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20 January 2016 - Innovation

Big Data: from data to long-term value

The third industrial revolution – that of data processing – is under way. True to its traditions of innovation and conviction-based management, Edmond de Rothschild Asset Management decided to create a Big Data fund. The defining feature is its wide scope.

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The use of communication methods worldwide has increased exponentially in the past 15 years, generating extraordinary amounts of data. Every day, 2.5 trillion bytes of data are produced around the world; growth in this area has been so rapid that 90% of existing data was created in the past two years. At the same time, digital data, which is expected to reach 35,000 exabytes by 2020 (or twenty times the amount that existed in 2010), is not being fully utilised. According to the International Data Corporation, only 0.5% has been analysed.[1]

The need to manage these data flows has sparked a global industrial revolution valued in hundreds of billions of dollars, according to Accenture[2]. This revolution affects every sector, not just tech companies.

After studying these sectors, Edmond de Rothschild Asset Management decided to create a Big Data fund whose defining feature is its wide scope.

Jacques-Aurélien Marcireau, who oversees the Edmond de Rothschild Fund – Global Data[3], regularly meets with tech company CEOs and studies the sector. He has identified a number of different yet complementary profiles for the economic players affected by Big Data both in and out of the tech sector:

"Big data is all about the three Vs: an ever-increasing volume of data from a wide variety of sources being transmitted at an ever-greater velocity, often in real time. The novel aspect is that it is possible to store all this information and analyse it, combining tweets, spoken conversations and machine-to-machine data."

Is this a convincing enough reason to invest in Big Data? By creating a fund for these values are we just succumbing to the latest flavour of the month? Is this craze just like the one we saw in the early 2000s? Are we facing the same risk we experienced at the beginning of the golden age of the Internet when the bubble burst? These are a few of the questions that the Edmond de Rothschild Asset Management teams asked themselves before creating the Edmond de Rothschild Fund – Global Data.

Thus, we do not invest in every new innovation that comes along; instead, we focus on areas with strong growth potential and avoid those that seem too risky. Here is one example of our conviction-based management style, which may seem to run counter to general trends. Guillaume Poli, Deputy Managing Director in charge of development at Edmond de Rothschild Asset Management, explains:

"By prioritising a value[4]-based approach in the late 1990s, we employed a technique that already existed to achieve a ground-breaking innovation. At a time when everyone was looking only at Internet stocks, you had to be a true contrarian to invest in old-fashioned discounted stocks. The innovative aspect had to do with holding these equities and earning returns by seeking out value."

This is not the case today with Big Data. Guillaume Poli adds:

"You need to know how to continually evolve in order to stay one step ahead. Innovation and invention are two different things. We maintain control over innovation because we don’t invest in what we don’t understand and we don’t fall prey to fads."

It is the processing, not the data itself, that is new

Today's technological advances make it possible to process the information found in all the collected data so that it can be used effectively. This processing is the true innovation. Structured data has been around for a long time now. It was the ability to store and analyse an enormous volume of unstructured data, however, that made Big Data possible. On the one hand, storage costs, which had been prohibitively expensive, were slashed, and on the other hand, ongoing innovation made it possible to analyse and cross-reference this data.

Developments in storage capacity

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Edmond de Rothschild Asset Management sees value creation in the tech sector. Over the past few years, the major players in the sector (IBM, Cisco and Microsoft) have invested heavily in building data centres and developing analytics solutions.

Jacques-Aurélien Marcireau emphasises :

"In the future, the role of development will not be limited to just companies and agencies, but instead will extend to entire cities. The aim will be to offer them comprehensive, turnkey solutions with a player who can handle every aspect from A to Z."

The various potential applications for Big Data include industrial maintenance, customised products and services, energy efficiency, preventive medicine and self-driving cars. The consequences for the economy as a whole could be game-changing. Companies that find a way to take advantage of this long-term trend could create new products and services, gain an edge over their competitors and tap into an area with considerable potential for value creation.

An unlimited scope of application

In the healthcare sector, for instance, the human genome can now be sequenced in a few hours for just 1,000 dollars, whereas fifteen years ago it took the coordination of seven or eight research centres and cost one billion dollars. According to Laurent Alexandre, CEO of NBIC Finance, "by 2030, no medical testing will be performed without help from a systems expert. Medical histories will contain one million times more data than they do now. This revolution is the result of parallel developments in genomics, neuroscience and connected devices."

In an entirely different field, smart cities have the potential to generate substantial savings and improve resource allocation. Jacques-Aurélien Marcireau mentions the example of Philadelphia:

"In 2009 the city modernised rubbish collection by implementing smart bins, which monitor the amount of trash inside the container and the level of decay. This enabled the municipality to make three times fewer rubbish collection rounds."

Another concrete example can be found in the automotive industry. Self-driving cars are now allowed on the roads of some American states. In addition to being a major technological innovation, these vehicles could dramatically reduce the number of accidents and yield substantial profits, thereby increasing overall GDP. Jacques-Aurélien Marcireau notes:

"Each year, 80 million vehicles are sold worldwide," . "Given 3% annual market growth, the on-board electronic equipment – semiconductors, software, etc. – in self-driving vehicles has a growth potential that is at least twice that of the overall rate."

While the tech players are looking at a major opportunity, automakers are faced with a difficult choice – should they partner with Google? Or develop their own solutions in order to become the Apple of the automotive sector? Or should they focus on assembling? These strategic decisions will have major repercussions in terms of creating or destroying stock-market value.

Transportation, distribution, insurance, municipal services, energy and more – the scope of application knows no bounds. In the end, huge swaths of the economy will be affected by the Big Data revolution. This is what convinced the Edmond de Rothschild Asset Management teams to create the Edmond de Rothschild Fund – Global Data, bringing to bear over 30 years of proven expertise in the creation of thematic funds.

The key feature: a wide scope for the fund

While continuous innovation can yield returns, it can also create obsolescence and therefore risk. To avoid these pitfalls and reduce the impact of bubble[5] », the fund conducts extensive fundamental analyses and calls on independent experts from the research community. For the Edmond de Rothschild Fund – Global Data, the teams have developed a qualitative approach to choosing securities, selecting stocks traded on markets around the world at every level of market capitalisation and whose growth has remained largely unaffected by the global economic climate. This strategy keeps us in close contact with tech players (at least 51% of the fund is made up of securities issued by companies active in the tech sector or involved with analytics technologies) and enables us to invest in those who are putting these advances to good use in traditional industries.

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Source: Edmond de Rothschild Asset Management (France). The investment process described above incorporates various internal management constraints put in place by the management team. This is the current process and may be subject to modification.

The resulting portfolio includes different categories of stocks: you will find key players, such as Google (which has partnered with Sanofi and Novartis for health research), companies specialising in data (Interxion), genome sequencing (Illumina) or sensors (Sensata), and the French firm Criteo, an expert in targeted online advertising. Jacques-Aurélien Marcireau remarks:

The approach taken by the fund involves investing early on in tech companies that will lead the revolution and then identifying the companies in traditional sectors of the economy that can take advantage of it to create value. A wide scope is one key component of the fund allocation."

1 Source: International Data Corporation
2 Source: Source: Accenture – Study "Guiding Digital Transformation" - 2015
3 Edmond de Rothschild Fund – Global Data is a sub-fund of the Luxembourg-registered SICAV accredited by the CSSF that has marketing authorisation in France, Switzerland, Spain, Italy and Luxembourg.
4 These so-called "value" stocks were considered highly undervalued.
5 A speculative bubble occurs when a trading price exceeds the intrinsic financial value of the goods or assets exchanged.