Old Mutual Wealth: Finding investment opportunities in innovation

Innovation is unstoppable because of the human desire for discovery and progress. Necessity truly is the mother of invention, and crises tend to bring opportunity advises Old Mutual Wealth.

The global Covid-19 pandemic has forced some companies round the world to adjust the way they conduct their business; others have had to pivot by shifting their approach entirely. While social distancing and remote working have led to an impressive plethora of digital services entering the market, these existing technologies represent a mere tip of the iceberg. And if the history of pandemics is a guide, this contagion, like all others, will spark a wave of innovation that is directly proportional to the disruption it caused.

Old Mutual Wealth
Chris Potgieter,
Managing Director:
Old Mutual Wealth Private Client Securities

In the context of the coronavirus pandemic that has upset the global economy, it’s fitting to remember that conflict and turmoil have always spurred on accelerated technological development. The space race ignited by the Cold War between Russia and the US is a case in point, as one of the most profound of humankind’s accomplishments happened amid a series of crises occurring at the same time. Today is no different. 

In the midst of every crisis lies great opportunity 

Innovation is unstoppable because of the human desire for discovery and progress. Necessity truly is the mother of invention, and crises tend to bring opportunity. The lesson for investors is that despite Covid-19, technology will keep advancing – possibly even accelerate as a result of the pandemic – and this creates opportunities.

The key for investors in achieving long-term capital growth is to identify themes or trends that will define our lives in the decades to come. This goes beyond the well-known technology giants, as the disruptors of today may themselves become disrupted in the decade ahead. Increased regulation and anti-trust action against the giants of today may be their largest existential threat. Investors therefore need to look further forward to identify the innovations and emerging technologies of the future. Just as many of the current crop materialised from the shift to cloud computing, emerging technologies like artificial and connected intelligence, nanotechnology and biotechnology will be commercialised over the next decade.

The greatest advances often happen because technologies from different areas intersect and reinforce one another. This is evident today in the advances in hi-tech sectors, from artificial intelligence and networked connectivity of people and things to nanotechnology and cell- and gene-manipulation. The US and China are currently locked in a race for superiority in these fields. As happened 50 years ago during the Cold War, this conflict will result in technologies being rapidly developed, perfected and commercialised. Two areas that hold particular promise of growth through innovation into the future are food production and healthcare.

A growing global appetite

Food technology will take on increasing importance as the world population grows. Current projections show that food production will have to increase by 50% to keep pace with a population expected to reach nearly 10 billion by 2050. There will be an inevitable strain on land and water supplies unless we make some major adjustments to how we manage our limited resources. Add to this climate change and it’s clear that much more innovation will be needed. Precision farming and precision biology are two promising trends that have emerged, with vertical farming technology and non-animal protein production both on the rise.  

Over the next decade, it is estimated that the food technology industry will grow by more than USD 500 billion. Nestlé, John Deere, Unilever, Ecolab and Xylem, as well as smaller companies such as Bowery Farming, are a few major names to watch. Research efforts that can be successfully commercialised will be closely monitored, with the University of Wageningen of the Netherlands being a prime example of a source of such efforts.

Healthcare innovation intensifies

Healthcare will be driven both by a growing global middle class and by ageing populations, particularly in developed economies. By 2050, 21.4% of the world’s population will be 65 years old and older. Given that at age 65 the cost of healthcare tends to double, the pressure on health services as we move into the future is only going to intensify. In emerging nations, the lack of healthcare capacity has shown up as countries have battled pandemic caseloads.

Medical innovations that are proliferating include genome testing, which was prohibitively expensive but is now broadly affordable for the middle classes. The next innovations in this sector are likely to concern cellular level intervention and gene editing and modification, with the ultimate aim of eliminating diseases at the genetic level. 

While there is still some way to go in terms of aligning these technological advances and societal ethics, it is clear the map has been drawn and growth within the sector is inevitable. Innovation in healthcare is therefore set to increase, making this another sector for investors to monitor. There are many companies to watch, including Johnson & Johnson, Novartis, Thermo Fisher Scientific, Abbott Laboratories and Danaher. In addition, there are indirect ways to get sector and theme exposure through appropriate exchange traded funds (ETF). 

A world of opportunities 

The key takeaway for investors is that they need to pay attention to companies investing in research and development (R&D) that will help them to adapt as the market changes. While we are very interested in what start-up companies are achieving, we prefer to invest in multinationals that are spending on R&D and have the appetite and ability to acquire and scale successful start-ups. We will also take sector exposure through an appropriate ETF if it offers a better return versus risk profile. By the same token, we avoid companies that refuse to recognise and adopt innovations that will disrupt their industries. Such industries we’re keeping an eye on include energy, traditional retail, food production, transport and property.

What seems fanciful today will seem like second nature tomorrow and savvy investors who can get an early foot in the door will boost their chances of creating substantial wealth over the next decade.

Complications when dealing with offshore estates: a cause of avoidable financial strain

The passing of a loved one is already traumatic and complications and delays often add unnecessary stress and financial strain if an estate cannot be settled quickly.

Mandy Dix-Peek,
Head of Old Mutual Wealth Fiduciary Services

With more South Africans moving assets offshore, many investors are unaware of the unforeseen tax and fiduciary hurdles associated with the ownership of foreign assets. This is more than simply an annoyance in the case of deceased estates, as complications can easily hold up processes when multiple jurisdictions are involved, effectively jeopardising the financial well-being of dependants and affected family members. 

Currently, by law, South Africans don’t need more than one will if they have assets locally and elsewhere in the world. However, a South African executor is permitted only to manage matters and assets that are held domestically. An offshore will would, therefore, have to be handled by an executor in that jurisdiction or permission would have to be sought for the South African executor to administer the estate. This process can take time and can further draw out the settlement of the estate.

Other potential pitfalls lie in regulatory differences between countries. For instance, in South Africa we have the right to choose in a will who receives proceeds from the estate, whereas in many European countries this is dictated by law. 

Inheritance tax is another case in point, with South Africans liable for this duty on assets in countries where it is levied. For example, in the US, inheritance tax of 40% is levied on inheritance assets of more than USD 60,000, while in England inheritance tax of 40% is levied on assets worth more than GBP 325,000. However, estate duty for South Africans with assets in these countries above these thresholds can expect that estate duty will increase by 20% to 25%. If properly advised, clients will be aware they can claim a credit from SARS if they’ve paid inheritance tax abroad by virtue of global Double Tax Agreements South Africa has signed. 

The passing of a loved one is already traumatic and complications and delays often add unnecessary stress and financial strain if an estate cannot be settled quickly, with proceeds being used for estate taxes and fees. When an estate has to account for assets across borders, matters become even more complicated unless the right processes have been followed.

So while clients may be tempted to move their assets offshore at all costs, they need to consider they are placing the financial well-being of their families at risk if they don’t structure their wills correctly. This highlights the importance of preparing for the various scenarios and processes that may be faced and determining ahead of time how to properly manage them. 

About Private Client Securities

Private Client Securities (PCS) is a capability within Old Mutual Wealth, an elite service offering brought to you by several licensed Financial Services Providers in the Old Mutual Group. PCS specialises in bespoke investment management for high net worth investors.  

This content is for information purposes only and does not constitute financial or tax advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any of the attached information.