As sectors like cybersecurity continue to receive outsized funding, the challenge for us as investors as we navigate the noise, is to pick out which companies will outlast the fads. We try to steer clear of companies exhibiting sales growth without a clear path to profitability, management enrichment schemes, or the use of financial engineering to maximise this quarter’s earnings. Instead, we remain focused on finding companies with consistent cash-flow generation, strong balance sheets and reliable stewards, who are well placed to contribute to, and benefit from, sustainability. On our recent trip to the US, it also became clear that some of the very best companies are maintaining a laser-sharp focus on what their customers need, in many cases before the customers themselves know it.
Jack Henry*, a leading provider of data and payments processing, primarily for the financial services industry, launched its platform-as-a-service (PaaS) JHA BankAnywhere in 2020. The platform can integrate add-on modules from Jack Henry and third-party solutions, enabling its customers to expand beyond their existing branch networks and seamlessly scale as their customers and deposits grow. This is particularly relevant for smaller community banks who, regardless of their core systems, have the toolkit to “deliver the digital experience their customers now expect.”1
On our drive to the San Jose airport, we caught a glimpse of a large black billboard with only four words taking centre stage: 'Enterprise AI: We’re hiring!'
The strategy is paying off, with Jack Henry continuing to take market share, particularly amongst small banks with $1-15bn in assets. The ability to stay one step ahead of customers has been absolutely critical to Jack Henry’s prosperity in a time of rapid digital transformation.
In light of the feeding frenzy that characterises parts of the technology sector, with new and incumbent players alike vying for a seat at the table, adaptability to new challenges is central to a company’s survival. One such challenge is the current labour shortage; the Great Resignation has affected all companies in some way, a fact we had acknowledged but hadn’t quite understood the full extent of. On our drive to the San Jose airport, we caught a glimpse of a large black billboard with only four words taking centre stage: “Enterprise AI: We’re hiring!”
We came to understand the desperate situation that many companies find themselves in, and learned of the unique ways in which some of them are adapting.
Fortinet*, a founder-run security software company based out of Sunnyvale, has long grappled with the challenge of nurturing and retaining long-term talent pools. This is exacerbated by the fact that their offices are located 5 minutes down the road from Palo Alto Networks, one of their largest competitors. In response, Fortinet has trained 1.2 million people on cybersecurity to date and has teamed up with 385 academic institutions to offer specialised courses on cybersecurity.2 Providing these educational opportunities is an initiative that will hopefully help train the next generation of talent and attract greater diversity.
KLA Corporation*, a leading 45+ year-old provider of equipment to semiconductor chip manufacturers, faces a similar issue. Amid rising talent wars and changing employee expectations in Silicon Valley, KLA has strayed off the beaten path and chosen to establish its second North American headquarters in Ann Arbor, Michigan. The area offers exposure to a robust talent pipeline, anchored by proximity to the University of Michigan. Michigan is also at the forefront of automated vehicle testing projects and legislation, enabling KLA to be close to automotive original equipment manufacturers (OEMs) and stay ahead of their evolving needs. KLA’s decision to take a long-term view on tackling labour shortages stands out against the mainstream approach of aggressively ramping up stock compensation to attract and retain talent.
What Jack Henry, Fortinet and KLA all have in common is a drive to invest in innovation and talent over the long term, without succumbing to the ‘Wall Street Game.’ Part of the bedrock that enables this mindset to take shape is management tenure. Jack Henry, KLA and Fortinet are all run by individuals who have spent more than 20 years at the companies, helping reinforce unique cultural traits that span years, if not decades. As digital transformation continues to drive change in an increasing number of industries, we continue to seek out companies with these enduring characteristics.
* For illustrative purposes only. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.
View our list of investment terms to help you understand the terminology within this document.
Subscribe to our updates
To get regular updates and content from Stewart Investors, please register here.
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication but the information contained in the material may be subject to change thereafter without notice. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.
References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors' portfolios at a certain point in time, and the holdings may change over time.
References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.
Not all First Sentier Investors products are available in all jurisdictions.
This material is neither directed at nor intended to be accessed by persons resident in, or citizens of any country, or types or categories of individual where to allow such access would be unlawful or where it would require any registration, filing, application for any licence or approval or other steps to be taken by First Sentier Investors in order to comply with local laws or regulatory requirements in such country.
This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore, Japan and the United States, and should not be relied upon by or be passed to other persons.
The First Sentier Investors funds referenced in these materials are not registered for sale in the United States and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG). Our investment team operates under the trading name of Stewart Investors which is part of the First Sentier Investors Group.
This material may not be copied or reproduced in whole or in part, and in any form or by any means circulated without the prior written consent of First Sentier Investors.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
- Australia and New Zealand by First Sentier Investors (Australia) IM Ltd, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
- the European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI ref no. C182306; Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; Company no. 629188).
- Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors and Stewart Investors are business names of First Sentier Investors (Hong Kong) Limited.
- Singapore by First Sentier Investors (Singapore) (Company no. 196900420D) and this advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) and Stewart Investors (registration number 53310114W) are business divisions of First Sentier Investors (Singapore).
- Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611).
- the United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (FCA ref no. 143359; Registered office: Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB; Company no. 2294743).
- the United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167).
- other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
© First Sentier Investors Group