Worldwide All Cap

Founded in 1873 to make products for Sweden’s railways, Atlas Copco is a multinational provider of industrial solutions including air compressors, vacuum pumps, and tools. It derives 70% of its sales from outside Europe.²

Atlas Copco was named after the mythological Titan who carries the sky on his shoulders; such lofty etymology highlights the ambition, determination and passion that has driven this company over 151 years. Beginning with one of the three original founders of the business, André Wallenberg, Atlas Copco continues to be stewarded by the Wallenberg family, and benefitted from their support during two difficult periods in the 1880s and 1930s when the business pivoted from railway products to diesel motors and, finally, air compressors.

Atlas Copco’s end markets are well-diversified, ranging from manufacturers of semiconductors, automobiles, food and beverage, and pharmaceuticals. The product portfolio is formidable, but Atlas Copco’s key innovation was the development of energy-saving variable-speed drive compressors in 1994, which are still iterated today using new software and sensors to optimise performance. The latest version saves a further 11% of CO2 emissions compared to their predecessors, and as much as 90% of the energy used can be recovered for use in heating or steam.³ Further innovations in dry air compressors – critical in the manufacture of electronics – exemplify the rewards of Atlas Copco’s sustained research and development (R&D) spending, which was 4% of sales in 2023.⁴

As innovative as Atlas Copco’s new products are, their closeness to customers allows them to seize the opportunity of finding new applications for existing products such as the use of an oil-free air compressor to create ‘bubble curtains’ around offshore wind developments. This reduces underwater noise by over 90% to protect marine wildlife.⁵

Much of Atlas Copco’s innovation has been spurred by the decentralised model. This splits the business into divisions and smaller business units, which are entrusted with autonomy and accountability for their own profit-and-loss statement, as well as customer engagement. An internal job market and strong encouragement of internal mobility – including internationally – has built a strong culture, whether employees are based in Stockholm or Manila. Testament to this is the enduring tenure of both the CEO Vagner Rego (25 years) and the CFO Peter Kinnart (31 years).

With a relatively asset-light business model and outsourced manufacturing, Atlas Copco’s cash flows are stabilised by recurring servicing and aftermarket revenues. Ongoing acquisitions into new technologies should complement organic growth opportunities within industrial electrification and digitalisation, setting Atlas Copco up for another 150 years.

Atlas Copco faces the risk that worsening macroeconomic conditions may reduce customer budgets and propensity to spend. There is also the risk of intensifying competition from Chinese companies. 

1 As of 19.9.24.

2 CapIQ.

3 No waste - low emissons - Atlas Copco Group

4 Keeping it dry - Atlas Copco Group. R&D spend – S&P Capital IQ.

5 Oil-free bubble curtains protecting marine life - Atlas Copco UK.

Founded in 1896 by Fritz Hoffman-La Roche, Roche is a multi-national healthcare company that produces pharmaceutical drugs, as well as diagnostic equipment and reagents. In 2023, its medicines treated 22 million patients worldwide and its diagnostic systems 29 billion test results.³

One hundred and thirty years on from its foundation, Roche continually finds new ways to meet patient need. The ownership of the Hoffman and Oeri families empowers Roche to pursue decade-long opportunities; that Roche has had just seven CEOs in 125 years is testament to their long-term outlook.

Roche is industry-leading in its research & development (R&D) spend at 26% of pharmaceutical sales – almost USD15 billion⁴– and has produced blockbuster drugs in areas as diverse as neurology, oncology, and immunology. Their multiple sclerosis drug Ocrevus, for example, has over 25% share in the United States⁵; a recent formulation allows treatment by injection rather the original 4-hour infusion, saving patient and healthcare professionals’ time.⁶ Roche’s sustained investment in drug development has built a diversified pipeline of over 100 drugs, with nine in final phase testing⁷. Nor is Roche averse to finding new development methods; their gene therapy subsidiary, Genentech, has entered a strategic collaboration with Nvidia using artificial intelligence to maximise drug discovery opportunities within Roche’s extensive datasets.⁸

The pharmaceutical business has been strengthened by Roche’s market-leading diagnostics segment, which offers strong recurring revenues from the sale of consumables as well as equipment. Roche currently offers 600 tests and plans to launch a further 40 each year⁹. Long-term structural trends guide investment and development; Roche’s new, automated mass spectrometry systems (measuring the characteristics of chemical samples) should enable laboratories to perform more sensitive tests without hiring highly specialised technicians to operate complex machinery. Similarly, Roche has pioneered one of the first regulatory-approved¹⁰, self-administered cervical swabs to address low uptake of cervical cancer screening; an innovative solution that hopefully reduces the 4,000 annual, preventable deaths from cervical cancer in the United States, and many thousands more in middle- and low-income countries.¹¹

Roche’s true opportunity lies at the intersection of its unique expertise across diagnostics, data, and drug development: personalised medicine, enabling earlier detection of illness, individualised treatment, and better patient monitoring. With its consistently strong balance sheet and strong cash flow generation – with cash flows growing at an average compound rate of 20% over the last 20 years¹² – we believe Roche is ready to seize the opportunity.

Roche faces the risk of failures within its drug pipeline, although its extent and diversification, as well as the diagnostics segment, should cushion the impact of any one failure. Similarly, technological disruption could affect Roche’s business, despite its strong position in R&D investment.

3 Roche factsheet, 2023

4 Source: Stewart Investors investment team and company data

5 Source: Stewart Investors investment team and company data

6 Subcutaneous Ocrevus gets approval in EU for forms of MS (multiplesclerosisnewstoday.com).

7 Source: Stewart Investors investment team and company data

8 Genentech and NVIDIA Enter Into Strategic AI Research Collaboration to Accelerate Drug Discovery and Development | Business Wire

9 Source: Stewart Investors investment team and company data

10 Approved in the United States by the Food and Drug Administration (FDA)

11 Press release by Roche on cervical swab approval, 2024

12 S&P Capital IQ.

Founded in 2000 by brothers Ken and Michael Xie, Fortinet is one of the largest global providers of network security hardware and software. These solutions support customers across a highly diversified set of geographies, industries and customers. In 2023, their Fortiguard services offering blocked 2.4trn vulnerability attempts and 3bn malware deliveries to protect customers.¹

Fortinet’s strength lies within its founders’ expertise, patience, and ambition. Together, Ken and Michael have almost 50 years of experience in network security. They had the foresight as early as the late 1990s to invest in the design and manufacture of firewall-specific processing chips (application-specific-integrated-circuit, or ASICs).

When compared to firewalls run on general-purpose computing processors, Fortinet’s ASIC-based firewalls operate more quickly and efficiently, allowing them to block more complex threats from accessing the network. Not only do Fortinet’s chips offer better performance at lower power requirements (-88% vs. industry-standard processing chips), reducing the overall cost of ownership for customers, but vertical integration helps them secure chips, even during recent supply chain snarls in which some competitors experienced months-long shipping delays.

This technical expertise has helped Fortinet build a strong franchise across a highly diversified customer base, with its single biggest country exposure being the US at 27% of sales. More predictable services revenues now amount to 60% of sales, while Fortinet has grown free cash flow at a compounded average growth rate of 27% since 2015. Pleasingly, the Xie brothers’ long-termism has seen much of this bolster a balance sheet which has more cash than debt. They have also been able to invest cash flows into research & development, and have invested  $1.7 billion to this end since 2017. This investment underpins Fortinet’s ambitions to grow further through end-to-end network security solutions – protecting infrastructure, data, access and applications.

As such, Fortinet is well-placed to capitalise on structural tailwinds around our economy’s increasing dependence on computing networks to connect data, devices, and people – fanned further by the possibilities of broader AI adoption – but also the mounting risks posed by cyberattacks. Some estimates suggest global cybercrime costs could hit $10.5 trillion dollars by 2025², to say nothing of less-easily quantified reputational risks or consequences of state-sponsored attacks on critical infrastructure. In an increasingly uncertain world, Fortinet’s technical expertise and patient investment offers customers the protections they need to seize the digitalisation opportunity.

Fortinet itself faces the risk of cyberattacks and technological disruption, although we feel these are mitigated by their R&D investment and expertise. Similarly, deteriorating macro-economic conditions could pressure customer budgets and push out cybersecurity investments, although recurring revenues and cash generation should help Fortinet weather short-term demand weakness.

¹ Fortiguard Outbreak Alerts Annual Report 2023

² 2022 Official Cybercrime Report by Cybersecurity Ventures: https://www.esentire.com/resources/library/2022-official-cybercrime-report

Reference to the names of each company mentioned in this material is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation.