Data and software companies listed on the London Stock Exchange such as Sage and RELX are set to perform well over the long term as the use of artificial intelligence increases and improves, according to Finsbury Growth & Income’s (FGT’s) deputy portfolio manager Madeline Wright (pictured).
Throughout January, these types of companies within the trust’s portfolio performed particularly well, with data owner RELX up 4.9%, financial services company Hargreaves Lansdown up 4.3%, and credit score company Experian up 3.4%. Meanwhile, Sage – which provides software solutions for small businesses – gained 1.6%.
Wright said this is “significant” and marks the start of strong long-term gains as the companies use AI to enhance their data capabilities.
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FGT currently has a 51% allocation to six stocks it believes will be beneficiaries of AI. Alongside the aforementioned companies, this also includes the London Stock Exchange and Rightmove.
“Gaining access to companies that are likely to be beneficiaries of technological advancements has been a key investment theme in Finsbury’s portfolio for well over a decade, but it’s become even more of a focus in recent years as the pace of advancement has accelerated,” Wright explained in FGT’s latest factsheet. She added that the six holdings all have “credible opportunities to use AI to build on their substantial histories” and “very successful existing products”.
“All six are dominant in their respective industries and have long track records of value creation. LSEG’s share price total return CAGR has been 20%, while RELX and Sage’s have been 13% and 12% respectively. These three companies have been held in the portfolio since the early 2000s.”
Company traits
Wright said there are several key characteristics a company must have if they are to successfully integrate AI into their businesses to streamline operations.
Top of that list, according to the deputy portfolio manager, is ownership of “market-leading” data given that “algorithms and tools are only as good as the datasets that they are run across”.
“All six of our ‘digital winners’ are industry leaders with large and established installed bases and – most importantly – wide and deep pools of unique data,” Wright said.
“RELX, for example, owns one of the world’s most unique and valuable collections of scientific, legal and risk data. 1.7 million new legal documents are added to its LexisNexis database every day, and the data the company handles overall is doubling every year.
“LSEG is the biggest global provider of real-time financial market data – which is one reason Microsoft decided to enter a partnership with it to develop generative AI models.
“Experian holds credit data on 1.4 billion individuals and 191 million businesses across the world, and its CEO says that the company has almost more opportunities to create new services from that data than it can deal with.”
A second key trait for a company to benefit from AI is a global reach, according to Wright, who believes the bigger the customer base, the more valuable the data is.
“RELX, LSEG and Experian are UK listed but are all unquestionably global businesses, with the majority of their revenues originating from the US. Perhaps more surprising is that Sage, too, now has the US as its largest geography, accounting for 40% of revenues and predicted to grow at 16% this year.
“The two exceptions are Hargreaves Lansdown and Rightmove, which are both very much UK-focused. However, we think that in both cases their extensive UK reach combined with the size of the domestic opportunity makes them attractive prospects in their own right.”
Finally, Wright said companies must be willing to invest substantially in AI research and development, and pointed out that all six of FGT’s ‘digital winners’ are investing both money and time into utilising AI.
“RELX’s progress represents over a decade of investment into AI, while Sage established an AI division five years ago,” the deputy portfolio manager explained. “The two final characteristics are a revenue stream comprised of recurring payments for workflow tools rather than an emphasis on transactions, and a customer base made up of businesses rather than consumers.
“We specifically seek recurring revenues in our companies more generally, as we recognise that they tend to be stickier and investors value them more highly, and so are confident that all six ‘digital winners’ are broadly skewed towards this favourable dynamic.”
While UK equities remain unloved globally, with many investors opting for exposure to the US stockmarket to access beneficiaries of tech trends, Wright said she feels “fortunate” that FGT is able to invest in “so many world-class companies listed on the LSE with a credible opportunity to benefit from continuing digitisation and the advancement of AI”.
“Taken together, Sage, RELX, Experian, LSEG, Hargreaves Lansdown and Rightmove account for a mere 7.5% of the UK index – making Finsbury’s 53% exposure a significant differentiator,” she continued.
“Over time we expect that percentage to increase as we continue to build the position in Rightmove, and remain alert to the possibility of finding and holding other UK-listed owners of unique and valuable proprietary data.”
