Robin Geffen

Finding the next FAAMGs among global small caps

Robin Geffen

As the manager of the Liontrust Global Smaller Companies Fund, I am trying to find the next FAAMGs for my investors (of whom I am one). To uncover the Facebook, Apple, Amazon, Microsoft or Google of the future, it is first important to understand where the current ones came from.

None of these companies would exist today if it was not for one man, an almost forgotten Englishman called Tim Berners-Lee, and what he created in 1989. This scientist, who was then working at CERN research laboratory in Switzerland, invented the World Wide Web and yet he didn’t make a penny from it.

Many years later, Tim made some money from the lecture circuit but he gave the internet to us for free. Without him and his invention, Mark Zuckerberg at Facebook, Steve Jobs at Apple, Bill Gates at Microsoft and Sergei Brin and Larry Page at Alphabet-Google may never have become the household names and multi-billionaires they are today.

The Technology sector has thrived as everyone’s reliance on it has become even greater during the pandemic. The FAAMGs comprise more than 20% of the US market and have been the biggest drivers of the global stock market over the past year. While they have continued to prove great investments, the exceptional returns have been made by those who invested early when tech companies like Amazon were mere small caps.

If you believed that Jeff Bezos could build the “Everything Store” starting with selling books online, you could have bought Amazon shares at $1.73 on 16 May 1997. Today they are $3,290. If you had bought 304 shares in 1997 at a cost of $526 then you would now be a dollar millionaire (initial cost £204). If you had thought bigger (way bigger) and invested $525,920 to buy 304,000 shares, you would now be a US dollar billionaire and sitting on a beach somewhere toasting your visionary foresight, Jeff Bezos and his team.

When Amazon began, it might have seemed that the limit of its ambition as an online bookseller was to eat away at the dominant market share of the then successful nationwide bookstore Barnes and Noble, a much larger quoted company. Even when Amazon made its first pivot into selling CDs online, few people realised the entrepreneurial vision of Bezos, who intended to build the ‘Everything Store’ that would keep so many of us supplied at home with everything from food to cooling fans during the Covid-19 pandemic lockdowns.

Is it possible to find small caps today that can provide this kind of uplift to a portfolio? Step forward Twilio. Founded in 2008, Twilio is the leading Cloud platform for communications. Just like Amazon Web Services does in its field, so Twilio also plays a critical role for software developers by allowing them to easily and securely build communication services such as voice, messaging, video and authentication into their software and scale those services elastically and globally.

The company’s core product categories include Programable Voice, Programmable Messaging and Programable Video. Twilio now has over 10 million developers on its platform, which makes the business very valuable. Twilio was founded in March 2008 and one of the original founders, Jeff Lawson, is the CEO and holds shares worth well over $1 billion. Twilio’s share price is up 1,319.42% over the last three years to 31 December 2020, which makes it the top performing stock in the Liontrust Global Smaller Companies Fund over that period.

Looking at the other companies in the Fund, I would highlight Varonis Systems. This is a data management software company specialising in human-generated data. Varonis has developed a security software platform that allows organisations to track, visualise, analyse and protect unstructured data. This comprises content (such as documents, emails, spreadsheets, presentations and videos) created by employees, not machines, and generally contains higher value sensitive/financial data and intellectual property.

Varonis provides a framework to analyse usage of this data and associate it to proper owners and users. This provides a clear visibility for both IT departments and businesses to monitor and manage the permissions, ownership and usage of data. These capabilities reduce the risk, complexity and cost associated with the growing volume of human generated content.

The company was co-founded in 2004 and released its first product called DatAdvantage in 2006. Varonis went public in 2014 and is headquartered in New York, with significant research and development in Israel. Every time there is a major data breach, you hope that they have Varonis looking after them.

Ransomware attacks, in which a hacker tries to install hostile software to shut down a company unless a ransom is paid, are becoming increasingly prevalent along with hostile data breaches to destroy a company’s data. In these days of booming cryptocurrencies, some nations appear to be sponsoring hackers to steal them for the national benefit.

Cybercrime has boomed during the pandemic and lockdowns. The task of protection has become more and more complex as data are stored both on premises and on the Cloud. To add to this, businesses are using a growing number of platforms such as Windows, 365, Teams, Slack, Amazon Web Services and Google. This makes the task of protection more and more complex.

The company’s original founders are still CEO (Yaki Fatelson) and Chief Technology Officer (Ohad Korkus).  Varonis Systems was created to solve a problem that Fatelson had when he was asked to help an oil company whose critical research data on a new oil field had disappeared from their IT system as a result of rogue activity. Fatelson realised that companies had no idea who could access what files, and that once a rogue operator was inside a company’s IT system they could access, alter and delete whatever they chose to.

With the protection of Varonis Systems, even if the perimeter of on premise or on Cloud platforms are breached, there will be no risk of data breaches or huge ransoms being paid as they can instantly identify abnormal behaviour from cyberbreaches.

This is a science and IP led business that is critical to the new cyberworld that we all live in. If your hotel company or airline emails to tell you of a breach involving your data, you can write back and ask them why they weren’t using Varonis Systems to protect both them and you.

Some of the quoted smaller companies around the world will be the mega cap household names of the future. I look forward to continuing to try to find them for you.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Wednesday, March 31, 2021, 12:19 PM