU'VE SEEN Steven Spielberg’s Ready Player One, you probably won’t have a hard time imagining a futuristic augmented or virtual reality (AR or VR). It may feel a little premature to be piling all of your eggs into a new virtual basket, but there are companies that are making strides in the space. Signs of interest in virtual life are increasing at gaming companies like Somnium Space and Decentraland, which are designing open-source digital meccas using blockchain and ethereum technology. Users can buy plots of land and other unique in-game assets, also known as parcels, in these virtual landscapes through nunfungible tokens (NFTs). These are units of data stored on a digital ledger to ensure they are unique and can’t be replaced.

In the AR space, a Floridabased startup called Magic Leap has been manufacturing the hardware and is expected to launch its second-generation mixed-reality headset in the fourth quarter. The only trouble for businesses innovating in such a futuristic space is that demand is limited to a few very early adopters because of pricey hardware and a lack of content. b 11

UPDATES

b Telemedicine

b Immuno-oncology THE FDA APPROVED Bristol-Myers Squibb’s [BMY] Opdivo (nivolumab) in 2016 and, two years later, it approved Merck’s [MRK] Keytruda (pembrolizumab). These are two new forms of immunotherapy-based melanoma treatments, and both are types of PD-1 inhibitor. The checkpoint inhibitor technology underlying them has since revolutionised oncology, the study and treatment of cancer.

In 2015, Loncar Investments launched its Cancer Immunotherapy Index [LCINDX] to track innovative immunotherapy companies. CEO Brad Loncar says the theme has come a long way since. “By now people have mostly heard of immunotherapy — that’s cool [because] at launch not many had,” he tells Brainy Bull. “There are now dozens of approaches to

←A computer model showing the structure of a pembrolizumab antibody that targets the immune checkpoint PD-1.

The transforming face of medicine Investments in the healthcare sector have significantly grown, but what’s fuelling investor excitement?

Three themes in particular have seen an increase in interest: oncology, connected health devices and telehealth MANUFACTURING

UNDER-THE-RADAR 3D printing saw a resurgence during the pandemic, as additive manufacturing stepped in to support disrupted supply chains

12

isolation wards, nasal swabs, and even human organs, all of which can be 3D printed. USF Health has printed models of hearts for doctors to practice procedures in Florida, while bio-printing experiments have also been conducted on the International Space Station, taking 3D printing out of this world.

immunotherapy — a few have already succeeded in major ways.”

Among these successes are not only checkpoint inhibitors, but also cell therapy, which re-engineers body cells to detect and kill cancer. “We’re starting to see different classes of immunotherapy succeed in trials,” says Loncar. “As exciting as that is, it’s still very early days. There are dozens of approaches [to the] research right now.”

Awareness of biotech investment’s potential has increased over the last year as a result of the pandemic.

“People saw how quickly the vaccines were developed,” says Loncar.

Sales of checkpoint inhibitors alone have reached $23bn since Opdivo and Keytruda received FDA approval, with Bernstein analysts predicting $12bn additional growth in the next eight years. Despite expectations of Keytruda soaking up the bulk of this growth, Merck’s share price rose 1.4% during the first half of 2021, while Bristol-Myers Squibb is up 8.6%.

Investing in immunotherapy stocks is risky, Loncar warns, even for biotech specialists. “Cancer [treatment], in my opinion, is the most difficult thing to invest in,” he says. “The failure rate is very high.” That said, the Loncar’s Cancer Immunotherapy ETF [CNCR] has climbed 18.8% in the last 12 months (through 30 June).

BRAINY BULL — Issue 05

b Connected health During the pandemic, connected health devices boomed, allowing doctors to monitor patients remotely. Indeed, 360 Research Reports noted that the global market for connected health devices was worth close to $51bn in 2019 but expects it to reach over $155bn by 2026, growing at a CAGR of 17.2% between 2021 and 2026.

Leaders in the field include electronic health records company Allscripts Healthcare Solutions [MDRX] and Medtronic [MDT],

$281bn Images: Getty Images

HEALTHCARE

AS AN INVESTMENT theme, 3D printing looks to be making a comeback. The 3D Printing ETF [PRNT] shot up 126.2% in the year since 31 March 2020 after falling 22.5% during the 52-weeks prior.

The rise has been driven by the need for medical devices, including personal protective equipment,

While connected health devices permit active monitoring of patients remotely, 2020 also saw a big rise in demand for telehealth services, which allow patients to communicate with doctors from afar.

Like connected devices, telehealth services allow doctors to assess and treat patients remotely.

Grand View Research says the global market was valued at $55.9bn in 2020 and predicted it to grow at a CAGR of 22.4% between 2021 and 2028.

One of the earliest movers in the US in this space was Teladoc [TDOC]. Teladoc had a market cap of $25bn on 30 June and enough financial clout to match its patients to licensed doctors who can prescribe treatments. It snapped up rival Livongo in August 2020, in a deal valuing the latter at $18.5bn.

Its business model is a subscription

immuno-oncology market value by 2028* �

service that collaborates with hospitals, employers, health insurers and other organisations.

Teladoc’s share price gained 142.3% through 2020 but has fallen 16.8% over the first half of 2021. Its rival, 1Life Healthcare [ONEM], hasn't performed better so far in 2021, with shares down 24.3% in the same period. Teladoc and 1Life were the 14th and 18th largest holdings in the Global X Telemedicine & Digital Health UCITs ETF [EDOC] as of 30 June.

The acceleration of consumer and provider adoption of remote services like telehealth and connected health devices has helped expand access to care, which in turn has justified the use case for such technologies.

Thanks to increased awareness and investment since the coronavirus pandemic, the pace of technological innovation in the healthcare sector looks like it could continue to drive new growth and investment opportunities over the coming years. →Doctors at a German hospital in Stolberg virtually communicate with colleagues abroad during an online conference about COVID-19.

which manufactures pacemakers and other medical devices. Allscripts’ share price gained 173.4% during the 52-weeks to 30 June, while Medtronic climbed 38.2%.

Exposure to connected health device companies through any single ETF is difficult, given the age of the space and its overlap with other fields. As of 30 June, Allscripts Healthcare Solutions was the 23rd largest holding in the Global X Telemedicine & Digital Health ETF’s at 2.13% of the fund’s assets.

Meanwhile, Medtronic was

$298bn telehealth market value by 2028 �

the third largest holding in the iShares US Medical Devices ETF [IHI] at 10.34%. The fund gained 36.7% in the past year (through 30 June), while Global X’s telemedicine ETF climbed 24% since launching on 30 July 2020.

As the internet of medical things continues to develop, new technologies in AI-informed drug discovery and diagnosis systems, as well as precision robotics deployed in surgery, are expected to be some of the trends leading the connected health devices market. b

$155bn

connected health devices market value by 2026 �

*Source: Verified Market Research

BRAINY BULL — Issue 05

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UPDATES

TRENDS

The spectrum of disruption

A CONSISTENT PATTERN in business is when a dominant company fails to adapt to changing technologies or markets and is overtaken by its upstart rival.

A theory of this pattern, known as disruptive innovation, was created by Clayton Christensen, a Harvard Business School professor,

In a world of widespread disruption, a handful of companies are outcompeting their incumbent counterparts and changing the investing landscape

Bank of America 221%

to explain the phenomenon of when innovation transforms an existing sector or market.

Technology giant Apple [AAPL] is a prime example of a company that released a groundbreaking product that uprooted an entire industry, in this case cell phones. The iPhone was a revolutionary invention that created

a whole new market for smartphones.

The divergence between Apple and BlackBerry’s [BB]share price performances over the past five years can also be found between stocks like Netflix [NFLX] and Cineworld [CINE], PayPal [PYPL] and Bank of America [BAC], and Amazon [AMZN] and Walmart [WMT].

Even physical assets like gold, previously thought to be one of the safest investments as a store of value, have been thrown into question following the rise of cryptocurrencies.

As investors navigate shifting markets, a big question remains: What new changes will the next phase of disruptive technologies bring? b

PayPal: 5770%

Finance

Incumbents

Cineworld: -48%

BlackBerry 60%

Netflix: 392%

Media

Walmart 124%

Amazon 348%

Retail

Gold 57%

Apple: 441%

Smartphones

Storesof ofvalue value Stores

Innovators

0%

Bitcoin: 6733%

Charting disruption FINANCE MEDIA SMARTPHONES RETAIL STORES OF VALUE

Innovator Incumbent

2016

2017

2018

2019

2020

2021

2022

Looking at the performance of these 10 stocks in the past five years, disruptor stocks show continued yearon-year growth compared to their incumbent peers.

Source: TradingView; Yahoo Finance

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15

Genomics

Smart Manufacturing

A new investment world Next-generation technologies have become one of the biggest secular trends that the market has ever seen.

Here, Brainy Bull explores the themes generating outsized returns, including a u t o n o m o u s v e h i c l e s , d e c e n t r a l i s e d f i n a n c e , g e n o m i c s and s m a r t m a n u f a c t u r i n g

Illustrations: Michele Marconi

Autonomous Vehicles

Decentralised Finance 16

BRAINY BULL — Issue 05

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17

→p.22

HAPPENING NOW

Genomics

→p.26

NEAR FUTURE 10–20 YEARS

Smart Manufacturing

→p.30

DISTANT FUTURE 20+ YEARS DNA storage Genomic vaccines

POTENTIAL FOR DISRUPTION

Predictive gene-based healthcare

EXECUTE NOW Distributed ledgers

EXPERIMENT

Precision agriculture

Autonomous passenger aircraft

Autonomous vehicles

Cryptocurrencies Autonomous ships and submarines

Source: Richard Watson and Tech Foresight team at Imperial College London

18

Decentralised finance could be a game changer for the financial services sector. As the technology matures, how will a digital banking landscape disrupt incumbent industries going forward?

D

igital assets entered the public consciousness following the first major cryptocurrency exchange IPO on the US stock market of Coinbase [COIN] in April this year. But an even more popular term is now rocking the financial world: DeFi, shorthand for decentralised finance. The largest decentralised equivalent of Coinbase is UniSwap [UNI], which facilitates the most cryptocurrency spot exchanges in the world using nothing but automated market makers.

If you look beyond the memes and hype, you’ll see there’s a valid reason why DeFi tokens and currencies have become desirable assets in some eyes. DeFi is, in essence, a building block in the revolution that is set to disrupt and transform various financial services.

DeFi allows people to buy, borrow or invest in digital assets without the need for regulation, or an intermediary or centralised service to approve a transaction. Each transaction is recorded and stored on a blockchain, with individual records, or blocks, linked together to form a chain. Essentially, blockchain technology acts as a digital handshake, generating smart contracts that provide proof of ownership.

attracted the attention of individual investors and institutions, such as Goldman Sachs [GS] and, more recently, JPMorgan [JPM]. Although crypto assets with large market capitalisations have high liquidity and can be easily traded, many investors have bought them as a store-ofvalue and long-term hedge against inflation.

The largest cryptocurrency asset manager, Grayscale, is one of the leaders in developing trusts that invest in Bitcoin [BTC] and cryptocurrency assets, such as Ethereum [ETH] and Litecoin [LTC], for example. In 2020, the company grew its assets under management by more than 900%, from $2bn to $20.2bn, according to its fourth-quarter 2020 investment report. One of its fast-growing products was Grayscale Bitcoin Trust [GBTC], which saw its assets grow from $1.8bn at the beginning of 2020 to $17.5bn at the close of the year.

Grayscale stated it had experienced unprecedented demand for its products, with $3.3bn worth of inflows in its fourth quarter, which accounted for nearly 60% of the $5.7bn of total inflows for the fiscal year.

Recognising how DeFi is becoming one of the de facto investment classes, Grayscale recently launched several new trust offerings.

AN INVESTMENT CLIMATE RIPE FOR DEFI

The past 15 months have created a volatile investment environment. A combination of a devastating coronavirus pandemic and a global market correction has crippled economies. It’s not surprising, then, that cryptocurrency investment products have

TIME HORIZON

BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

Grayscale BitcoinTrust assets under management were

$17.5bn by the end of 2020

ROI Annual return on a $10,000 investment between 31.12.19 and 31.12.20

*Coinbase Global > $10,000 > -$2,794

Technologies that could disrupt the world in the forseeable future

Autonomous vehicles

A

Grayscale Bitcoin Trust > $10,000 > $29,072

→p.19

DeFi: The new kid on the block

Ethereum > $10,000 > $46,924

Decentralised Finance

Decentralised Finance

Bitcoin > $10,000 > $30,316

Taking a thematic investing approach means finding broad, long-term trends that will shape the world’s future. Fuelled by shifting market behaviours and increasing technological breakthroughs, disruptive innovation was one of the best-performing investment trends in 2020. Over the past six months, some of the top-performing themes have been autonomous vehicles, decentralised finance, genomics and smart manufacturing. As these trends continue to grow in popularity, Brainy Bull explores the investment landscape of each theme and how it could transform the work of tomorrow

*Time period: 14.4.21—28.5.21

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THE WORD ON WEB 3.0

Digital wallets are forecast to account for

All cryptocurrencies are a decentralised form of finance, but not all are powering DeFi. For the most part, DeFi in its current state refers to cryptocurrency exchanges, financial services and applications built on the Ethereum network. Ethereum-based DeFi tokens include Chainlink [LINK] and UniSwap, for example.

Digital asset platform Uquid is an example of DeFi-powered ecommerce in its nascent state. As well as being able to trade cryptocurrencies (including its own token [UQC]), customers can use its debit card to buy gift cards, gaming subscriptions, and, later this year, NFTs. Down the line, it could support merchants that sell physical products.

As the number of decentralised applications snowballs, this will lead

52%

of global ecommerce transactions by 2023 These give investors exposure to Filecoin [FIL], the cryptocurrency that powers the decentralised data storage network with the same name, and the crypto token associated with Livepeer [LPT], a decentralised video streaming network. Grayscale has filed trust filings for Polkadot [DOT] and Cosmos [ATOM] as well.

AN INNOVATIVE WAY TO TRANSACT

One area in which DeFi could really have an impact is cross-border transactions. Not only would payments be faster, but they could be approved without a foreign exchange service, meaning any transaction fees would be much lower. DeFi could also help smartphone owners who are either unbanked or underbanked to send and receive money.

Fast-forward several years and, if we assume that the current trend continues and stablecoins — tokens that are pegged to a fiat currency — have become a currency of choice over holding fiat, a DeFi ecosystem could support all types of transactions, including large assets and real estate. In the future payment landscape, the average customer could make transactions using DeFi credit and debit cards, and then receive decentralised loyalty rewards or earn interest on the stablecoins held in their DeFi wallet.

DIGITAL CURRENCIES ENTER THE FRAY

The likes of Visa [V] and Mastercard [MA] are partnering with fintech startups and crypto platforms. Last year, London-based startup Wirex secured a deal with Mastercard to issue credit cards directly — the cards can be used to pay with both crypto and fiat currencies.

Wirex already has a longstanding relationship with Visa. Cryptocurrency exchange Gemini announced Mastercard as partner for its credit card in April.

Raj Dhamodharan, Mastercard’s head of digital assets and blockchain products and partnerships, tells Brainy Bull that the 20

Net Fund Flows in H1 2021 Amplify Transformational Data Sharing ETF

$715.8m Siren Nasdaq NexGen Economy ETF

$89.3m Source: ETF Database

payments company has started to support certain cryptocurrencies. The move is because it recognises them as being integral to payments in the digital world, where businesses, customers and merchants should be able to move “digital value” around as and when they wish. “It opens merchants up to new customers that are flocking to digital assets and helps sellers to build loyalty with existing customers,” says Dhamodharan.

DeFi is well-positioned to give ecommerce a makeover. Used to store crypto assets without the involvement of a third party, ewallets are set to account for 52% of all global ecommerce transactions by 2023, according to a report from Worldpay.

An area of ecommerce that DeFi could transform is merchant loyalty programmes.

While often siloed, DeFi credit and debit card payments — linked to ewallets — could connect these programmes and enable shoppers to receive all their rewards in one place. Meanwhile, smart contracts on blockchain could facilitate more innovative shipping and logistics, and merchants may be able to sell to customers in more countries with less friction.

Nevertheless, although the technology is ripe for the picking, plenty of merchants still need convincing. “There’s a common misconception: BRAINY BULL — Issue 05

businesses often believe they must adapt their systems to handle crypto payments,” Pavel Matveev, CEO of Wirex, tells Brainy Bull.

“Innovative solutions have been built to bridge this gap and to ensure it’s easy to use in the every day.”

THE FUTURE OF MONEY

As with any disruptive technology, the rate of adoption is slow in the beginning.

But in the meantime, ETF issuers have been launching products to give investors exposure to blockchain technologies. The Amplify Transformational Data Sharing ETF [BLOK] has Grayscale and Argo Blockchain [ARB] in its holdings. The fund gained 36.3% in the first half of 2021.

Siren Nasdaq NexGen Economy ETF [BLCN] climbed 17% in the same period.

Its holdings include Mastercard and several crypto miners.

The fact that DeFi is tied to crypto assets means it can be volatile. But if its early potential is realised, it could change the financial services landscape, making it easier for people to access and send money, and transactions faster and more efficient. b Autonomous vehicles BRAINY BULL — Issue 05

to innovation in the Web 3.0 space.

Web 3.0 is the infrastructure without which the decentralised internet would not be possible.

Min Teo, a managing partner at ConsenSys Mesh, is leading the company’s venture investments with a focus on Web 3.0. She tells Brainy Bull that the current trend for depositing money into DeFi protocols and investing in digital stable currencies will only gain popularity in the months and years ahead.

“It will be fuelled by Gen-Z’s mobile-native approach and the persistence of low real rates that will motivate investors to seek high-yieldgenerating opportunities in the crypto trading landscape,” says Teo. “DeFi has progressed to the point where it can no longer be regarded as a toy.”

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Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

Cryptocurrency risks Trading in cryptocurrencies carries a significant risk. Cryptocurrencies are traded on non-regulated digital exchanges and their value is therefore not affected by any changes introduced by the regulators.

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Non-endorsement The references to third party offerings of cryptocurrencies in the CMC Markets commentary material does not in any way constitute as endorsement or recommendation by CMC Markets. You should conduct your own research and due diligence on the third parties before trading with them.

21

The fund rose 18.3% in the first half of 2021.

With growing investor interest, there is huge investment potential, but where is the greatest opportunity?

Institutional Interest in Q1 2021

Annual return on a $10,000 investment between 31.12.19 and 31.12.20

Number of hedge funds holding:

MAPPING A PATH TO PROFITABILITY

Luminar Technologies

As with all developing technologies, part of the gamble is backing the right horse (or, in this case, horsepower). Most autonomous vehicle manufacturers favour a vehicle laser sensor system to map distance called Lidar (light radar), and major Lidar component manufacturer Luminar Technologies [LAZR] has proven to be a lively investment in recent months.

The stock’s price had hovered around the $10 mark since its debut in March 2019.

But, in late November last year, it suddenly quadrupled in value over three weeks. In an interview with Yahoo Finance in December, Austin Russell, Luminar’s CEO, said that the $1trn US trucking and logistics industry is one of the largest and most overlooked opportunities. However, Luminar’s share price has been relatively flat since April and was down 35.4% at $21.95 in the first half of 2021.

Another attractive Lidar investment is Aptiv [APTV], a self-drive tech firm that calls itself “the brains behind the future of mobility”. It launched a joint autonomous vehicle venture with Hyundai [HYMTF] called Motional, which built Singapore’s first robotaxi service.

Following the first US coast-to-coast test drive, the company plans to rollout robotaxi

Autonomous vehicles may offer a wealth of investment choice and opportunity, but which companies are driving the market?

QOQ↑3040%

Aptiv

695

QOQ↑6.1%

Tesla

2066 QOQ↑0.6%

services across the US by 2023. Shares in Aptiv grew 20.7% in the first half of 2021.

Kevin Clark, CEO of Aptiv, said in an earnings call in May that he is seeing more demand for high voltage electrification, safety solutions and vehicle connectivity.

“A few years ago, 50% of global vehicle production had an ADAS [advanced driver-assisted system] on it. In a few years, it’ll be 75%,” Clark said, adding ADAS will grow 35% this year, with market growth expected to be half of that.

LASERS VS CAMERAS

Part of the uncertainty surrounding Lidar could be down to the technology’s most vocal, highprofile and potentially significant critic, Elon Musk, CEO of Tesla [TSLA]. He has called the light radar technology a “fool’s errand” that has “doomed” anyone who backed it.

Tesla’s autonomous vehicles instead use eight cameras, which Musk says are cheaper and easier to produce and install. Lidar advocates claim camera images are not as accurate in computing distance. But if Tesla’s technology proves safe and reliable (and the jury is still out on that one), the stock, which has gained 214% in the past 12 months (through 30 June), could find an even higher gear. Meanwhile, Lidar’s long-term journey could yet stall.

BIG TECH ENTERS THE DRIVERLESS RACE

Unsurprisingly, the autonomous vehicle space also includes the tech behemoths. While Apple [AAPL] — whose iPhone 12 features Lidar technology — has made no announcement, people familiar with the matter told Reuters that Project Titan, headed by ex-Tesla engineer Doug Field, is working on a mass-market self-drive vehicle. Apple’s stock ended June at $136.96,

Nio

555

QOQ↑0.8% Source: WhaleWisdom

Net Fund Flows in H1 2021 Global X Autonomous & Electric Vehicles ETF

$662.7m iShares SelfDriving EV and Tech ETF

$213.7m

Nio > $10,000 > $111,243

Tesla > $10,000 > $74,339

The future of mobility

157

Aptiv > $10,000 > $3,753

Autonomous vehicles

22

ROI

Luminar Technologies > $10,000 > $23,333

S

elf-driving cars dominate so much of the road ahead that the autonomous vehicle market is predicted to reach $556bn by 2026, with a compounded annual growth rate of 39.4%, according to an outlook report by Allied Market Research. McKinsey forecasts up to 15% of vehicles produced by 2030 will be fully autonomous.

The coronavirus pandemic highlighted the practical use of autonomous vehicles — in China, driverless cars disinfected roads, hospitals and airports. But there is a range of different levels of autonomy. While most mainstream cars have some form of semiautonomous features, such as lane centring, self-parking and automatic braking, full autonomy allows a vehicle to drive on all terrains and conditions on its own. The most pragmatic level of autonomy is in the middle, in what’s called sufficiently autonomous driving, which uses geo-mapping to determine the most feasible route.

As companies accelerate ahead, manufacturing the hardware and designing the software required for autonomous vehicles, investments in the space have picked up. Launched three years ago, the Global X Autonomous & Electric Vehicles ETF [DRIV] invests in companies involved in the electric vehicle and autonomous driving segments, but only began to pick up outsized momentum last year. Despite the pandemic, it soared 63% in 2020, but has steadied since the start of 2021.

BRAINY BULL — Issue 05

Source: ETF Database

BRAINY BULL — Issue 05

23

UNDER THE HOOD However, the company is hugely optimistic after its P7 sedan model completed a nearly 2,300 mile (3,675km), cross-country selfdrive from Guangzhou to Beijing. Its P5 model, which launched at the Shanghai motor show in May and, according to executives at XPeng, is the first electric autonomous vehicle that works in a city.

Meanwhile, Chinese rival Nio [NIO], which launched its first autonomous vehicle, the ET7 sedan, in January, has signed a deal with Mobileye to ship dozens of cars to Tel Aviv for testing as robotaxis. The stock climbed just 9.1% in the first half of the year.

However, despite a pandemic-driven worldwide semiconductor shortage, Nio reported delivering 7,100 vehicles in April, a 125% growth from the year-ago period.

While XPeng and Nio enjoy a higher profile, in December Baidu [BIDU] became the first Chinese autonomous vehicle developer to win a licence to test on the country’s public roads and beat both of its main rivals in every category for the third year running at the Beijing Autonomous Vehicles Road Test Report.

It’s not just about what the vehicle sees, but how it processes it. US tech giant Nvidia [NVDA], which has historically provided graphic processing units (GPU) for video games, may prove an autonomous vehicle game changer with its software platform Nvidia Drive AGX Orin. From next year, the technology will be used in, among others, US start-up Plus, which has received

10,000 pre-orders for its upcoming self-driving trucks and is said to be planning an IPO following a planned $3bn merger with Hennessy, a capital investment SPAC. 5G will also play a major part in the autonomous vehicle rollout.

Qualcomm [QCOM], whose 4G and 5G technology is already in use in 150 million vehicles, teamed up with Great Wall Motor Company

INDUSTRY TITANS VS DRIVERLESS CARS

The autonomous vehicles market is forecast to hit

Not all autonomous vehicle manufacturers are disruptors. Ford [F], the stock of which was up 69% in the first half of 2021, has unveiled a driverless vehicle based on its Escape Hybrid and announced a $29bn investment in its autonomous and electric vehicles tech budget.

General Motors [GM] and Honda [HMC] also teamed up to unveil the Origin, a six-person driverless shuttle, and partnered with Microsoft [MSFT], which enabled its proposed driverless taxi service, Cruise, access to cloud services.

Meanwhile, Volkswagen [VOW3.DE] announced a 75% stake in Chinese electric vehicle firm JAC, worth over $1bn, and has ploughed a further $2.6bn in Argo AI, which plans to rollout autonomous delivery vehicles and taxis across the US by 2022.

$556bn by 2026

marking a 51.2% rise in the last 12 months and a 3.5% uptick in the year to date.

Alphabet’s [GOOGL] autonomous vehicle arm, Waymo, is making faster headway. It has been trialling a limited driverless ride-hailing service in Arizona for over two years. However, Waymo will not yet say how many successful trips it has made — the company requires all customers to sign a non-disclosure agreement.

Despite the lack of clarity, Alphabet’s share price has risen by more than 74.7% in the 12 months to the end of June, hitting an all-timehigh of $2,461.91 on 23 June.

BAIDU TAKES THE LEAD IN CHINA

Chinese autonomous vehicles companies are also leading the race. XPeng’s [XPEV] share price has slowed down for far this year, climbing just 3.7% in the first of 2021.

24

Ford’s self-driving fleet are fitted with Argo AI’s next-generation Lidar sensors

When it comes to AI investment volumes within the private sector, Stanford University’s Artificial Intelligence Index Report 2021 ranks autonomous driving in second place.

And following a significant increase last year, investors’ appetites remain high. “What could hinder this optimistic trend is that the BRAINY BULL — Issue 05

Images: Getty Images; Ford

THE JOURNEY TO DRIVERLESS ROADS

1/7

vehicles produced by 2030 could be fully autonomous BRAINY BULL — Issue 05

Baidu’s Apollo Go Robotaxi service

to announce Snapdragon Ride, a 5G platform that also enhances performance in automated urban driving conditions. Qualcomm’s share price dipped in the first half of 2021, but the future looks bright — 5G rollout is blanketing cities faster than anticipataed. Qualcomm’s stock gained 77.1% in 2020 and hit a 52-week high of $167.94 in January but was down 5.2% in the first half

regulatory system is not completely there yet,” Iosif Itkin, co-CEO and co-founder of Exactpro, tells Brainy Bull. “A growing number of legal suits around autonomous driving assisting systems is something that can have an impact on future investment trends.”

But that’s not to say that there hasn’t been increasing public sector buy-in.

The UK underlined its commitment to autonomous vehicles in April, when it passed a ruling that vehicles with automated lane keeping system technology — allowing a car to drive itself in a single lane in slow traffic — would be permitted on British roads by as soon as the end of this year.

For autonomous driving technology to continue to gain momentum and attract investment, Itkin says “it is important to ensure that all the pieces of the puzzle are trustworthy”. “Transparency and accountability… will define the future of the industry,” he added.

As cars evolve to become “computers on wheels”, the unprecedented amount of data collected will also improve the safety and convenience of journeys, making the market more attractive in particular to fleet owners.

As an investment theme, investing in autonomous vehicles doesn’t appear to be in the slow lane. Still, for Itkin, “it’s definitely not happening overnight: there are so many different domains on the technology side, plus legal and regulatory frameworks are involved — it will take time to synchronize”. b

was launched in Beijing back in September 2020

Genomics 25

a

new investment world

Genomics

Investing in the cutting edge of science

L

ast year was a seminal time for the genomics industry.

Scientific breakthroughs in the ability to sequence, synthesise and edit DNA — as well as RNA, which is single-stranded, unlike DNA — was catapulted from novelty ancestry-tracing small talk to a matter of life and death. Teams of scientists around the world sought to identify the genetic make-up of COVID-19, and then went about combatting it.

Investment in genomics companies soared after March 2020 when the coronavirus pandemic hit, with the global market growing 22.6% faster in 2020 than its average over the preceding three years. The rush to develop COVID-19 vaccines — there were 89 clinical trials for vaccines in March this year, with a peak of 445 in April 2020 — using cutting-edge genomic technology has helped move countries towards a post-pandemic world.

[TWST], Exact Sciences [EXAS] and Pacific Biosciences of California [PACB]. The three stocks combined accounted for 13.35% of the fund’s value as of 30 June 2021, and saw growth of 194.1%, 43% and 913.6%, respectively, over the same 12 month period.

Ark Invest’s genomic fund has also outperformed rival thematic ETFs during that period, with the Invesco Dynamic Biotech & Genome ETF [PBE] and the Global X Genomics & Biotechnology ETF [GNOM] gaining 32.7% and 42%, respectively. The fact that all three funds have outperformed the healthcare sector as well — the S&P 500 Health Care Index grew 25.8% — is a good indication that the sector’s expansion has been driven by genomic innovation.

Before the pandemic, Pacific Bioscience’s share price, held by all three funds, did not rise beyond the $17.45 it hit in its first week of trading in October 2010. That changed with

GENOMICS GAINS ECLIPSE HEALTHCARE

Ark Invest has been on the pulse of the gene editing boom. While the firm launched the ARK Genomic Revolution ETF [ARKG] in 2014, it had a hard time breaking past the $40 mark but that all changed last April. The fund saw gains of 78.7% in the 12 months to end of June 2021, driven by the surging share prices of genomic innovators, such as Twist Bioscience 26

Net Fund Flows in H1 2021

Over the past year, genomics has dramatically changed, accelerated by a global health emergency that spurred big breakthroughs. As we dive deeper into the industry’s developments, Brainy Bull looks at how investors can tap into the potentially revolutionary technology

$200bn

$3.03bn Invesco Dynamic Biotech & Genome ETF

Institutional Interest in Q1 2021

$6.32m Global X Genomics & Biotechnology ETF

Number of hedge funds holding:

Pacific Biosciences

$131.9m

256

Source: ETF Database

QOQ↑21.9%

Twist Bioscience

231 QOQ↑5.9%

Exact Sciences

618 QOQ↑2.3%

AstraZeneca Living drugs in oncology are forecast to generate more than

ARK Genomic Revolution ETF

723

QOQ↓-4.7% Source: WhaleWisdom

in the US

BRAINY BULL — Issue 05

the success of its Single Molecule, Real-Time (SMRT) sequencing platform to harness the natural process of DNA replication, which played an integral part in mapping the COVID-19 genome. The stock price rocketed as high as $53.69 on 11 February 2021 — 1,196.9% above its level in the year-ago period. Exact Sciences saw a similar rise off the back of the role its COVID-19 testing kits played in the fight against the pandemic.

Pacific Bioscience is at the forefront of long-read sequencing (LRS), dubbed “third generation sequencing” in Ark Invest’s Big Ideas 2021 report. According to the firm, LRS revenues were estimated to have totalled $250m in 2020, and the company expects them to grow at an annual rate of 82% to $5bn by 2025.

BRAINY BULL — Issue 05

FROM THEORY TO THERAPY

For Ark Invest, the genomic revolution was already well underway before the coronavirus took hold globally. An Ark Invest white paper on the genomics industry published in July 2020 highlighted that, over the past five years, various milestones in the understanding of and ability to manipulate human and non-human genomes had been reached. It also noted that the cost of sequencing genomes has fallen from nine figures to hundreds of dollars, DNA editing is able to cure previously chronic diseases, and that living therapies offer single-dose cures for a range of ailments. Ark Invest expects the genomics revolution to create trillions of dollars in market valuations by 2024, with living drugs in oncology alone showing potential to generate $200bn.

27

REWRITING GENETIC CODES

The multi-cancer screening market is forecast to hit

The genomics revolution has primarily been driven by CRISPR, a method of gene editing that deploys the CRISPR-Cas9 enzyme as a genomic scissor — a term coined by scientific discoverers Emmanuelle Charpentier and Jennifer Doudna — to snip genetic strands at precise points, prompting the body’s own repair systems to create desired alterations to genetic code. CRISPR has already been used to improve crop yields, prevent mosquitos transmitting malaria and to cure previously untreatable genetic diseases.

Among the next generation of technologies that may be set to revolutionise the CRISPR

Dynamic Biotechnology & Genome ETF [PBE] and the Global X Genomics & Biotechnology ETF [GNOM], neither of which hold Twist Bioscience.

$150bn

become one of the

in the US

opportunities in the

mosquito species to not carry malaria

While gene sequencing and vaccine production were at the forefront of the healthcare market in the wake of the pandemic, the implications for the new era of genomics could see a whole new world of precision medicine. Oncology is set to be revolutionised through increasingly affordable multi-cancer screening technology.

This technology, according to Ark Invest’s Big Ideas 2021 report, has fallen in price from $30,000 in 2015 to $1,500 in 2021, and is expected to drop to $250 by 2025. Ark Invest expects the market for multi-cancer screening

140% 130% 120%

Vanguard Health Care Index Fund ETF [VHT]

110%

iShares US Medical Devices ETF [IHI]

100%

Invesco Dynamic Pharmaceuticals ETF [PJP]

90%

iShares Nasdaq Biotechnology ETF [IBB]

80% 70% 60% 50% 40% 30% 20%

The global genomics market grew

-10% -20%

28

AUG

SEP

OCT

NOV

DEC

JAN 2021

FEB

MAR

APR

MAY

JUN

BRAINY BULL — Issue 05

Images: Getty Images

10% 0%

DEPOSITING DNA

A NEW ERA OF CANCER DETECTION

Source: TradingView

Ark Genomic Revolution ETF [ARKG]

Annual return on a $10,000 investment between 31.12.19 and 31.12.20

22.6%

faster than its previous three-year average in 2020 BRAINY BULL — Issue 05

AstraZeneca > $10,000 > -$99

the genes of one

to scale to $150bn in the US, preventing 66,000 cancer-related deaths and saving 1.4 million US human life-years annually.

Exact Sciences is one of the companies most actively involved in research into multi-cancer screening. In January 2021, it completed its purchase of Thrive Earlier Detection, a pioneer in the field, for $2.15bn. Thrive was one of more than 35 organisations that joined the MultiCancer Early Detection (MCED) Consortium in April 2021. Exact Sciences is the second-largest holding in the Ark Genomic Revolution Fund, at 5% of the fund’s assets (as of 30 June).

ROI

Exact Sciences > $10,000 > $4,326

technology to change

field are Cas12, an alternative to the Cas9 enzyme that improves CRISPR effectiveness at screening complex biological processes such as tumour metastasis and CRISPR-associated transposases. Rather than slicing DNA and relying on the body’s unpredictable repair process, it instead inserts DNA fragments into gene sequences.

Twist Biosciences is one of the companies at the forefront of applying CRISPR technology.

Angela Bitting, SVP of corporate affairs at Twist Bioscience, says another key area of development in CRISPR is prime editing. This involves “single bases, and small stretches of genomic DNA [being] precisely removed and changed as required.” It has the potential to revolutionise the treatment of diseases: “We are seeing the very first research coming out using this system in the correction of mutations in models of debilitating genetic diseases like muscular dystrophy.”

Besides Ark’s Genomic Revolution ETF [ARKG], other ETFs tracking the rise in CRISPR technology are the Invesco

genomics theme

Pacific Biosciences > $10,000 > $40,466

to use CRISPR-Cas9

Genetic tweaking of this kind, combined with the ability to decipher viral genomes at speed, helped arm the global fightback against COVID-19. Researchers at the University of Oxford’s Jenner Institute successfully manipulated a chimpanzee adenovirus to create a safe vector (known as ChAdOx1), which had already been used to provide candidate vaccines against the more common flu, the Zika virus and Middle East Respiratory Syndrome (known as MERS) — the latter being another form of the coronavirus.

This was further adapted to carry COVID19’s characteristic spike protein, or “corona”, to trigger human immune system responses to the disease, resulting in the OxfordAstraZeneca [AZN] vaccine. The team used the same technology to develop a vaccine against malaria, a disease thought to have killed more humans throughout history than any other and responsible for 409,000 deaths in 2019. In April 2021, trials of the vaccine suggested efficacy of 77%, eclipsing the 55% achieved by the most effective existing vaccine, called R21/Matrix-M.

Twist Bioscience > $10,000 > $57,280

Researchers were able

KEY

JUL

biggest investment

INNOVATING GENETIC INSTRUCTIONS

Genomic-focused ETF leads returns across healthcare market

JUN

DNA sequencing has

Genome stocks may predominantly offer exposure to the healthcare sector, but new developments in our ability to synthesise and edit DNA could give investors early exposure to a potentially groundbreaking development in the technology space. Genomics companies, including Twist Bioscience, are developing the ability to store digital data using DNA. The boundary between biology and computer science will become increasingly blurred by the emergence of next-generation DNA data storage. Binary code can be transposed into DNA’s four fundamental building blocks, with 00 corresponding to A, 01 to G, 10 to C and 11 to T. Twist Bioscience is then able to write this DNA sequence, allowing the resulting data to be stored for thousands of years as a microscopic, highly durable DNA molecule.

Twist already counts Microsoft and the University of Washington among clients leveraging its technology. The commercial implications of this are far-reaching, meaning the race to unlock value is heating up. Investments in the genomics space have grown in the past year, fast-tracking the R&D of new technologies set to radically change the future of disease treatment. b Smart Manufacturing 29

I

Smart Manufacturing

Manufacturing gets smart

ntegrated automation solutions that combine smart technology with big data (connecting industrial devices to each other through the Internet of Things) are streamlining production and saving costs across the world.

The Fourth Industrial Revolution — a term coined by Klaus Schwab, executive chairman of the World Economic Forum, to describe the next stage of advancements since the digital revolution — is accelerating at such pace that the global smart factory market, valued at $270.7bn last year, is expected to hit $461.8bn by 2026, with a compound annual growth rate of 9.3%.

With the revolution well under way, investors have been gaining exposure to the smart factories theme through various areas of the manufacturing market. But which companies are powering the transformation?

Demand for fully automated production facilities has significantly grown since the coronavirus pandemic wreaked havoc in factories across the world. As companies look to adopt flexible technologies, investments in the space are fast becoming one of the biggest growth areas in the industrial sector

Institutional Interest in Q1 2021 Number of hedge funds holding:

Fanuc

21

QOQ↑0%

Teradyne

659

QOQ↑1.8%

NXP Semiconductor

844

QOQ↑7.4%

Nvidia

2250 QOQ↑0.9%

Source: WhaleWisdom

STREAMLINED PROCESSES

“As smart factories and smart warehousing develop it’s all about the potential to maximise efficiency,” Andy Williams, chief revenue officer at Attabotics, a groundbreaking robotics storage, retrieval and delivery firm, tells Brainy Bull. “That is achieved by tying in highly sophisticated robotics with AI and machine learning, connecting to the cloud to assess demand, forecast, and place inventory in the right places at the right time.”

Attabotics is revolutionising supply chains by building robots that can pick, pack and ship items so densely stacked they take up just 15% of traditional warehouse space, allowing manufacturers to operate in smaller buildings in city centres rather than out-of-town hangars, thereby speeding up delivery times. This human-free environment is all underpinned with innovative hardware and software that, Williams says, will revolutionise manufacturing over the next few years.

“Investment-wise, the place to be is 5G, LTE [long-term evolution] and edge computing,” he adds. “The amount of data in a system like this is mind boggling. The capability to aggregate 1,000 different data streams, format them all into a useful state that can be understood by AI — that is the future.”

NEXT-GENERATION CONNECTIVITY

5G technology is considered to be one of the biggest catalysts for the smart manufacturing transformation. But a global shortage of semiconductors due to the coronavirus pandemic is steering many investors towards US test equipment designer Teradyne [TER].

The Boston-based firm, which provides smart manufacturing solutions to, among others, Samsung, Qualcomm [QCOM], Intel [INTC] and IBM [IBM], is likely to see a high demand for its innovative testing programmes as manufacturers seek ways to rollout alternative products.

Teradyne aims to “transform the way you test chipsets for industrial applications” by making a range of devices, from appliance remote controls to digital signal producers and memory devices. The stock has almost doubled in value over the past year to $133.96 at the end of June, and is up 12% since the turn of the year.

Dutch firm NXP Semiconductors’ [NXPI] shares have climbed steadily year-on-year for the past decade. Its price accelerated sharply

Net Fund Flows in H1 2021 The Global X Internet of Things ETF

$73.5m The Defiance 5G Next Gen Connectivity ETF

$258.8m Source: ETF Database

30

BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

31

Investing in future technologies The global smart factory market is forecast to hit

$461.8bn by 2026

Connectivity: Defiance 5G Next Gen Connectivity ETF

Machines: Global Robotics & Automation Index ETF

32

pack and ship products at picking stations

40%

Artificial intelligence

28%

Blockchain

22%

Autonomous vehicles

16%

Fulfillment robots

of respondents expect capacity requirements to increase in the next year

3D printing Augmented reality Drones

BRAINY BULL — Issue 05

16% 11% 10% 7% 7%

Crowd-sourced delivery

6%

VR and digital twins

6%

Delivery robots

4%

ROI In 2019

Annual return on a $10,000 investment between 31.12.19 and 31.12.20

2.7 million industrial robots were in operation

UTILISING THE MACHINES

If 5G is what connects all the moving parts on the factory floor, AI is the protocol that’s automating the robotic production line. In this area of the market, California tech firm Nvidia [NVDA] leads the charge. The company is looking to power the factory floors of the future by building the AI-enabled chips and solutions. Its share price more than doubled in the year to April and rose 53.3% in the first half of 2021, closing at $800.10.

Using AI-enabled technologies, Attabotics is driving innovation through what it calls “the first supply chain for modern commerce”, with robot shuttles that use 3D vertical space to reduce warehouse footprints by up to 85%.

The robotics company has raised a total of $117.4m from six funding rounds at the time of writing, following partnerships with Microsoft to manage cloud-based supply chains and eGrocery management solutions specialist FoodX Technologies.

While robotics is at the heart of smart factories, Williams says their connectivity to AI, machine learning, data transfer and cloud

61%

Machine learning

Nvidia > $10,000 > $12,229

Global X Artificial Intelligence and Technology ETF

humans, who can pick,

41%

Cloud logistics

NXP Semiconductors > $10,000 > $2,660

AI and big data:

symbiotically with

47%

Internet of Things

Teradyne > $10,000 > $7,671

Investing in the smart factories supply chain of the future? There are a variety of funds to gain exposure to the different technologies, including:

storage system works

55%

Predictive analytics

Fanuc > $10,000 > $2,587

Smart manufacturing as a service model

Attabotics’ 3D

optic cables a key part in powering the Fourth Industrial Revolution. The US technology company Corning [GLW], known for selling ceramics and glass, has become a key provider of optical communications infrastructure and networks, with its share price subsequently booming 61.8% in the past 12 months (through 30 June) and 14.9% in the year to date.

According to a recent report by PA Consulting Group, the biggest barrier to companies adopting smart manufacturing across 5G networks will be cybersecurity.

CrowdStrike Holdings [CRWD] is a cybersecurity platform of services including antivirus, vulnerability management and threat intelligence. The stock quadrupled in value in 2020 and, though growth has slowed, it is up 18.6% year-to-date (through 30 June), its near $400m acquisition of cloud log management firm Humio is expected to accelerate security threat detection.

Warehouse automation

Image: Attabotics

following COVID-19, almost doubling in the 12 months to the end of June 2021, when it closed at $205.72. The stock climbed after NXP Semiconductors announced it had partnered with BISTel, a Belgian smart manufacturing AI specialist, last year. The partnership will see BISTel deploy technology — including anomaly detection and predictive analytics to solve a manufacturing problem before it happens — in NXP products throughout the US and Europe.

Reliable wireless networks are an essential part of smart manufacturing, making fibre-

Source: Visual Capitalist and EyeforTransport 2019

Percentage of retail, manufacturing and logistics professionals who are investing in:

BRAINY BULL — Issue 05

computing means investors should be targeting companies who see robotics as a service model.

“Efficiency is about being close to your customer base, aggregating orders correctly, automatically, which then informs a tight, ultra-efficient backbone to supply chain – based on data and technology that changes all the time. This ever-more efficient model will be attractive to investors,” Williams explains.

Japanese tech group FANUC [6954.TYO], which specialises in robotics and wireless computer systems, has seen its share price fall 9.8% from its February peak of JPY29,700 to JPY26,795 on 30 June, but recently launched autonomous welding machines which operate at its highest ever payload. Meanwhile, Swedish firm Hexagon AB [HEXA-B], already a global leader in industrial sensor, software and autonomous solutions, further signalled its intentions last month by acquiring French AI/ machine-learning pioneers CADLM, which may further drive up its share price that is up 17.5% in the year-to-date (through 30 June) — the stock has fallen 28% in the past year.

INVESTING IN INDUSTRY 4.0

As more manufacturers continue to invest in automation, the more the investment space has increased for smart factories. The Global X Internet of Things ETF [SNSR] offers exposure to sectors including networking infrastructure and software, wearable technology and business automation, with 75% of its holdings in semiconductors, communications, electrical components and computer hardware. Like many of its peers it was significantly boosted during global lockdowns, gaining 47.8% in the past 12 months to the end of June. The fund’s price has levelled off since February, rising 7.3% to $35.71 in the second quarter of 2021.

Similarly, Defiance 5G Next Gen Connectivity ETF [FIVG] — which is primarily made up of technology and communications holdings, headed by NXP Semiconductors NV — has soared 41% in the past 12 months to the end of June and is up 13.8% in the year-to-date at $38.05.

Connected factories and warehouses are shaping future manufacturing and logistics sectors, and the technology driving them is some of the most innovative around. But with so many new players, investors will have to look beyond the tech. “You could have the fanciest robots in the world, but if they’re used on a traditional capital expenditure path, that’s not going to keep making you money,” says Williams. b 33

P ro fi le : M a r k Y u s k o

DEaLing in

For renowned investor Mark Yusko, taking the road well-travelled when it comes to investing, hasn’t been at the top of his agenda. He speaks to Brainy Bull about the fringes of innovation, what it’s like to be surrounded by innovative thinkers, and blurring the lines of his investment approach 34

Words: Danny McCance Photography: Mike Belleme

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35

Profile: Mark Yu s k o

“YOU HaVE TO BE WILLInG TO aCCEPT

C H A n g E .

YOU HAVE TO BE WILLInG TO START WITH A BEGInnER’S OR CHILD’S MInD AnD IMAGInE WHAT IS POSSIBLE” ...

... says Mark Yusko, CEO and CIO of billiondollar investment fund Morgan Creek Capital Management, when Brainy Bull asked him how, as an investor, he’s able to capitalise upon innovation.

Innovation is the hallmark of his investment practice and one that he embraces as the foundation of his investment outlook. His current focus is on cryptocurrencies, which have the capacity to cause untold disruption and, as Yusko believes, create unbridled wealth on a previously unimaginable scale.

For Yusko, wealth creation is about getting ahead of the crowd and putting trust in an idea before others will consider it. It is, for him, the cornerstone of being a successful investor and part of a successful approach to getting in early on innovation.

It is Yusko’s understanding of the power of change and the relentless nature of growth that drives his investment focus on innovative and groundbreaking technologies or ideas. To Yusko, there are only two states in the natural world: growth and death. Understandably, he prefers the former.

CHANGES aHEAD Yusko spent a great deal of his youth in the seventies in Seattle, Washington. The state is home to some of the world’s biggest and most recognisable tech brands. Yusko jokes that 36

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BRAINY BULL — Issue 05

most of his friends don’t have to work anymore because they got involved with a little company called Microsoft.

It was not long, however, before his parents packed him up while he was attending high school and moved him to the East coast.

Not long after, he moved to Houston, Texas during his senior year. The upheaval was fortuitous in some ways though, as it taught Yusko how to socialise, how to meet new people and fit in, as well as, crucially, how to be flexible and adapt.

He would then move to South Bend, Indiana, to study at the University of Notre Dame. Initial aspirations of becoming an architect fell apart when Yusko realised the career he’d chosen to pursue was too subjective. It was in sciences that he found his vocation after stumbling into a premedicine course in biology and chemistry.

But again, Yusko had a realisation that maybe he was on the wrong track as he didn’t feel his calling was to be a doctor. He felt that the potential outcomes in this field were somewhat limited. “The only jobs you can get with a premed degree if you don’t go to med school are basically as a pharmaceutical sales rep, or as a consultant. I was not 6’4” and handsome. I was not going to be a pharmaceutical sales rep.”

He decided that he would go back to school — specifically, business school at the University of Chicago. After finishing his studies and formalising his investment education by attaining an MBA in accounting and finance, Yusko entered the world of work.

“I took the first job that was offered and went to work for an insurance company,” he recalls.

“I’d say my life is a series of happy accidents,” Yusko says, as he got lucky as the person responsible for investments at the firm where he worked retired, leaving him in charge.

After a stint at this insurance firm, he then moved on to a quant long-only equity management firm called Disciplined Investment Advisors, which was run by two professors at Northwestern University and was, Yusko explains, one of the first of its kind run by university professors.

It’s here that he was exposed to the discipline of quant value investing. He realised that — as much as he loved working in a small team — he wanted to return to his alma mater. “I got the call,” Yusko states. He likens the experience to when American college football coach Lou Holtz, who had a lifetime contract at Minnesota, moved to University of Notre Dame. “Notre Dame called and so he went — I kind of had 37

Profile: Mark Y u s k o

the same thing,” he jokes.

So, Yusko headed back to Notre Dame to work with its investment team at the university, where he would come to learn some of the most important lessons of his investing career.

EXPONENTIAL STEPS While working in the investment office at Notre Dame, Yusko recalls how he and his team were fortunate to have developed good relationships with some individuals at Stanford University. “We would hang out with them on

“AS YOU BUILD ANYTHING ON TOP OF PREVIOUS INNOVATION OR DISCOVERIES, IT GETS BETTER NOT LINEARLY, BUT

Sand Hill Road [in Silicon Valley] and they would introduce us to all the great venture capitalists,” he says, adding that this led to his team allocating some capital in what was a small company at the time called Google [GOOGL]. “That changed our portfolio forever,” he reflects. “We put in $500,000 and that turned into $200m. There should be a quad at Notre Dame called the Google quad.”

It was his time spent investing for the university that gave rise to one of Yusko’s most significant moments of clarity. He realised that the path of science he had taken at the start of University was now permeating his career, which led to personal discoveries about how best to invest.

“When I was first in the business, I was obsessing over ‘should we own Ford [F] or General Motors [GM]?’. The reality is that didn’t matter. What you should do is realise that personal computers were going to be a big thing.

That the internet was going to be a big thing or some biotech innovation was going to be a big thing, because that’s where the big returns are made.”

This is due to, what Yusko explains as, the compounding nature of innovation. “As you build anything on top of previous innovation or discoveries, it gets better not linearly, but exponentially. This is the part that most people just can’t process and the reason the average person doesn’t invest enough in technology and innovation is that we all think linearly; we think in linear steps,” he says.

SCHOLarLY CirCLES Yusko’s relationship to the academic world also extends to his physical proximity to it. Even today, he lives within the Chapel Hill Research Triangle, an area that exposes him to some of the greatest minds at the University of North

Carolina at Chapel Hill, Duke University and North Carolina State University. “There’s probably something to be said about that,” Yusko considers. “If you think about university endowments as being some of the best investors and having the best track records.”

For a long time, Yusko has been one of the foremost proponents of the investing approach, which was first formalised and perfected by Yale’s legendary chief investment officer, David Swensen, alongside his colleague Dean Takahashi. Swensen had sadly died following a long battle with cancer the week before Brainy Bull’s interview with Yusko.

The model that Swensen popularised and which he came to embody was one that Yusko, a scientist-turned-investor, also embodies.

Swensen carried the torch for the model from his role as investment director at the University of Notre Dame to North Carolina, where he founded and was CIO of the University of North Carolina Management Company, the endowment investment office for the institution.

A 2020 article from Forbes states that over the past circa 70 years to 2017, endowments managed to achieve a return of 6.6% with a 0.54 Sharpe ratio — used to show performance of an investment compared to a risk-free alternative after adjustments for risk.

“Compared to broad asset classes and a generic institutional portfolio of 60% equities and 40% bonds (60/40 portfolio), endowments have done well, averaging a 1.00% return advantage with a much higher Sharpe ratio,” Randy Brown, CIO of Sun Life and head of Insurance Asset Management at SLC Management, wrote in Forbes in November. “While the endowment leaders have done much better, even the laggards have matched or beaten the 60/40 portfolio, with lower risk,” Brown added.

Yusko says that’ its probably no coincidence that these teams are embedded

EXPOnEn TIALLY” 38

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39

Profile: Mark Y u s k o

“IF YOU’RE AROUND

in the university community. “They run into professors and they’re around innovation in all kinds of areas. It’s the same thing with Silicon Valley or Route 128 in Boston. If you’re around innovative, creative people, you’re going to get exposed to big opportunities.”

Chapel Hill is the home of Morgan Creek Capital Management, the investment firm that

Practically speaking and in terms of his investment approach, Yusko admits he blurs the line between innovation and entrepreneurship.

“I talk about ‘big E entrepreneurs’ and ‘little e entrepreneurs’. A ‘big E entrepreneur’ or a ‘big I innovator’ would create something new, something completely new.”

He points to the Defense Advanced

EnTER BITCOIn “Every new technology starts at the fringe and that is axiomatic because the fringe is barred from mainstream activity,” Yusko considers.

Bitcoin was previously considered as the preserve of illicit dealings. It was thought to be a tool through which people could transact on the

I n n O V A T I V E , CREATIVE PEOPLE, YOU’RE GOING TO GET EXPOSED TO BIG OPPORTUNITIES” 40

Yusko set up in 2004. The firm manages circa $2bn in discretionary and non-discretionary assets. It has a strong grounding in the endowment model that has “a focus on asset allocation and top-down portfolio construction,” which he thinks dwarfs the impact of security selection.

“The endowment model of investing was really about forming hypotheses, gathering data, testing hypotheses, reforming hypotheses, and about being tightly tied to the scientific community and innovation community,” Yusko explains.

NO ‘ I’ IN INNOVA TION Yusko deals, very successfully, in innovation, but what does it all mean?

“To me, innovation is about the creation of new knowledge. So, you’re innovating in a field or you’re innovating in an area of application of science, or the application of technology.”

In many circumstances, however, innovation is born out of necessity. There are places one can track innovation other than the hallowed halls of the Ivy Leagues, or in the corridors of Stanford.

“We can all pass judgment on whether that’s a good thing or a bad thing, but the reality is that people are forced to [turn to] innovative [solutions],” Yusko says.

BRAINY BULL — Issue 05

Research Projects Agency’s (DARPA) invention the internet, and to Marc Andreessen creating the web browser, or Tim Berners-Lee’s first web page.

Those individuals, he says, were ‘big I innovators’.

“But then to me,” Yusko explains, “there’s also the ‘little e entrepreneur’ or the ‘little i innovator’ who takes something new and applies it to something old and makes it better.” This, although something he suggests is regarded less highly, can often be very lucrative. The simple explanation is that you’re not having to reinvent the wheel.

“You’re taking advantage of the incumbent technology or incumbent innovation and you’re getting that flywheel effect, that compounding effect, non-linear growth, that network effect.”

One such example has been the rise of connectivity. “There are 10 billion mobile phones that are all connected across this ubiquitous mobile net and… it totally transformed information exchange, commerce, relationships — everything that you can imagine just got completely transformed,” he considers. This has facilitated another great change, for we are on the precipice of the next iteration. This Yusko calls the trust net — an era in which the middle person is no longer required.

BRAINY BULL — Issue 05

dark web, away from the purview of authorities.

However, its recent adoption by big institutions, not to mention the rash of investor interest in recent years, shows Bitcoin’s reputation has changed. It’s now considered, at least by some, to be the next great generator of wealth.

Decentralised finance (see DeFi: the new kid on the block, p.19–21) is something that Yusko believes will generate untold wealth in coming years. “Any innovation in a process, or a segment, can be meaningful,” Yusko says. “And the one where I’m spending all my time now is in the blockchain technology and crypto world.”

This space is, after all, building on all of the work that has come before it from the developments within the world of computing.

It’s the next iteration in the decades-old evolution of computing power that will see humanity continue further into the digital age.

Yusko explains that in the old days, those lending money relied on a single ledger. “I wrote down the amount and you had to trust me that I wrote down the right amount.” This gradually evolved into dual-entry accounting, wherein two ledgers are used to record the amount borrowed from both the perspectives of the lender and the borrower. “But,” Yusko asks, “what if one of us writes down a different amount? Who’s going to be the arbiter? The answer was simple: banks.

“The banks have had a pretty good 700year run being the arbiter of truth and it’s 41

P ro fi le : M a r k Y u s k o

“EVERY nEW

their word over ours. That’s all well and good, except we have to trust them. Well, now we have the technology to say, ‘I don’t have to trust a human or an organisation’. Now, we can trust code.”

This is not a new idea. Think of every time you need directions. You open Google Maps, Yusko explains. Likewise, rarely do we just trust a single person’s restaurant recommendation anymore; we

Opportunities in every direction.

Set more eyes in the watch towers.

You are independent. But never alone.

TECHnOLOGY STARTS AT THE FRInGE AnD THAT IS AXIOMATIC BECAUSE THE FRINGE IS BARRED FROM MAInSTREAM ACTIVITY” 42

check aggregated online reviews.

But still, many at the top of the investment world remain cautious on cryptocurrencies. Jamie Dimon, CEO of JPMorgan Chase and an outspoken critic of the cryptocurrency technology, told The Wall Street Journal CEO Council in early May, that, despite the bank offering products to its clients, that he’s “not a Bitcoin supporter”.

This does not perturb Yusko. “The fact that people like Dimon were railing against Bitcoin meant that it was a really, really good idea, because he’s a really smart guy in a really powerful position at a really big organisation,” Yusko says. “The vehemence of his vitriol toward the asset meant that it was a serious threat.”

As Yusko says, a huge amount of wealth is generated from investing in something you believe in before others even understand it, if that thing goes on to become wildly successful. “I don’t fancy myself a technology seer. I don’t think I have any special talent for identifying the next big thing,” he says. “But I think I’ve got a decent nose for when somebody shows me something and is excited about it I can get excited about it as well.”

But there is a tension that comes with accepting something unknown, if not an abject terror at trusting in something completely new and alien. There is a reason the Luddites sabotaged the textile machinery that would eventually become their undoing — their fear and distrust of the technological innovation was not unfounded.

However, often this objection can be a better sign to an investor willing to push boundaries than a warning.

“I’ve learned that the greater the opposition to an idea and the higher the quality of the opposition, the better the idea.” b

It’s been a time of change and opportunity in the investment markets.

You just need a trained eye to point you in the right direction.

At Century Financial, you’ll find all the guidance you need with our in-depth briefings, staggering choice of investment options and much-awarded trading interface.

Extensive spectrum of investment products: 40,000 trading instruments across 125 global markets. +971 4 3562800 | info@century.ae www.century.ae Regulated by SCA Disclaimer: Century Financial Consultancy LLC (CFC) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). objectives, risk tolerance and your level of experience with these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor, and you should ensure that you understand the risks involved and seek independent advice from professionals and experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to risk disclosure on our website.

BRAINY BULL — Issue 05

Report: Semiconductors The Apple M1 chip has the world’s fastest CPU core in low-power silicon, with the best performance per watt

Will an Apple a day keep Intel at bay?

Composite Image: Getty images, Apple, M1 chip not to scale

When the iPhone maker switched to designing its own ARM-based processor architecture, the move was bad news not just for Intel, but the whole semiconductor industry. How did the tech giant’s transition, along with the proposed Nvidia-ARM merger, disrupt chip makers?

Words: Rich McEachran

44

BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

45

Report: Semiconductors

ust as the first Macintosh changed the personal computer (PC) market when it was launched to the masses in 1984, Apple’s [AAPL] move to design its own processors is expected to be a game changer.

To understand the significance of the move, it’s vital to look at the relationship between the big players in the central processing unit (CPU) and chip industries to understand how the market got to this point.

Apple’s revolutionary Macintosh arrived with great fanfare. A futuristic commercial directed by Ridley Scott had more than 77 million viewers glued to their TV screens when it aired during the 1984 Super Bowl.

Priced at around a quarter of its predecessor Lisa (circa $2,495 in 1984), the Macintosh was much more affordable. Initially, excitement and demand were strong — 70,000 units were shifted in the first few months — but sales gradually slumped.

Around the time of the launch, Microsoft [MSFT] and Intel [INTC] were dominating the computer industry. Their partnership — colloquially known as Wintel — was formed when Microsoft started optimising software for IBM’s [IBM] computers, which were running on hardware developed by Intel. For a while after that, many of the PCs pushed out to households around the world for everyday use ran on a combination of Microsoft Windows software and Intel hardware.

To counteract the growing threat of this duopoly, Apple teamed up with IBM and Motorola [MSI]. The three companies formed what is known as “the AIM alliance” in 1991 and developed a new processor architecture, the PowerPC, in an attempt to rival Intel’s more popular version.

Below: In 2005, Steve Jobs announced that Apple would switch from IBM to Intel chips

The AIM alliance’s inability to innovate quickly enough was another contributing factor. IBM and Motorola couldn’t keep up with Apple’s demand, which was putting IBM at a disadvantage. Its machines were dependent on inferior architecture, and the company was falling behind Intel in the processor performance race.

Fifteen years after it first embraced Intel, Apple decided to step away from the company.

Last year, it announced a transition from Intel’s x86 chips to Macs built with Apple

“Intel is too monolithic to be able to adapt to meet changing market conditions” b Tony Craythorne, Bamboo Systems

DESIGNING A CHIP FOR THE FUTURE Of course, Apple is no stranger to using its own chips. The first ARM-based processor designed in-house, and manufactured by Samsung [005930.KS], was the A4, which was used in the first-generation iPad and the iPhone 4. Before this, Steve Jobs, co-founder and former CEO and chairman of Apple, had asked Intel if it would fabricate the ARM chip for the iPhone 1, an offer that the company declined.

Before he stepped down as Intel’s CEO, the late Paul Otellini admitted the company had turned down the offer because the mobile processor market had been a low margin business until that point. He had never expected the iPhone to help usher in the smartphone revolution and go on to shift millions of units.

“The thing you have to remember is that this was before the iPhone was introduced and no one knew what [it] would do,” he said in 2013, adding that they had crunched the numbers and just didn’t see it as worth the time and investment.

Apple’s move to ARM was foreshadowed back in 2011. The technology news site SemiAccurate claimed at the time that “Apple is going to show Intel the door” when it comes to its computers. “The short story is that Apple [is] moving the laptop line, and presumably desktops too, to ARMbased chips as soon as possible… x86 is history,” wrote the founder of SemiAccurate, Charlie Demerjian, in a 2011 article.

A SHIFT IN INTELLIGENCE

Images: Getty images

Before the advent of the AIM alliance, Apple had been using Motorola processing units since the launch of the Lisa in 1983. After more than a decade of relying on PowerPC architectures, however, Apple announced in 2005 that it would be shifting to Intelbased systems the following year. The main reason for the shift was that the PowerPC architectures used too much energy and generated too much heat.

46

silicon — a term it uses to refer to its own chips. In November last year, it launched its groundbreaking M1 chip, based on CPU architecture developed by UK chip designer ARM Holdings.

Reviews of the M1-powered Macbook Air indicate that the chip offers a significantly faster, more efficient and powerful performance than the x86. But in February, several months after Apple silicon was first announced, Intel disputed claims that the M1 was superior. What is clear is that Apple’s move to ARM-based processors is a threat to Intel, even if recent share price performance paints a different picture.

In the past year through to 30 June, Apple’s share price was up 51.2%, while Intel’s share price was down 3.7%. Shares in Intel had hit its highest price in 20-plus years — $68.49 — on 12 April.

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Report: Semiconductors

APPLE UNLEASHES THE M1 By using its own chips, Apple now controls its own destiny. It can bring plenty of upgrades to its computer range with the M1, especially when it comes to performance and power efficiency. Apple has a successful history doing this too. A case in point is the A5x processor that helped power the thirdgeneration iPad’s groundbreaking retina display released in 2012, which made screens appear crisper and cleaner.

Apple’s transition to in-house chips will also help to establish a common architecture across all Apple products. New Macs with the M1 and future processors are now able to support iOS applications that were previously only available for iPhones and iPads. Another silver lining is that Apple is no longer at the mercy of delays affecting Intel’s chip production. Like in 2019, when delays to its 10nanometre (nm) Cannon Lake processor production had a knock-on effect on the shipment of new iMacs and MacBook Pro laptops.

In a bid not to fall further behind, reports surfaced late last year that Microsoft would be moving away from Intel as well by designing its own processors for servers and Surface PCs.

Below: Pat Gelsinger, who spent the first 30 years of his career at Intel, rejoined as CEO in 2021

A DISCONNECTED CHIP INDUSTRY

third quarter in a row that revenue growth had declined. Its data centre revenue, including sales of chips for servers, tumbled nearly 20% year over year to $5.56bn.

Going forward, new Intel CEO Pat Gelsinger — who stepped into the role in February of this year — hopes to revive the chipmaker’s fortunes by rapidly expanding its foundry capability. “I am confident that the majority of our 2023 products will be manufactured internally,” he said on an earnings call in January, adding, “it’s likely that we will expand our use of external foundries for certain technologies and products.”

Historically, Intel has kept the production of its chips in-house, while most of the other big players like Qualcomm [QCOM] and Broadcom [AVGO] have outsourced, allowing them to focus more on designing the chips.

Gelsinger said at the start of the year that the company would invest $20bn in Intel Foundry Services to build its first foundry operations in Arizona. It’s a move that could lead to Intel manufacturing ARM-based chips for the likes of Apple and Qualcomm — assuming these companies agree to be clients.

Despite this, some industry experts aren’t convinced Intel will be able to turn its fortunes

USA

48

Micron Technology $20.3bn

Synopsis $3.4bn

Micron (Switzerland) $6.6bn

Nvidia $10.6bn

Intel Corp $72bn

Key to the future success of Intel Foundry Services group will likely be its collaboration with IBM. The two companies are to work together to accelerate innovation in

semiconductor research, development and manufacturing. Intel, along with Samsung, is expected to benefit from IBM’s breakthrough 2 nanometer chip — a world first.

BRAINY BULL — Issue 05

FOUNDRY EQUIPMENT IDM**

Samsung Electronics (South Korea) $55.7bn

TSMIC (Taiwan) $55.7bn

AMD $6.7bn

Tokyo Electronic (Japan) $10.3bn KLA $5.3bn SK Hynix (South Korea) $23.2bn

Texas Instruments $14.4bn

Broadcom $22.6bn Lam Research $9.5bn

Qualcomm $19.6bn

around. “Intel is too monolithic to be able to adapt to meet changing market conditions…

Outsourcing production may help the company somewhat, but it’s also a metaphoric white flag in the air when you consider the maturity of ARM,” Tony Craythorne, CEO of ARM server vendor Bamboo Systems, tells Brainy Bull.

Craythorne adds that little has fundamentally changed with the x86 architecture since it was designed in the 1980s.

He predicts that Intel will gradually lose its share of the data centre market, which for a long time has stood at over 90%. Craythrone expects ARM to chip away at the market share

earnings call, “We do believe that the ability for our customers to take advantage of x86 this way will be a meaningful shift in how people think about ARM versus x86.”

NXP (Netherlands) $8.8bn Infineon (Germany) $8.9bn

ASIA

Applied Materials $14.9bn

Images: Intel

For a long time, Intel has been protective of its processor designs and has restricted licensing it out to third parties.

But this is set to

ASML (Netherlands) $13.2bn

Cadence $2.3bn

What does the Apple shake-up mean for Intel financially? The impact is unlikely to be that bad. The profit generated from its Macs segment accounted for just 10.7% of its total revenue in the second quarter of 2021.

In the first quarter of fiscal 2021, Intel reported that sales of chips for notebook laptops were up a record 54% year over year, while sales for the whole PC segment rose 38%.

However, overall revenue for the three months to the end of March was down a marginal 0.78% year over year at $19.7bn, marking the

change following Apple’s shift to ARM. The standalone Intel Foundry Services group will open the intellectual property of its x86 processor.

Intel’s Gelsinger said during April’s first quarter 2021

EUROPE

Asia is home to the world’s two biggest foundries

BREAKING UP WITH INTEL

INTEL SHARES ITS SECRET SAUCE

DESIGN FABLESS*

SMIC (China) $3.1bn Figures from 2019 revenue in US billions. Source: Bloomberg data

*A semiconductor company that designs chips but outsources its production. **Integrated Device Manufacturer, which is a semiconductor company that designs, manufacturers and sells integrated circuits.

“It’s unlikely to be businessas-usual for the largest ARM licensees. It is a massive wake-up call for the whole sector” b Mark Lippett, XMOS BRAINY BULL — Issue 05

over the next five years. Its data centre business could be affected if Microsoft uses its own ARMbased chips for servers.

NVIDIA’S AI DREAMS The prevalence of ARM-based processors in smartphones and impending future growth in the data centre market could be further strengthened if AI-focused Nvidia [NVDA] acquires ARM from Softbank [9984.T].

The $40bn deal, first reported last September, is subject to an investigation ordered by the UK government, and could yet be blocked. The argument is that ARM’s open licensing model could be restricted, making it possible for Nvidia to use ARM’s innovation and technology to benefit itself, though Nvidia CEO Jensen Huang said to analysts on a conference call in September 2020 that it would “maintain ARM’s open license model and customer neutrality”.

“Although Nvidia has promised to retain an open licensing model, it’s unlikely to be business-as-usual for the largest ARM licensees,” argues Mark Lippett, CEO of fabless semiconductor company XMOS. “It’s a massive wake-up call for the whole sector.”

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Report: Semiconductors

AMD’S COMEBACK STORY Nvidia’s ARM deal could bring the wolf to long-time Intel rival Advanced Micro Devices’ [AMD] door.

Sales of AMD’s Ryzen desktop x86 processors were boosted in 2020 as work-fromhome orders and lockdowns drove

demand for gaming PCs and laptops.

Meanwhile, the segment encompassing data centre and high performance computing products saw its revenue skyrocket 176% to $1.28bn in the fourth quarter of 2020. Overall, full revenue for the three months to the

end of fiscal year was up 45% from $6.73bn to $9.76bn.

In the first quarter of 2021, revenue was up a record 93% year-over-year to $3.44bn. Sales from the computing and graphic segment rose 46% to $2.1bn, while the data centre segment went through the roof —

with revenues up 286% to $1.35bn.

AMD’s incredible start to the fiscal year is a far cry from the five consecutive quarters of revenue growth decline it experienced throughout 2015 and the first quarter of 2016.

The reasons for the company roaring back are

threefold: AMD has improved its architecture, thirdparty manufacturing partners have been reliable, and Intel has floundered.

As Intel boss Pat Gelsinger looks for ways to help the company bounce back, all eyes will be on whether it can recover to the same degree as AMD.

THE SEMICONDUCTOR CHIP CRUNCH The scrutinised deal has been playing out against the backdrop of a global semiconductor shortage that has put the brakes on automotive manufacturers (who need chips for things like power steering or brake sensors to work) and crippled the electronics industry.

What initially started as a temporary delay in factories forced to close due to the coronavirus pandemic in March 2020 has turned into longer term disruption, due to surging demand driven by changing habits.

Gelsinger expects the situation to drag on into 2023, he said during Intel’s first quarter earnings call in April. Meanwhile, Apple announced during its second quarter of 2021 earnings call in April that it expects sales of iPads and Macs to be hampered.

The situation is forecast to cost Apple between $3bn and $4bn in the third quarter, although it says the quarter’s overall revenue growth should still be in the double digits.

Although Apple has secured the production of the 5nm chips that it needs, the semiconductor shortage is tightening its grip on other companies. For instance, Samsung has had to push back the release of its new Galaxy Note to 2022, which was meant to ship in the second half of this year, citing a shortage of Qualcomm processors. Qualcomm expects its supply chain woes to ease by the end of the year and is working hard to secure capacity with manufacturing partners. Nevertheless, Qualcomm’s share price fell 5.2% in the first half of the year.

The unprecedented and volatile nature of the chip crunch has weighed down funds like the SPDR S&P Semiconductor ETF [XSD], which grew by just 12.7% in the first half of the year. In comparison, the iShares PHLX Semiconductor ETF [SOXX] and the VanEck Vectors Semiconductor ETF [SMH] had gains of 20.1% and 20%, respectively, in the same period.

A DISRUPTIVE DEAL

50

“If you’re Apple, the risk of chip shortage will be manageable because it has pre-purchased manufacturing capacity. But, if you’re a smaller company with smaller quantity orders, any delay will be more pronounced” b Wayne Lam, CSS Insight

BRAINY BULL — Issue 05

A PARADIGM SHIFT

Images: Nvidia

What’s next for the semiconductor industry and what might a Nvidia-ARM tie-up mean for Apple and others licensing from ARM? It will likely cause many of the big players to have a rethink. Some might switch from ARM to new, competing architectures like RISC-V, Lippett says. The open-source architecture, which started being developed in 2010, has recently gained attention, partly because there’s no lock-in or hefty license fees to pay.

It’s not inconceivable that Apple could switch to RISC-V architecture at the end of its current ARM deal. Especially if the worst was to happen and Nvidia’s acquisition is approved, and it starts to develop products that could end up rivalling Apple’s. However, switching architectures could end up being a case of “jumping out of the frying pan into the fire” for ARM licensees, says Lippett.

That said, a switch would likely be easier for Apple than others. ARM offers different types of licenses: one where companies can buy both the design and chip and make any necessary tweaks and modifications, and another where companies buy ARM’s instruction set architecture and design their own chips to be compatible with it. Apple is in the minority as its licensing deal is the latter.

This, however, is all hypothetical. It’s likely to be at least two more years until Nvidia’s proposed purchase of ARM is given the green light by regulators — if at all.

Since the deal was announced on 13 September, Nvidia’s share price has gained 64% through 30 June — it hit an intraday of $818.24 on 1 July. In a bid to make the stock more appealing to investors, the company announced a four-for-one stock split on 21 May.

“If you’re Apple, the risk of chip shortage will be manageable because it has pre-purchased manufacturing capacity. But, if you’re a smaller company with smaller quantity orders, any delay will be more pronounced,” Wayne Lam, senior director for research at CCS Insight, says. CCS Insight provides market analysis for BRAINY BULL — Issue 05

Global semiconductor projected sales revenue in 2022:

$542 billion Data centres are set to see the biggest demand for chips

Data processing electronics

34.2%

Automotive electronics

Communication electronics

12%

30.2%

Military/Civil aerospace

Consumer electronics

1.1% Industrial electronics

9.3%

13.2%

Source: Gartner, Deloitte 2019

Left: Nvidia’s A100 AI chip, which it launched in 2020, is the engine of the company’s data centre platform

companies in the mobile and wireless sectors.

Lam explains that a major foundry like Taiwan Semiconductor Manufacturing Company (TSMC) [TSM] will naturally want to focus on fulfilling orders for Apple and Qualcomm. The smaller the order, the lower down the pecking order the company is likely to be, he says.

Despite TSMC’s lack of manufacturing capacity, it secured a deal in April to produce 5nm and 6nm parts for Qualcomm, which also outsources some manufacturing to Samsung, and has recently agreed to manufacture Qualcomm’s own flagship 5G chips.

The chip industry never stands still.

When the dust from the semiconductor shortage finally settles and supply chains return to normal, the impact of Apple’s move to ARM-based architecture shouldn’t be underestimated. “They drive the ecosystem,” says Craythorne. “Apple moving to ARM is a huge paradigm shift.” b 51

Perspectives:

“Sometimes decades go by and nothing changes, and sometimes a single year goes by and you get decades’ worth of change”

Author Neil Howe predicted the “Crisis of 2020” back in 1991. He explains why society is ruled by predictable cycles of events spanning decades, and how investors can use these patterns to better understand the markets

Words: Peter Taylor-Whiffen Photography: Stephen Voss

52

PANDEMICS ARE NOT completely random,” says Neil Howe. “They usually break out after periods of global mobility.” Indeed, there’s a long-term correlation between periods of openness and closeness in society, and pandemics can play a significant part in that cycle, he argues.

Howe, a generational theorist, knows this because he has the evidence to prove it — centuries’ worth of data which indicate that throughout history, the human race follows cycles of behaviour that affect our lives, our health, our outlooks, our attitudes to risk… and therefore, yes, our investments.

Take COVID-19, for instance.

While the virus has an identified cause and starting point (at least according to the World Health Organization) and ostensibly could have happened at any time, the coronavirus pandemic is also part of a generational pattern, believes Howe.

“It’s true that great pandemics usually break out after long periods of increasing global mobility,” he says. “Look at the Plague of Justinian [a sixth-century pandemic thought

to have spread from China, India and Egypt along trade routes], or look at the Black Death, which occurred after we finally opened up the Silk Road. It’s a rough echo, and there is at least the idea that pandemics are not completely random.

“And, what you often see historically,” he adds, “is that after a pandemic, we kind of close down a little bit, right? You certainly saw that after the Spanish flu — it wasn’t just everyone’s bad memory of World War I. The enormous toll of the Spanish flu caused the 1920s to have that atmosphere, certainly in the US, of completely turning away from foreign policy, and isolationism closing the immigration window.

That created a very different mood.

There is a long-standing relationship between openness and closeness and pandemics — it’s all part of the cycle.”

A COLLECTIVE BIOGRAPHY

It’s 30 years since Howe, a former public policy advisor who tracked trends in global ageing, long-term social policy and migration, teamed BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

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Perspect i v e s

up with US author William Strauss to unveil a theory that societal behaviours repeat themselves about once every 80 to 100 years — about the same time as a long human life.

The Strauss-Howe theory posits that each period, known scientifically as a saeculum, comprises four 20-year generations of societies that always follow the same occurrences and behaviours. They argued that as each saeculum ends, humankind encounters a crisis, which is followed by 1), a communal commitment to recovery that the authors called a high, then 2), an awakening or a backlash and attack on this community spirit in the name of individualism, which eventually results in 3), an unravelling, or societal and political unrest, which creates conditions for 4), a new crisis — which is where we are now.

The pair’s first book, Generations,

which was published in 1991, is lauded and respected as an interesting and relevant theory. Al Gore, the former vice president of the US, said it was the most stimulating book in US history that he’d ever read. But sharp readers with good memories might also recall it predicted the “Crisis of 2020”, which, while it didn’t specifically identify its nature, warned “it could rival the gravest trials our ancestors have known…” and might result in “some catastrophic failure in the world economy”. No wonder Howe is suddenly in hot demand.

“It’s basically a collective biography of each generation, from the Old World settlers coming to the New World,” he says. “Each generation views the world differently from their predecessors, not just because they’re older, but because they have lived a different experience — and there are

“It’s true that great pandemics usually break out following long periods of increasing global mobility”

54

patterns. One generation comes of age in a war, the next generation are the children during that war, and they have a very different view of what that event meant. And, of course, it shapes them differently and they grow their thinking and feeling differently.

“But certain kinds of generations always follow other kinds of generations. Baby boomers came of age as a very idealistic generation: they wanted to teach the world to sing, and they had all these great ideals for changing morality and culture and values. But they were followed by the notorious Generation X, who started coming of age during the 1980s, and are seen to be very cynical and pragmatic by some. That contrast between a brilliant idealism followed by a kind of cynical, caustic generation is a pattern that goes way back. We tried to apply these patterns, to look at where the US was going.”

BOOM-TO-BUST CYCLES

Howe and Strauss (who died in 2007) called each 20–25 year cycle a ‘turning’ — the fourth turning is the crisis — and each one can also predict patterns of investment behaviour. That’s why, Howe believes, the current generation — whose description as millennials was first coined in Generations — are playing the markets more cautiously than their parents and grandparents.

“Millennials tend to be very riskaverse,” says Howe. “They think stocks are risky. One of the reasons ETFs have become so popular is that millennials think they’re like some sort of dedicated, scientific, expert instrument that doesn’t have equities.

Which is, of course, ridiculous.” This risk aversion comes from a generation that craves stability, following on, he says, from “older generations who don’t believe in order.

“There’s a kind of menudriven, optimisation orientation of millennials, who want to get the most expert view, but also have a herd quality, oriented to making sure that they keep up with their community.

“I think that actually accentuates what we’re seeing generally in the BRAINY BULL — Issue 05

“The contrast between a brilliant idealism followed by a kind of cynical, caustic generation is a pattern that goes way back” economy with the growth of the passive-investing ETF mentality — everyone wants to follow the herd.

The thing you hear particularly from millennials is ‘I don’t care if I grow poor with all my friends, I just don’t want to be left behind.’”

Howe’s own cycle of life began in October 1951, when he was born in Santa Monica, California. In his late teens and early 20s, he achieved three separate degrees in English, economics and history, all of which BRAINY BULL — Issue 05

fuelled his interest in the links between particular generations and behaviours.

While working in jobs as a public policy advisor to organisations including Blackstone, the Concord Coalition, which is committed to stabilising the US national debt, and the partially state-funded Centre for Strategic and International Studies, he began his ground breaking work with Strauss. He has subsequently authored a raft of other books with such titles

as 13th Gen: Abort, Retry, Ignore, Fail?, Millennials Rising and Millennials Go To College. In fact, The Boston Globe called Howe one of the “great American prophets” after publishing The Fourth Turning (which was also co-authored with Strauss).

But it’s his current role that gives him an opportunity to pair his impressive generational insight with stock market trends — as managing director of demography at the Connecticut-based hedgefund research company Hedgeye.

GENERATIONAL PATTERNS

So, do particular investments do better than others after a particular turning? What can investors learn from these generational patterns?

“Certainly, the worst periods are the fourth turnings, or crisis points,” says Howe, “which is where we are right now. It’s turning out to be a time of tremendous turbulence.” His research shows that equity markets 55

P er sp ec t i v e s

Perspect i v e s

experienced the highest rate of volatility and lowest CAGR of 1.5% during fourth turnings. Meanwhile, first turnings are characterised as having the lowest volatility with a CAGR of 6.8%. He adds: “The thing I’m most concerned about now is accelerating inflation expectations, there’s no question about that. I don’t make recommendations for a living, but on my podcast a couple of months ago, I suggested shorting TLT, which is an ETF for long-term fixed rate bonds, nominal bonds, and that was a pretty good call.

“But I think inflation, particularly in the longer term, is not just a problem, it could be a solution, which I think should actually really worry people. Think about it — look at the

collateralised bond obligations, the 30-year outlook, not just on economic growth but on fiscal policy, debt and so on. It’s just crazy right now. Even given extremely optimistic assumptions about negative real interest rates for the next few years — rates that are way below nominal GDP growth until the early 2030s — the federal debt is still expected to more than double from its current level. The net financial position of the US is starting to deteriorate extremely rapidly.”

However, Howe suggests that certain policymakers may see inflation more as a solution than a problem.

“It equalises wealth and incomes. You transfer basically to all the debtors, and you take away from all the creditors,” he states, pointing

Neil Howe (left) and William Strauss in Washington back in 2001.

The pair authored their seminal work, Generations, in 1991, in which they theorised that history has discernible boom-to-bust cycles.

“Each generation views the world differently from their predecessors — but there are predictable patterns” 56

BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

to sovereign wealth funds.

“Maybe we care whether China’s central bank experiences losses… but I think the ways in which this could be regarded as a solution should actually worry people even more.

“If you do see an acceleration of inflation, you will see equities and treasuries being correlated again, moving in the same direction, up or down. And that’s going to be the end of the whole risk-parity approach to investing and further detract from the demand for bonds. They will no longer help you balance your portfolio any more. These are all things to worry about.”

Part of the problem, Howe suggests, with the long cyclical nature of societies and economies is that investors can’t call on their personal experience of previous similar situations. “Not many participants in the markets were around in the late 1970s and early 1980s,” he says.

“So, another problem is that we are dealing with an issue that exceeds the current memory of people.”

But, he suggests, society — and therefore the markets — are also shaped by generational attitudes, with every generation having to wait its turn to put down its particular stamp.

“The fourth turning is that civic turning point. It’s been kind of a long human lifetime since the Great Depression and World War II, all of the incredible public sector innovations, the redefinition of citizenship that really went on in the 1930s and early 1940s.”

In the intervening decades, he says, the cycles have continued as before.

“In the US, we had the awakening — the Age of Aquarius and Woodstock.

In China, we had the Cultural Revolution. And in Europe, we had the Baader-Meinhof gang and Euro terrorism.

“And here we are back to the fourth turning again. I think everyone feels we’re entering something. Sometimes decades go by and nothing changes, and sometimes a single year goes by and you get decades’ worth of change.

Fourth turnings are when the whole framework of our lives change much faster than they normally do.” b 57

Mindset

“Our goal this year is to beat the Ark Innovation ETF” Being on the pulse of evolving technology means understanding the macro. Beth Kindig — founder of the I/O Fund and former tech evangelist — talks to Brainy Bull about investing in future innovation

Words: Amelia Schwanke Illustration: Alexander Wells

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BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

WHEN BETH KINDIG stepped on the Silicon Valley scene in 2010, many of the technology titans we know today were still in their infancy — Uber [UBER] was still working on its taxi-hailing app and Netflix [NFLX] had only just started expanding its streaming service internationally.

A decade had passed since the dotcom crash, and tech investments were beginning to boom again. Many corporations at the time were looking to digitally transform their businesses, but couldn’t understand what separated one cloud company from the hundreds of others.

Kindig was one of the few people who could decipher the technical jargon and translate it for the investment world. She was hired as a venture capital analyst at Sky Group to write reports that simplified complex technical concepts. This whet her appetite, and over the past 11 years, she has worked with more than 300 startups, authored more than 1,000 articles and presented at numerous high-profile technology conferences.

Her unique technical understanding fostered a reputation and career that led her to found

CitizenTEKK, an online platform with more than 300 tech leaders. It didn’t take long for Kindig to become one of the most trusted technology-focused sources for public markets. Some of her most notable calls were predicting the Facebook [FB] stock dip in the second quarter of 2018 and Uber’s IPO loss in the second quarter of 2019.

Kindig has since built out a talented investment team to launch her I/O Fund, which specialises in investing in tech microtrends.

To gain an insight into the mindset of a tech aficionado, Brainy Bull asked Kindig to talk through her journey setting up the I/O Fund, how she analyses companies and what tech themes she’s most excited about.

In 2018, I started to write for the public markets and made some big calls that turned out to be exceptional wins. I called Roku [ROKU] at $30. Our first entry was $16, just after the IPO. Everyone thought it was a company that would get eaten up by the tech giants because Google [GOOGL] and Amazon [AMZN] played in the same arena. At the time, I laid out a clear thesis explaining why its third-party ad network would stave off big tech competitors, which had not yet materialised, and today it’s clear it was correct. We sold for more than 100% gain and re-entered around $29 in December 2018, which we have held since. We’ve held Roku through three 60% or greater drawdowns and now have four-digit returns.

59

Min d s e t

“The combination of knowing what trends are in play and the ones to double down on is important” In July 2019, I teamed up with Knox Ridley to launch the premium service. By this point, I’d been writing a weekly newsletter and building an audience. I knew that you could have a really strong tech analyst make great stock calls, but I needed someone with a financial background and portfolio management experience to manage risk. So, I teamed up with somebody who has been managing and looking at investment portfolios since 2007. We launched our portfolio in 2019 and let people know every trade we make, alongside full-length analysis.

Six months before COVID-19 struck, I said Zoom’s product would and could go viral. I explained in great detail how the product was positioned and had a viral mechanic built in.

Six months later, it blew up in a viral manner and it was a big deal. Nobody had called that. The virality of that product was something I could see that nobody else saw. We re-entered Zoom at circa $64, have added to our position numerous times since and are still holding. [The stock

climbed 333% in the year after Kindig published analysis on 6 September 2019.]

Around the time the coronavirus pandemic began in 2020, our business really started to get put on the map because cloud exploded.

On our premium site, we were talking about all kinds of cloud companies between September and December of 2019, while cloud was out of favour.

I was so adamant that the sell-off in September of 2019 was a buying opportunity and my readers should be positioned in cloud. That was like standing in front of a train because everyone was worried, thinking it was the end of cloud with many stocks being down 50%. Then, it exploded — and that really put us on the map.

It was one of those stronger calls where you stand in front of the market as a contrarian. I feel comfortable doing that because I know the products so well. That combination of knowing when to be a contrarian and having a different reality to those who have never really worked a day in tech is where the edge comes from.

In May 2020, we officially told our premium members that we’d combined our money and were a fund. We formed the fund because we assumed that moving forward, we should get audited. We started to approach investing in that way and Ridley began to release his trades in real time. The reason why that’s important is that the question an average Joe in the market needs to answer to is: “Are you buying today?”

It’s one thing to call a stock three years ago and another thing to disclose if you’re buying today. Calling stocks is useless to most readers as it could be

60

flow analysis because of Warren Buffett and value stocks, is competitive analysis. And if you don’t have that breadth of experience in the tech industry, then it can stunt you a little bit because you have nothing to rely on to make these critical decisions.

trading a top. Strategically, we add to key positions but also trim a lot off the top because [you’ve got to] take into account the timing issue with trends.

I’m aware of this because I saw startups that were brilliant yet unable to get funding until the timing was right. The combination of knowing what trends are in play and the ones to double down on is important.

We start with quality, in-depth product analysis and that’s completely different to how most companies do it. They’ll begin with financials and that’s the problem.

The best tech investors, hands down, are venture capitalists. They’re doing it blind on the financials because the companies don’t have any kind of real revenue growth yet. Or, if they do, it’s not insightful enough to draw proper conclusions from. They’re having to completely rely on key metrics, such as market size, product-market fit, product features and rate of adoption, which describes how a product is being adopted, plus how sticky the retention is.

We think requiring perfect numbers is counterintuitive to how a tech product grows. If you look at Amazon, [its figures] will be really flat, then, all of a sudden, it completely spikes up with hockey stick growth and takes off.

If you’re a financial analyst, you tend to look at the lagging financials first, then you’ll examine the consensus. That’s BRAINY BULL — Issue 05

Beating benchmarks Fund returns for the period between 9 May and 31 December 2020

I/O Fund Ark Innovation ETF Invesco QQQ ETF MSCI World Index S&P 500 Index

115.15% 115.5% 39.5% 30.5% 28.2%

Source: YCharts. I/O Fund figures were provided by the firm

where a lot of human error occurs because it relies on financial modelling.

There’s no edge to that approach. If you were to turn your attention to the consensus of Nvidia [NVDA] during the crypto bust, it cannot accurately forecast what artificial intelligence (AI) will do for their data centre segment.

But, if you’re looking at adoption among AI developers of Nvidia’s CUDA platform, that’s where the financials are not representative of opportunity.

We were able to confidently call

Nvidia the best AI play even when the company reported negative data centre revenue for a year after our original analysis.

We’re watching key levels of sentiment because tech stocks are very sentiment driven, which means there’s this excitement and exuberance that is behind them. But there’s also extreme fear, and that unjustifiably plummets the price. For example, most recent earnings reports couldn’t have been better for the majority of companies we cover, even if we don’t own them in our universe. We’re probably in oversold conditions because tech, despite the price volatility, is steady on the actual earnings. It’s because of the high rate of adoption across the globe.

Tech is incredibly competitive.

I would say the number one analysis that is needed in the tech space, and people will talk about discounted cash

“Knowing when to be a contrarian and having a different reality to those who have never really worked a day in tech is where the edge comes from” BRAINY BULL — Issue 05

Our goal this year is to beat the Ark Innovation ETF at the best of times and the Invesco QQQ ETF in the worst. We want to always be above the indexes and highest-performing fund on Wall Street in tech. You have to be somewhat realistic because one thing that people in tech have to understand is that if you’re a tech investor, you won’t get four-digit gains if you don’t have double-digit losses. For instance, we have some big winners, but we wouldn’t have those if we didn’t hold through certain drawdowns.

In the short-term, we’re leveraged into connected TV ads. A lot of people think that over-the-top technology and connected TV is a cord-cutting trend.

But the message I’ve had for three years is that it’s not — it’s a pay TV ad migration trend. The brands that are paying for ads on TV have had to migrate their budget over to connected TV, and that takes time. But we think that’s finally happening. This is why we’re long on FuboTV [FUBO]. We think live sports’ ad budgets, which have been going to linear television, are going to migrate to over the top.

One thing I’ll probably continue to become more vocal on is that Ridley and I think the five-to-10-year opportunity will be AI. It will be four times larger than mobile. Also, as far as the general narrative goes, something we might think differently about is that I don’t think the semiconductor shortage is a negative. It’s showing us there’s an increased demand for semiconductors. I don’t believe that’s ever going to change in the next five years. I’d say they’re moving from a cyclical to a secular trend. The other trend I’d say is augmented and virtual reality. That’s a space that’s going to challenge a lot of investors as they may not understand the opportunity. b 61

Tools of the Trade:

MaKInG a SPLaSH

“It’s really the retail investors that have taken a love to SPACs because they feel like they get to be part of the IPO process without paying a huge premium” — Howard Lindzon, Social Leverage

SPACs have dominated investment headlines in recent years, growing from less than 10% of the IPO industry in 2016 to more than 75% in the first quarter of 2021. But what exactly is a SPAC? A SPECIAL PURPOSE acquisition company, or SPAC, is an entity that’s formed to raise money for an initial public offering (IPO) to subsequently acquire or merge with another company. SPACs are also known as blank-cheque companies because, while their founders might have a particular target in mind, the company it will eventually purchase is unknown to the general public.

Because a SPAC has no commercial operations (it is, in effect, just a pool of money), its own IPO is a relatively straightforward affair. Once it has publicly listed, it can acquire and merge with another commercially operative company, taking it public without the bureaucratic hurdles that come with a conventional IPO. While SPACs are typically founded by investors with expertise in a particular field — and seek institutional investment and underwriters before offering shares to the public — private investors can buy into a SPAC through its IPO. The money raised is held in an interest-bearing trust account and cannot be used for any purpose besides acquiring a target company or returning investors’ money in the event of liquidation (which usually happens after two years if the SPAC fails to find a suitable target to acquire).

62

Soaring eagles

Companies active in the field include Eagle Equity Partners, which has launched several SPACs, including Soaring Eagle Acquisition Corp., which took DraftKings [DKNG] and Skillz [SKLZ] public. The SPAC has plans to take Ginkgo Bioworks, a synthetic biology startup that works with bacteria, public next.

Meanwhile, in April, the Southeast Asian ride-hailing company Grab agreed on a record-breaking deal to go public through a $40bn merger with the California-based SPAC Altimeter Growth Corp. Previously, the likes of Virgin Galactic [SPCE] and lithium battery producer QuantumScape [QS] went public through SPAC vehicles. Some of the top-performing SPACs from last year were Live Oak Acquisition Corp, which took Danimer Scientific [DNMR] public, and dMY Technology Group, which has launched four SPACs. Live Oak Merchant Partners has since launched a second blank-cheque company focused on high-growth businesses.

Sprouting SPACs

For much of history, SPACs have been something of a sideshow to the traditional IPO process. In 2009, only one company went public via a SPAC deal, raising $36m in equity.

Words: Daniel McEvoy Illustration: Joe Wilson

BRAINY BULL — Issue 05

BRAINY BULL — Issue 05

63

Tools of the T r a d e

2021

Source: SPAC Analytics 11.06.21 | IPOs greater than $40M

(through June)

64

362

SPAC IPOS

RAISED $111.1BN

2020

248

2019

59

SPAC IPOS

RAISED $13.6BN

2018

46

SPAC IPOS

RAISED $10.8BN

2017

34

SPAC IPOS

RAISED $10BN

2016

13

SPAC IPOS

RAISED $3.5BN

SPAC IPOS

RAISED $83.4BN

2015

20

SPAC IPOS

RAISED $3.9BN

2014

12

SPAC IPOS

RAISED $1.8BN

2013

10

2012

9

2011

16

2010

2009

SPAC IPOS

SPAC IPOS

RAISED $1.4BN

RAISED $490M

SPAC IPOS

RAISED $1.1BN

7

SPAC IPOS

RAISED $503M

1

SPAC IPOS

RAISED $36M

The return of the SPAC SPAC activity fell to just one SPAC IPO in 2009 but has returned with a vengeance to hit more than 360 in the first six months of 2021

Even as recently as 2019, only 59 companies went public through SPACs globally, raising a combined $13.6bn.

However, as COVID-19 hit, SPACs presented companies with a frictionless way to go public. As a result, 2020 saw a significant resurgence, with 248 SPAC IPOs taking place throughout the year at an average deal size of $336.1m. That trend hasn’t slowed down in 2021 either. A whopping 362 SPAC IPOs, a 49% increase on 2020’s annual total, had already taken place by 30 June 2021, raising $111.1bn in capital.

Julian Klymochko, CEO and CIO of Accelerate Financial Technologies — which launched the world’s first SPAC-focused ETF, the Accelerate Arbitrage Fund [ARB.TO] — makes the pace of growth clear: “SPACs went from 10% of companies going public, to 50% last year, to more than 75% in the first quarter [of 2021].”

For Klymochko, the sudden rise in popularity is surprising considering that SPACs had a “slimy reputation” in the past. Back then, reputable companies avoided these niche investment structures.

In 2013, SPACs started to be structured differently, leading the way for more high-quality sponsors and companies looking to go public.

“The seminal event was probably the Virgin Galactic deal. That changed the misconception that public market investors only want reliable returns and showed that many want not just pre-profit but pre-revenue companies,” he says.

The industry has grown so rapidly that the number of SPACs thought to be seeking an acquisition or merger this year (285, according to SPAC Analytics) far exceeds the number of IPOs that typically take place in a year — circa 195, based on data by Statista between 1999 and 2019. This suggests that there is a greater supply of SPACs than companies ready to go public.

Disruptive IPOs

SPAC advocates argue that one of the advantages of this process is how it BRAINY BULL — Issue 05

broadens the range of companies that can be taken public. Klymochko told Brainy Bull: “Earlier stage companies, some not only pre-profit but prerevenue, can go public via SPAC, but not through a traditional IPO. This offers public market investors the opportunities to invest in earlierstage growth companies along the lines of late-stage venture capital.”

Howard Lindzon, founder and managing partner at Social Leverage, told Opto Sessions: “It’s really the retail investors [that] have taken a love to [SPACs] because they feel like they get to be part of the IPO process without paying a huge premium.”

However, there are risks for retail investors that want to go down this route. “You’ve still got to do the research,” says Lindzon. “The retail investor can read the S-1 [a form that is, in the case of companies going public on the US markets, filed with the SEC to register a company’s securities], they can talk to the management team, we’re all on Twitter.”

He explains that retail investors will pay a premium of $0.10-$0.20 per share in a SPAC on top of a typical share price of $10 for a blank-cheque company’s stock. “You’re going to be paying less of a premium in general

than an IPO, which is marked up.”

When asked if he saw any downsides to SPACs, Klymochko responded: “Yes, the media has a negative bias against SPACs. In addition, SPACs can represent a more costly method of going public or raising capital.”

The extra cost is incurred through dilution from the sponsor.

However, Klymochko stresses this doesn’t always have to be the case.

“If done correctly, like the Pershing Square SPAC, it could end up being less expensive than a traditional IPO. The other question is, ‘is the sponsor providing value for that dilution?’. You can’t make a blanket statement — for some companies it is, for others perhaps not,” he says.

Klymochko’s Accelerate Arbitrage fund uses an arbitrage strategy of simultaneously buying and selling securities in different markets to earn returns of 6% or higher “with minimal downside risk”. “I feel that arbitrage… has a great risk-reward profile and is generally uncorrelated with traditional asset classes,” he explains. b

One of the biggest factors that helped SPACs shake off their bad reputation was a slew of celebrities, such as Serena Williams and Jay-Z. These are some of the leading financial heavyweights fuelling its rising popularity: Bill Ackman Founder and CEO of Pershing Square Capital Management The hedge fund activist filed to take his SPAC, Pershing Square Tontine Holdings, public in July 2020 and announced plans in early June this year to acquire 10% of the outstanding ordinary shares of Universal Music Group for $4bn.

Chamath Palihapitiya Founder and CEO of Social Capital The so-called ‘SPAC king’ is one of the biggest names in the financial markets, having taken Virgin Galactic public. The Wall Street Journal notes that Social Capital Hedosophia raised $3.7bn for five SPACs last year and seven more confidentially.

Five top-performing SPACS in 2020 Company

Return from IPO date

Live Oak Acquisition Corp

171%

Kensington Capital Acquisition

162%

TPG Pace Beneficial Finance

154%

Longview Acquisition Corp

110%

dMY Technology Group

97% Source: FactSet

BRAINY BULL — Issue 05

SPAC Pack

Michael Klein Founder and managing partner of M.Klein & Company Churchill Capital Corp. has taken seven SPACs public so far, according to data by The Wall Street Journal, including Clarivate Analytics, MultiPlan and most recently Lucid Motors.

Although S3 Partners noted that it was one of the most shorted SPACs in April.

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Take

More hands on deck.

Easier to navigate the winds of change.

with:

You are independent. But never alone.

Lyn Alden The founder of Lyn Alden Investment Strategy has been providing thousands of investors with global macro research for more than 15 years

LYN ALDEN HAS a unique investment approach. She focuses on long-term fundamental equity investing, but takes a contrarian stance to finding quality, undervalued stocks. Alden’s background in engineering and finance, and how she applies that methodical thought process to her investment approach, is what gives the investor her edge.

1: What’s the top mistake that investors make?

Buying and selling emotionally.

2: Who or where do you go to for investment or economic insights?

I have a wide network of information sources. Years ago, it used to be that having information was the advantage. Whereas now, there’s so much information that we need to synthesise it. I have a select group of specialists that I listen to, but it depends on what your overall goals are. If you’re a generalist investor, you want to find specialists in different fields.

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By picking people who are experts in their fields and using them as filters, you can extend your reach in terms of things you could pay attention to without trying to be an expert in everything. That’s how I’ve approached it.

3: What’s the most memorable moment from your career so far?

The launching of my flagship research service, just because it did so well. It did better than I thought it would and so I was happy to see that people found it valuable.

4: What top tip would you give to your younger self?

I would say to be flexible. If I could go back, I would have been a little bit more flexible with some of those fast-growing companies to see the forest through the trees.

5: If you were to narrow it down to one thing, what do you think your biggest source of alpha is?

A long-term view. The market is so short-term focused because many of its participants are getting judged on a monthly or quarterly basis. If you had the luxury to say, “I have no idea what’s going to happen to this investment in the next six months, but I have a high conviction that it’s going to outperform over the next three to five years” — that’s where I think one of the past few places of alpha is. The algorithms have taken out so much short-term alpha that the longer-term focus is really where there’s still some edge to be had.

The second one would be diversification.

If you can combine an equity focus with a multi-jurisdictional approach, that’s where you can still find something that clearly has a better risk-reward potential, simply because it’s not on a lot of peoples’ radars. b BRAINY BULL — Issue 05

In the investment markets, change can work to your advantage.

You just have to know how to navigate it. See how you can make the best of the opportunities change brings with our in-depth briefings, staggering choice of investment options and much-awarded trading interface.

Extensive spectrum of investment products: 40,000 trading instruments across 125 global markets. +971 4 3562800 | info@century.ae www.century.ae Regulated by SCA Disclaimer: Century Financial Consultancy LLC (CFC) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). objectives, risk tolerance and your level of experience with these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor, and you should ensure that you understand the risks involved and seek independent advice from professionals and experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to risk disclosure on our website.

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Out in the investment world, new opportunities are at play and new innovations abound. The advantage is with the quick and agile. At Century Financial, we keep you ahead of the game with our in-depth briefings, staggering choice of investment options and much-awarded trading interface.

Extensive spectrum of investment products: 40,000 trading instruments across 125 global markets. +971 4 3562800 | info@century.ae www.century.ae Regulated by SCA Disclaimer: Century Financial Consultancy LLC (CFC) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). objectives, risk tolerance and your level of experience with these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor, and you should ensure that you understand the risks involved and seek independent advice from professionals and experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to risk disclosure on our website.