"Disrupters” – firms that can garner huge profits from developing cheaper and more popular ways to meet consumers’ needs – can make investors a small fortune.
It is Douglas Brodie’s job to spot such gems early and then make his investors money by getting in on the ground floor and holding for the long term.
Here Mr Brodie, who manages the Edinburgh Worldwide investment trust, names the disruptive shares that have caught his eye and are wreaking havoc on more traditional business models.
How do you go about picking shares?
We look across the world for innovative businesses that are disrupting incumbents.
They could, for example, be achieving this by coming up with a new product or delivering a better service. I prefer to buy young companies at the early stages of their development and then holding for five to 10 years.
When I buy shares in a small company I have in mind how big and profitable it could potentially become, rather than paying too much attention to its valuation. I do not obsess over whether a certain metric shows a business to be undervalued or overvalued; they can often be a poor guide.
How is the fund currently positioned?
In terms of areas of the world we find interesting we have 70pc in a combination of North America and Britain.
We want a real innovation skew to the portfolio and find the depth of those markets really important for what we are trying to achieve. Entrepreneurial flair in these markets is rife.
Opportunities can be found elsewhere, such as in the emerging markets. But in those markets the innovative businesses we seek to invest in do not often list their shares until they become bigger.
Can you give us three disruptive shares to buy and hold for the long term?
In terms of stocks that we like – and bear in mind that I am cherry-picking from around 100 shares – I would first pick out Ocado, the online grocery retailer.
We believe it has cracked how to do groceries at scale on the internet. Incumbent supermarkets somehow struggle with this in terms of double-layering on costs to try to cater to increasing appetite from consumers to do their shopping online.
Another business I would highlight is US-listed Alnylam Pharmaceuticals. It is based around technology designed to suppress the expression of genes. The more we understand how genes play a key role in certain diseases, the more that link will provide an interesting opportunity for companies such as Alnylam to interfere in the course of those diseases.
Another interesting business here in Britain is Xeros Technology, spun out of Leeds University. They have a very interesting polymer technology to aid laundry, effectively reducing the amount of water and energy needed. They are beginning to commercialise the technology.
What types of share do you avoid?
Any business that attracts plenty of direct competition.
I also shy away from “me too” small businesses that are not offering a new product, while also avoiding those that are capital intensive.
Can you name the best and worst investments of your career?
A company I bought early on, around seven years ago, was Asos, the online fashion retailer. This is an example of an early-stage business that evolved into a huge company. It remains a holding in the trust.
In terms of mistakes, rather than picking out a single name I would highlight some bad experience in general investing in Chinese businesses. It is unfortunate that certain management teams in China do not act in shareholders’ best interests.
Asos shares over 10 years
Do you invest your own money in the trust?
No. But I do intend to in future.
What alternative careers did you consider?
I did think about a career in scientific research.
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Our view
Edinburgh Worldwide is a “solid choice”, according to Stephen Peters, an investment trust analyst at Charles Stanley, the stockbroker.
But one thing to bear in mind is that this “global” fund has a big home bias.
“Just under a third of the portfolio is in British shares. This makes me less keen,” he said. “I would prefer a smaller weighting as the trust has a mandate to invest anywhere, but it is far from alone, as other global investment trusts and funds also have huge weightings in our home market.
“However, it is one of my favourite global trusts for those who are willing to hold for the long term. The discount may look attractive at 9pc, but this is not far off its one-year average of 7pc, so I think in this case it is not a bargain.”
The trust’s biggest rival is F&C Global Smaller Companies, a stellar long-term performer that has increased dividends every year for 45 years. Its charge is low at 0.53pc a year.
Among ordinary funds the most obvious like-for-like alternative is Baillie Gifford Global Discovery, also managed by Mr Brodie. The portfolios are nearly identical.
Artemis Global Income, one of the best-performing global funds over five years, is also favoured by brokers. It has a bias towards medium-sized companies.
For fans of tracker funds it is worth looking at Vanguard LifeStrategy 100pc Equity. This fund holds a mixture of “tracker” funds, which aim to mirror the performance of various global share indices.
The fund enables novice investors, or those without the time to manage their own investments, to put money into the world’s stock markets.
How to buy the fund as cheaply as possible
The trust is listed on the London Stock Exchange so it can be bought like any other share through a stockbroker or investment shop. But remember that the intermediary will normally levy a separate annual charge. The fund has an ongoing charge figure (OCF) of 0.92pc. This is slightly more expensive than other global funds, which typically cost 0.8pc. With an investment trust there are no “share classes” to worry about.
Our tables will guide you to the cheapest fund shop according to the size of your portfolio.
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