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While the technology sector offers compelling potential for growth, expensive valuations tend to reduce the number of attractive entry points for investors. However, with technology now permeating almost every aspect of our lives and revolutionising behaviours, investors can find innovative companies with strong growth propositions at reasonable valuations just beyond the tech sector, claims Chi Chan, European Equities Portfolio Manager, Hermes Investment Management.

One such area to consider is retail; in Europe, 53% of consumers bought something online in the year to June 2016, even higher in the UK at 81%. With this growing demand, the market is adapting and those businesses that are most effectively evolving their product offering and user experience are capturing increasing market share. Here, we identify three companies that we believe are poised to succeed in what we think will be a “winner takes most” market.

ASOS is a fast-fashion retailer, which has effectively targeted the younger generation to outstrip most of its major rivals. It streamlined the product development process for its own brand to ensure that it could respond to new trends at pace, while curating collections of niche brands that customers would struggle to find on the high street. The company has pioneered online logistics so that customers can receive orders within twelve hours, an astonishingly rapid turnaround. It has also invested heavily in building customer allegiance, through loyalty schemes and content-rich online marketing, such as its in-house magazine and a series of short films which premiered last year. The pervasiveness of its brand and status as a shopping destination was shown when it launched the ASOS Marketplace, where smaller, independent traders can sell their goods on the platform for a small fee.

Zalando is a similarly innovative clothing retailer to ASOS, although its target customer base is at the higher end of the economic scale. As well as a healthy business in own brands, Zalando has also developed strong partnerships with third party brands to translate the brand’s story to the consumer. These partnerships also have practical elements, including the ability to source stock from the brand’s own warehouses should Zalando’s stock run out, preventing customers from migrating to other sites and other brands. The company has also invested heavily in its logistics and data processing, developing industry-leading algorithms to identify and predict customer behaviour patterns, prompting actions to engage and drive sales. For instance, customers flagged as being inactive on the site for some time will be targeted with promotional discounts.

KION Group
Regardless of who wins the market share war, it’s certain that the behind-the-scenes logistics systems will have to evolve. KION provides automated warehousing systems and forklift technologies to ensure that warehouses are as efficient and cost-effective as possible. Importantly, through a series of acquisitions it has ensured that it can support automated warehouses operating 24-hours a day, a crucial capability when customers are promised delivery times as short as twelve hours or even less. The commitment KION has shown to adapting to the changing needs of its customers suggest it will continue to perform well for some time to come.

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