Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
Data and data analytics have always been potentially valuable to businesses. Emily Barnard, Deputy Portfolio Manager of Edinburgh Investment Trust, explains how AI-related technologies is driving this value every higher and how the Trust is exposed to companies that will benefit from these technologies.
Data – and data analytics – have long been seen as valuable to businesses. When harnessed effectively, they support the development of new products and services and the duration of growth and returns which businesses can achieve. In particular, products and services that incorporate proprietary data create barriers to competition, helping companies to build economic moats. This creates value for firms, customers, and investors.
Today, the rapid emergence of AI-related technologies is driving this value ever higher for both firms and investors.
The advent of modern computing in the mid-20th century enabled ever more sophisticated data processing and the exponential rise in the volume of information brought about by the internet led to big data analytics in the 21st century. With the world having moved from just ‘data’ to ‘data and analytics’, the accelerating adoption of Artificial Intelligence (AI) means that it is now moving to ‘data and analytics and AI.’
Companies can create more value for customers by adding intelligence and analytics to their data products and services. They can use data to get closer to their customers and to offer higher value-add solutions. A mutually beneficial relationship means companies’ products and services become ‘stickier’, giving investors greater visibility over the future path of revenue growth. This step up in the value equation means that the most advanced companies can continue adding value to customers, growing their economic moat, supporting margins and delivering compounding returns to investors.
This evolution of data and analytics is illustrated by three companies held within the Edinburgh Investment Trust, all of which are new positions since we took over managing your Trust earlier this year: the London Stock Exchange Group (LSEG), RELX and Verisk. These companies provide a range of services, but a key element of their propositions has been to provide data analysis that clients have embedded into their own workflows. Companies such as these are more often adopting a ‘pricing to value’ philosophy. With increasing value delivered which enables growth and efficiencies at their customers, data and analytics leaders are now pricing their products and services to reflect this – yielding strong and likely sustainable pricing power.
For example, if we analyse a company that is deeply embedded with its customers, providing high-value critical data analysis products (often on a subscription basis), then this gives us clearer visibility of the range of its future growth outcomes. The company would typically be rated more highly because of the visibility and confidence in its outlook.
There are multiple factors which give each of LSEG, RELX, and Verisk an advantage from a ‘data and analytics and AI’ perspective. We will cover one for each:
End-to-end data coverage
LSEG is significantly diversified beyond just owning the London Stock Exchange. It is a global financial markets infrastructure and data provider serving customers across financial markets. It has mostly recurring revenue and 50%-plus margins. Its capabilities include data, indices and analytics, trade execution, clearing and risk management products and services. Its customers include a wide range of financial market participants, and increasingly corporates, who use the data for decision-making. LSEG’s data set is deep, broad, exceptionally difficult to replicate, and a significant and enduring source of competitive advantage.
A key feature of its services is its provision of end-to-end data coverage from the start of the trade life cycle, from which it can capture the full value chain, offer an expanded set of products and services, such as more recently the provision of data management as a service. This end-to-end data coverage gives LSEG a significant competitive edge.
LSEG announced a partnership with Microsoft in 2022 that sees LSEG utilising Microsoft’s cloud infrastructure and sees both leaders co-developing products together. This combines Microsoft’s excellent track record of product development and innovation, together with LSEG’s deep specialism in financial markets and broad and valuable data set. It is our belief that this will significantly enhance LSEG’s future revenue growth, pricing power, and margins.
An important driver of customer value
RELX provides information-based analytics and decision tools for professional and business customers in sectors including risk; scientific, technical and medical; legal; and exhibitions. For example, RELX owns Elsevier – a leading global scientific publisher which alongside publishing high impact journals such as The Lancet, also provides data analytics tools.
RELX’s strategy is to develop increasingly sophisticated information-based analytics and decision tools that deliver enhanced value to customers. It attributes its ability to develop and deploy these tools to having embraced analytics and AI technologies for well over a decade and believes that its ability to continue leveraging AI and other technologies as they evolve will be an important driver of customer value and growth in the business for many years to come.
RELX has delivered an improving trajectory of both revenue and earnings growth, as the business has shifted towards higher growth analytics and decision tools. The company’s approach is to price new and improved tools according to the value provided to customers. Its philosophy is to adopt a long-term approach, partnering with customers to deliver added value.
Another example of its offering is through its Lexus Nexus subsidiary, which provides data engines for law firms. It has launched Lexis+ AI, which helps lawyers to be more productive. Its features include conversational interactive AI search, it also drafts and analyses documents and provides legal summaries.
Proprietary and contributory data
Verisk is a US-listed business with high margins and returns on capital. It is a strategic data analytics and technology partner to the global insurance industry. Through advanced data analytics, software, and deep industry knowledge, it aims to help clients improve their operating efficiency and underwriting and claims outcomes, combat fraud and make informed decisions about global risks.
As a large and well-established company, Verisk has a deep competitive advantage: in addition to its proprietary data, it has contributory data from its broad customer base, enabling it to provide rich and hard-to-replicate data and analytic tools. This ability to merge its own data with that of its customers is a key value-add for Verisk.
Fitting the process
All three of the above companies meet the criteria for our investment process. They have strong economic moats which continue to strengthen, and attractive total return potential. By integrating data analytics and AI into the workflows of their clients, they become highly valuable long-term partners with their customers. This transparent value-add gives us greater confidence in the trajectory of revenue growth because these companies’ customers depend on them. By working together with their customers to solve problems, their ability to develop new products is all the greater.
The rising trend of end-to-end service models is also supportive of these three companies. Their customers see them as trusted partners offering consistent and high value-add products and services and will likely direct more spend to them as a result.
All three companies are outstanding examples of how data plus analytics plus AI can improve an economic moat, or a business’s ability to maintain a competitive advantage to protect long-term profits and market share. Their propositions are about more than just data – through their partnerships with clients, they can demonstrate the value they add, which should be a win-win for all, including investors.
Understand common financial words and terms See our glossary
Read, watch and listen to more insights from Liontrust fund managers here >
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Company is actively managed within its objectives and is not constrained by a benchmark. The Company borrows money to invest in The stock market within prescribed limits with The aim of enhancing returns. The Net Asset value (NAV) return of The Company corresponds directly to The performance of The securities in which it invests and The income from them. The share price, which will determine The return to The investor, will also be affected by supply and demand. Consequently, The return to The investor may be higher or lower than The underlying NAV return. We have classified this product as 4 out of 7, which is a medium risk class. This figure rates the likelihood of losing money in the future at a medium risk level. The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall. The product may invest in smaller companies which may result in a higher level of risk than a product that invests in larger companies. Securities of smaller companies may be subject to abrupt price movements and may be less liquid, which may mean they are not easy to buy or sell. The product may use derivatives for efficient portfolio management which may result in increased volatility in the NAV.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
