Binary Capital Investment Management

Whitepaper Disruption as an asset class: what is it, how to invest in it.

Long-termism shapes our relationships and our investments

January 2021 binarycapital.co.uk Disruption investing: a thematic view

Summary Authored by:

Is disruption a thing, a theme, an asset class? If so, what exactly is it and how can we access real disruptive investments, having it all aligned to our investment philosophy and importantly it being relevant to all client types? Real genuine opportunities that are transformative and highly exceptional. This paper sets out our thinking around disruption investing, and how we bring together such thinking into investable investment ideas and solutions. We Saftar Sarwar do not just talk about disruption in academic and entrepreneurship Chief Investment Officer terms but within an investment perspective in real active, investable portfolio management.

We are active, long-term investors; this gives us an edge, a real edge – we can take a longer-term view and take positions in such disruption areas in a more optimal manner than other investment professionals. This methodology of thinking is new in wealth and asset management, we like to believe we lead the way in some of these areas. We ourselves are a ‘disruptor’ investment firm. We have alignment to how we are as a business, and how we actually invest for clients. Amir Miah Junior Portfolio Manager

We believe that investment thinking should not be in narrow silos, focused on next quarters earnings or about weekly jobs data, but it should be broader, much broader. A deeper understanding of innovation and entrepreneurship can be a competitive advantage for investment professionals. We do that here at Binary Capital, and importantly execute our thinking into actual client results.

This paper is part of a series of papers on long-term, high conviction investing. We welcome your comments, feedback and engagement at [email protected] Introduction

We are witnessing a profound change in the way we live, work, think and act. Disruptive innovation is changing the way the world works.

The next decade and decades will be unprecedented in the innovation we will witness. Disruptive innovators will displace and/or eclipse industry incumbents, increase efficiencies and gain majority market share. The next 10 years will be much more revolutionary than the last 10 years. We believe that we will all look back upon these years with astonishment—that the world delivered so much innovation in such a short period of time. The work being undertaken is exceptional, we witness it every day.

As technologies emerge and transform entire industries and their value chains, we note that investors in benchmarks or investment indices may face more risk than historically – as past winners become future losers. The threat to existing businesses is severe and the opportunities and indeed the rewards for companies taking full advantage of the latest pervasive technologies, will probably be in the trillions of dollars.

There requires a forced shift and restructuring of existing business models to capitalize on this new world or paradigm. Those with flexible, high-tech infrastructure will persist. Those will adaptable management will persist.

In this paper we explore what innovation is, examples of disruption and importantly how one can gain investment exposure to such disruptive opportunities within investment portfolios. We hope the reader reflects on whether they are positioned on the right side of the innovation curve and understand that it is all about looking forward at times, every single time. We discuss the following:

1. Innovation economics

2. Pervasive technologies

3. The disruptors and the disrupted

Building portfolios with disruption 4. investment ideas and themes

Our approach to investing in 5. disruption stocks

6. Disclaimer

Disclaimer: The Information in this document is not intended to influence you in making any investment decisions and should not be considered as advice or a recommendation to invest. Any Information may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors and relevant offering material. Capital at risk. Please review full disclaimer. 1. Innovation economics

Entrepreneurship and growth are little understood topics in economics. A deep understanding of modern entrepreneurship and growth concepts have become a competitive edge for some optimistic investors, as we have seen extreme winners emerge (and losers) in the last decade, and therefore delivered extreme risk- adjusted excess returns for such investors. This phenomenon is highly probable to persist this decade. There is no compelling reason why it should not.

Creative destruction

There is a persistent force or gale of “creative destruction”, a concept termed by Joseph Schumpeter and used by entrepreneurs, academics and regulators to describe the constant forces of change in economies, caused by entrepreneurship that leads to a displacement of inferior innovations, and incumbent players. The forces simultaneously create newer, more superior products and services, as well as generating long-run economic growth. Some describe it as the engine of capitalist development and overall growth. The current storm of entrepreneurial creative destruction has no precedence, spurred by powerful technologies from the last two decades, the laser focus of entrepreneurs and their teams of employees that work like real owners. It is creative destruction and capitalism at its best.

The latest general-purpose technologies – robotics, artificial intelligence, cloud computing, DNA sequencing, innovations in battery storage and indeed blockchain will create surprise winners. The winners will be flexible, dynamic and hold deep competitive advantages through culture, knowledge and deep infrastructure. Their efficiencies resulting in temporary human anguish from job losses and structural changes in industries and indeed, entire sectors. The destruction element will be more pronounced than previous periods of industrial change as technologies converge to replace lower skilled jobs in all sectors. Real disruptive forces are at play.

Exponential thinking

We live in a world where there is exponential growth. The specifics of exponential thinking is often misunderstood or not acknowledged. Rather, people still view innovation as linear - a phenomenon called exponential growth bias. People tend to underestimate such growth drivers and only see them when it is far too late. Mistakes are made when this thinking is not understood well.

Exponential changes results in a world where there are shorter life-cycles for products, services, companies and industries, as a result from significant boosts in methods, efficiency and productivity. A well-known concept is Moore’s Law, where transistors in microchips double every 2 years. This empirical observation has seen applicability in other innovations such as energy storage (batteries) and gene sequencing. More applications in this area will develop and come through. 1. Innovation economics

We are likely to see new products, services and much lower unit costs across sector lines over the next five years from firms taking advantage of the power of exponential thinking and the latest general-purpose technologies focused forward a decade and beyond. We will see complete value chain transformations from what was once nascent technologies (we discuss more about these technologies in section 2). These technologies will become mainstream. These technologies will become permanent.

Figure 1 - Exponential change - 2 year

Source: Binary Capital Investment Management Ltd, 2020

Winners-take-all

‘Competition is for losers. If you want to create and capture lasting value, look to build a monopoly’ - Peter Thiel, co-founder of PayPal and Palantir

We witness global economics changing at a significant and often dizzying pace. Whilst we have seen the rise of populism politically, the movement forward of globalization has not abated. With globalization has been a rise in technology enabled opportunities across all sectors. Companies continue to dominate across not only sector and themes but globally too. We are in an era of exponential change, corporate movements and market developments on the back of such change. Naturally there will be regulatory pressures, but will it be enough to avert corporate exceptionalism?

Many markets are winners-take-all due to features such as cost, extreme economies of scale, learning and very high network effects. Competitive forces such as costs, margins, innovations curves, product and service superiority will result in an even wider divergence in investment performance between winners and losers. This is winner takes all economics. In this Darwinian world, the strongest survive and take market share from the weakest. In this world, new markets open up almost overnight. New demand is created or displaced. 1. Innovation economics

There are also newer, nascent markets opening. There will be new dominant market players. The markets include healthcare, where innovations such as DNA sequencing opens up mass commercial possibilities for novel techniques such as genome editing, genetic engineering. Other newer product segments such as electric and autonomous vehicles are seeing new dominant market players appear that have the potential to eclipse direct and indirect competitors.

Companies are building extraordinary moats to protect their market share – through technological infrastructure, that is provided to the market for rent through new business models. The plug for the play. Areas that this has already occurred significantly: retail, supply chain.Land grab has happened and continues to happen. Even during the 2020 COVID-19 pandemic, we have witnessed flexible technology enabled companies capture value by providing and becoming critical infrastructure for businesses, households and nation states. The disruption story has been vast in 2020. It will only get bigger.

There is new academic evidence that 75% of US industries have become more concentrated (a lower number of companies hold market power) and that there is statistically significant positive correlation between the concentration of an industry and the return on assets for companies in data from 1972- 2014 (Grullon, Larkin and Michaely, 2018). Leaders are investing consistently into R&D to protect their market share, create less market competition through barriers to entry such as large capital requirements to compete, technological barriers and extreme economies of scale. Leaders continue to increase revenue growth in current and new product segments, and in doing so generating significant long-term shareholder wealth. Leaders also use M&A to maintain product and service leadership and this has contributed to higher profitability for higher concentrated industries (Grullon et al, 2018).

Figure 2: Consistent revenue growth and investment in R&D (2006-2020)

Source: Bloomberg, Binary Capital Investment Management Ltd, 2020 2. Pervasive technologies

It is widely accepted by academics that innovative technologies provide a platform for further innovation. Innovation does not work in a vaccum, there are positive feedback loops and positive externalities across many areas. Historians refer to ground-breaking innovations as General-Purpose Technologies (GPTs).

Previous GPTs include electricity and the internet. Now, a new set have become the Bresnahan and Trajtenberg (1996) argue that a GPT platforms for further innovation – at an should have the following three characteristics: unprecedented rate; artificial intelligence and robotics will be much more transformational 1. Pervasiveness: The GPT should spread to across all sectors than the internet has been. most sectors. There is widespread consensus from business 2. Improvement: The GPT should get better over leaders, academics, governments, and time and, hence, should keep lowering the costs of investors that the following technologies are its users. transformational: 3. Innovation spawning: The GPT should make it easier to invent and produce new products or processes.

Figure 3: Next generation General-purpose technologies

Energy Artificial DNA Cloud Blockchain Robotics storage intelligence Sequencing Computing

Digitalization – Disruption of retail Global clean internet of things, energy cloud, mobile Fintech devices Healthcare innovation Innovations in Cybersecurity Smart transport and Factories logistics – Electric and Gaming autonomous vehicles Genome Immunotherapy editing Streaming/content

Source: Binary Capital Investment Management Ltd, 2020 2. Pervasive technologies

The technologies lead to further areas of innovation and create markets around such innovation – and we are far from the full realization and adoption of these technologies. All the technologies highlighted interact and stack, resulting in further innovation, a virtuous circle. New product and service markets are opening as a result, as well as efficiency and cost improvements in mature markets. All of this becomes self-fulfilling, and the opportunities become pretty immense.

We see exponential improvements being stacked on the general-purpose technologies - for example DNA sequencing of the human genome has been increasing in speed and decreasing in cost, where now the cost to sequence a whole human genome can be found for less than US$1,000 – opening up economics in other new areas. Energy storage and robotics are seeing an exponential rise in demand with costs curves continue to move lower, also opening up new areas. We are seeing creative destruction, exponential mechanics and winners-take-all markets converge with new pervasive technologies.

It is not just innovation; it is a technological revolution. A revolution of ideas, corporate and consumer changes, behaviours and habits. Amazon used to be a book seller, now as well as that, it streams UK football matches to a global audience. What is next for this global giant? 3. The disruptors and the disrupted

Avoid the disrupted.

Important to note that the winning disruptors will have genuine business models, infrastructure and economics. They are substantial corporations. Disruptors may not be in passive indices – such as the S&P500, Dow Jones Industrial 30 or FTSE100 which are based on past performance – yesterday’s winners, historical trends, historical industries.

That is fine for many – it provides accessible exposure to equity markets for such investors. However, with that, we lose any chance to provide clients good, consistent returns, a real chance to drive exceptional risk-adjusted performance.

We believe investing in indices can be problematic, indices are for investors with no view, no conviction in any view. A shotgun approach. For example, it has taken Tesla years to be included in the S&P 500 Index, If you solely relied on that index for Tesla exposure, you would have missed out on significant share price gains in the EV investment.

Value investing can be seen as a cult, driven by marketing machines built for fund products based on academic and investment thesis that one can argue is out of date; is no longer an effective investment strategy for wealth managers to meet client objectives. Most of this is based around mean reversion of markets, investment prices, it is worth considering if there will be mean reversion in corporates that have such substantial market share, which continues to grow. We believe the mean reversion model is broken and that there is significant investment value, share price value attached to businesses that can genuinely significantly disrupt. In the value category of investing, the opportunity to create returns from undervalued position is limited. In traditional growth investing and importantly disruptive growth investing the opportunity for significant returns in the long-term are based on multiplication factors, not small percentages.

Figure 4: MSCI ACWI Growth Index Vs MSCI ACWI Value Index (Dec 1996 – Dec 2020)

Source: Bloomberg, Binary Capital Investment Management Ltd, 2020 3. The disruptors and the disrupted

By being far too focused on short-term profitability business executives missed opportunities and were overtaken by competitors who better understood that growth at any cost could lead to eventual winner-take-all economics. The disruptors are coming for all of the market share. The technological advantages built extraordinarily deep to collect rents for decades to come, generational shifts in years. Is the reader still thinking about value investing: investing for dividend income, steady cashflow?

This is what we do: look for the winners and avoid, where we can do so, the losers and those that will not win and indeed significantly lose out. Looking at the winners, meaning looking deep into the future, and around all of this being patient and focused on the real disruptive forces at play. There will be losers and we want to avoid investing in such. All of this undertaken with deep research and expertise, the edge, the investment edge.

Over time value chains have become so complex; with the mix of multiple middle-men and many competitors competing for finite margin. There are also long-term structural issues to be faced by many corporations. Do we not all agree that oil demand will continue to fall, that FinTech’s are becoming the financial plumbing for modern business – eating away at the market share of large banks with large bank branch networks, or that DNA sequencing is creating a complete rethink of healthcare and how it is delivered to the end consumer?

Disruptors Artificial intelligence

Cloud Computing

Robotics

Disruption of retail. Brick and mortar.

Amazon, Alibaba, Mercadolibre are titans in their respective markets, delivering low-cost e-commerce to all, as well leveraging economies of scale, and extensive infrastructure to disrupt other areas. Shopify has become an important infrastructure provider, taxing small business for the chance to compete online, with plans to integrate further into areas such as logistics. These are not retail companies in the normal sense, but pure technology platform plays. 3. The disruptors and the disrupted

Artificial intelligence Disruptors Cloud Computing

Energy storage

Robotics

Disruption of traditional automobile and oil consumption

Tesla, Workhorse and NIO are leading the way for EVs in their respective markets. Further innovation is being stacked and could have other commercial uses. As traditional automotive manufacturers and suppliers unravel, the energy sector will face (or has already faced) peak oil supply while infrastructure evolves to accommodate a new age for energy. EV companies are not transport companies but diversified technology and energy plays.

Disruptors Artificial intelligence

Cloud Computing DNA Sequencing

Robotics

Disruption of healthcare

There is a healthcare revolution happening. New value chains are forming. Illumina offers genetic sequencing tools and CRISPR therapeutics is at the forefront of scientific discovery utilising CRISPR gene editing for more effective cancer treatments. Invitae are providing a platform for the early detection of health problems through genetic testing and data storage. Teladoc is changing the delivery of healthcare through innovative digitalization. Healthcare disruption has only just started and will only quicken.

Disclaimer: Binary Capital Investment Management may have direct or indirect investments in the companies mentioned in this document. Capital at risk. Seek financial advice before investing. Please review full disclaimer. 4. Building portfolios with disruption investment ideas and themes

Investors during the last decade have welcomed thematic thinking into their portfolios. Themes can be broad or narrow. For example, technology stocks or cybersecurity themed stocks. We suggest that investors should go further and look for genuine disruptors. Technology is all pervasive and categories such as GICS (General Industry Classifications) are becoming blurred. Investors should seriously consider how much of their portfolio is disrupting markets.

What is a disruption stock?

Disruption equities cannot be caught by an algorithm although, they often share the characteristics of traditional growth stocks – defined by their high P/E, P/B, sales growth or EPS growth or other traditional growth financial metrics – indicating how ‘expensive’ these stocks are. There is evidence that R&D to revenue has some relation, and that disruption stocks may be prone to larger drawdowns (Bessembinder, 2020). Are these stocks genuinely ‘expensive’ or badly understood by the investment markets? We believe the latter.

Disruption stocks are defined by characteristics such as a growing competitive edge, investing heavily now for the future. Genuine infrastructure, business model and edge with the use of relevant innovative technologies; rising in market share for their relevant sectors. Possess technology that has wide and variable uses. Disruptors often have a very long-term view and may forgo short-term earnings and revenue for longer term opportunities. Qualitative assessment is required. Disruption stocks are also by definition hard to source, that is why they are so disruptive, so it takes careful analysis, thinking and a long-term strategy to capture such winners in this area.

Benefits of exposure to disruption stocks?

Potential for exceptional investment performance: Investors should not be afraid to think ahead, not in a year or two, but in decades. Many investors anchor to past events such as the internet bubble or the great financial crisis of 2008. The events to anchor to, is in the future, 10 to 20 years out. The dot com bubble was pricing innovation or exuberance that is only now being realized, that would only be possible in the last few years due to cost, technical innovation and human ingenuity. That being said, we are growth disruption investors but at all times we base our investment decisions on sound investment fundamentals. There are overpriced equities that are not based on investment fundamentals and not genuine long-term investment opportunities. This can be highlighted with the example of biotech equities, which saw a broad surge in price during 2020 without any basis in the underlying fundamentals for most.

Paying for quality disruption stocks – those that have the potential to command large market share? Why would you not want to pay a high multiple for a company that could potentially be transformative for the next generation. Investors that can find and invest in the real winners have the potential to earn exceptional risk adjusted returns in liquid equity markets, earning returns associated with venture capital. 4. Building portfolios with disruption investment ideas and themes

Relevant for all client types: Disruption stocks can play a part in liquid portfolios for all client types – retail and institutional and for all risk profiles. Nevertheless, disruption stocks are often much more volatile than their competitors, with larger short-term drawdowns and so a long-term mindset is fundamentally important in any genuine investment strategy into such equity positions. All client types – institutional, intermediaries, professional and retail can benefit from exposure to such equities but it needs to be undertaken in the right manner.

Diversification: The benefits of first seeing disruption stocks as an overlay or asset class in a portfolio and investing in such assets is numerous for investors. These stocks and themes have the opportunity to be leading for the next generation, producing asymmetrical return pay-offs. It is an important consideration to include such disruption stocks to build the “engine of growth” for portfolios. Investors are beginning to argue that disruption stocks have a low correlation to other equities – as often such disruptive equities are not in traditional indices. Equities are correlated. Investors should not invest in such stocks for the sake of diversification (in the sense of managing risk) rather to position for the long-term on the right side of innovation, the right side of the future, the right side of history.

How can I invest in disruption stocks?

Disruption can be found in public equity markets, and the public equity markets have seen real winners emerge. Public equities through mutual funds or in a single line stock portfolio offer some distinct advantages over private markets and is a much better approach of meeting client outcomes for SIPPs and general investment accounts where there are no tax objectives. Advantages include intraday liquidity, on average much lower risk, higher quality and better accessibility to the investments available within established product universes. 4. Building portfolios with disruption investment ideas and themes

Table 1: How an investor can access and gain investment exposure to disruption stocks

Instruments Thoughts Private EIS/SEIS/Angel  Many disruption equities start their journey as privately funded entities – by venture markets investment capitalists, or other private equity. One can invest in such companies at an early stage, although this is a very high-risk approach - a high risk of total capital loss, illiquidity, Venture requires much resource, expertise, know how and sector and business specific capital trusts knowledge. Very difficult to find winners at this stage, often by luck. Investment trusts (VCTs) or VCTs can provide professionally managed exposure to earlier stage disruptors in a diversified way with some liquidity.  Products vary widely, and it is best to seek quality financial advice before considering any such investment. It is all about the quality of the investment strategy and proposition.  Tax advantages may be available for initial subscribers. Illiquid or low levels of liquidity, pricing may not be efficient, very high risk. Any funds may have additional features such as lock-in periods, high costs, as well as other more complex features. Public Investment  Investment trusts are unique in the sense that any private market exposure is often markets trusts efficiently priced with intraday liquidity. The permanent capital structure can allow for investment in both private and public markets in a very stable and patient manner.  There are a number of advantages to using investment trusts. Including often low cost, well diversified, additional governance mechanisms and Intraday liquidity available. Investment trusts can be positioned well for long-term investing in disruptive companies both public and private. There are investment trusts that exist that are significantly taking advantage of this opportunity. Listed equities  Fundamental analysis on equities, sifting through the equity universe – often outside mainstream indices to find companies. This is difficult to do without the relevant resources. Many traditional asset managers are not set up to invest in such companies, more accustomed to investing on benchmark mandates. The same is true of private banks and wealth managers who are usually sales led to the detriment of a proper, coherent, genuine, investment strategy.  Varying degree of liquidity dependent on free-float market capitalisation. No fund costs. Trading costs require consideration. ETFs  Investors can invest through thematic exchange traded funds (ETFs) and mutual funds. ETFs from providers such as iShares, L&G or Lyxor. Thematic ETFs are often actively managed in aspects of portfolio management and decision making, based on filters, proprietary stock level classifications and weightings based on firm characteristics such as revenue. This is a low conviction approach to investing. Mutual funds  Exposure to disruption stocks can vary dependent on the fund mandate. Broad, large, universe with a variety of investment styles available. Plenty of choice. Thematic  Thematic funds can offer investors exposure to technology or biotech as themes. mutual funds Broad thematic funds that may or may not be benchmark constrained. There is good and growing availability in such fund sector. Beware - thematic funds may track relevant indices such as country specific Tech or Biotech sector specific indices offered by index providers. Detailed research needs to be undertaken to understand thematic funds better. A complex area. Active, long-  Exposure to disruption stocks vary dependent on the fund mandate. A long-term very term, high high conviction approach is highly complementary to investing in disruption stocks. conviction Again, it is all about the right investment strategy, right investment team, proper disruption thinking and, importantly, allocation. mutual funds 5. Our approach to investing in disruption stocks

Disruption influences our geographic asset allocation. From a global perspective where is the technological innovation happening? Is it here in the UK or more broadly in Europe? No, it is in polar opposites of the world, in the US and China. The historical wealth creation for shareholders by winners in the US and China eclipses the wealth generated in other countries. Leading global economic players who led an arms race for innovation, disruption of traditional industry and leading-edge technological solutions for the masses. We have an overweight towards the US and China in our portfolios relative to our peers. China is pioneering all areas. We are one of the very few Discretionary Fund Mangers (DFMs) who take exposure to China directly.

We like asymmetrical investing. What is asymmetry in investing? This is the opportunity where the long-term return potential from an investment is very significantly positively skewed. In holding an investment, the most one can lose is 100% of the capital sum invested. In this investment thesis the investment return could be far in excess of this potential 100% loss – in other words a significant multiple of the sum invested. The upside return is therefore asymmetrical to the downside potential loss in a portfolio of such investments.

We believe that asymmetrical investing will be even more important going forward – the concentration of returns in key sectors and themes will make that obvious. Academic literature as well as practical portfolio management bears out the possibilities in such an investment strategy. In industry we see a bias towards the short-term, towards minimizing investment drawdowns, towards sales and marketing to increase assets under management and importantly being impatient with investments; all possible reasons why most investment professionals are distracted from looking at this asymmetrical approach in any meaningful manner. This type of investing is also not typically well understood by investment professionals.

Thematic thinking is good. Avoid fads. Not all trends are the same – many trends are fads. Many trends are overarched by bigger, more dominant themes. For example, investors can look at 2020 and think of the ‘work from home (WFH) trade’ or look beyond that, at the genuine disruption that is happening and the underlying drivers for such core disruption. As long-terms investors we look to see and invest in genuine disruption and change. We look at this from all platforms but with a particular focus on healthcare innovation, robotics, automation and digitalization: these areas are forming real innovation and development. A focus on companies that are truly leading the way, truly capturing interest, market share and development. Companies that just do not innovate but actually execute and stack on that innovation.

Throughout our portfolios there is a strong thematic investment philosophy. Whilst the portfolio may look to be split across geographical terms, underlying this are very core thematic trends and views. There are areas of investment markets that we just avoid such as tobacco, defence, oil - and others that we are significantly underweight such as banks, telecoms, hotels & restaurants, traditional retail, insurance and real estate. 5. Our approach to investing in disruption stocks

Price is always important. We are principled, pragmatic investors. We always stick to our best ideas. We are happy to pay for growth where we have high conviction that there is a genuine growth story backed by fundamentals and all the characteristics that create a legendary competitor. By being long-term, high conviction and focused on our best ideas, it provides a framework where the current bid price matters less to us at Binary Capital than other investors; although important. The price Is what the market is willing to pay, we look at that and ask what is priced in by the market, and what may investors be missing in the long-term story, what is the potential opportunity?

Proper detailed research and fundamental analysis is the only way. We use the example of investing in genomics. In scientific discovery, even more important are factors such as company management; less so fundamentals today. One must consider aspects such as the pipeline, the scalability of such a pipeline, chances of clinical trial passes and regulatory approval. This can only be done by fundamental investors with dedicated resources, deep knowledge and expertise, genuine first principles detailed research and analysis. All detailed work in-house as well as externally via experts.

Extreme winners

We are heavily influenced by the academic thinking of Bessembinder (2017, 2019, 2020) which primarily state that the distribution of long-run stock returns is strongly positive skewed, and a relatively small number of extreme winners create the lion’s share of aggregate net wealth for investors. The research looks at long-term characteristics of equities, using single-line stock data – looking at annual and decadal data. It turns out that indices such as the SPX500 are not good proxies for individual equities, and that short term return information does not accurately depict long term return distributions for stocks due to compounding effects.

We agree with this style of looking at investments, we have this thinking in mind when looking at stocks and funds. Daily, monthly even quarterly data, is noise. The whole philosophy around the disruption themes we talk about in this paper fits the narrative in recent academic research.

The maximum loss of a stock is 100%, whereas extreme winners have the potential to drive factors of returns much higher: 5x, 10x, 15x or more over the long term. If successful in identifying these stocks that will generate extreme excess returns, any losses will be significantly outweighed by the gains from extreme winners. Again, this is the academic thinking behind asymmetrical investing, behind disruptive investing. We always want to be on the right side of the investments, and literally the far-right side of this curve. Many stocks on the extreme right side will be, in our opinion, in the disruption category. It will be that category that produces these exceptional returns. 5. Our approach to investing in disruption stocks

Figure 5: Bessembinder (2019) – Do Global Stocks Outperform US Treasury Bills?

Source: Screenshot from Bessembinder et al., 2019 – Do Global Stocks Outperform US Treasury Bills? https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

Figure 6: Investment Philosophy is the key. It is fundamental.

Investment philosophy Long-term High Investment philosophy is the enabler for success conviction Best thinking in this style of investing. An optimistic long-term, approach ideas absolute return mindset. A mindset that over- diversification creates index like returns. That the best thing to do is stick to your best ideas, that you have conviction in. Think long-term, think in themes. Think in bold terms. Equity Portfolio

Strong durable Investment selection and Disruptors. companies. portfolio construction Potential to create 5 year+ high growth multi-bagger returns potential. Core Investing in disruptors, affects asset allocation within single equities. compounders. decisions as we consider where extreme winners will High R&D expenditure. come from in geographically terms. Recent evidence suggests the US and China not only now but for the next decade.

Asymmetrical return opportunity Asymmetrical return opportunity. By investing in this way, we can construct genuine Invest and hold long-term the winners. active portfolios that have an asymmetrical return opportunity within equity allocations. We aim to limit the downside and capture good upside returns.

Source: Binary Capital Investment Management Ltd 5. Our approach to investing in disruption stocks

How do we at Binary Capital, gain exposure to such disruption stocks?

Vehicle Solution

Single equities We have a focused 30 stock global buy list. We can adapt a portfolio around such stock positions if need be. This is a high conviction, best ideas list. We can place the best thematic stock plays into a portfolio, one theme or multiple themes. Group such investments together across similar strategies.

Thematic mutual funds On an active, or passive basis there are many thematic funds or ETFs out there in the marketplace which we can utilise as and when needed. The choices here are very broad from many product providers, so we can adapt according to circumstances and investment style – maintaining best-in-class criteria across fund types and styles.

Long term, high This is very important. We are long-term patient capital investors. conviction actively We are high conviction investors. We believe in the power of themes managed mutual funds and conviction and wish the underlying active managers we invest in to be similarly focused. We need alignment on strategy and themes. These principles gives us the freedom to invest in a very unique way that is not available from other investment providers, including other DFM managers. We are unique in this manner. Closing remarks

Do you want to look into the future now, or do you not? Should investments not be more aligned to genuine future opportunities? Which side of the risk and return curve do you want to be on?

Traditional investment management is just that, traditional and backward looking. Traditional investment management looks at historical trends, data and trying to forecast perhaps a year or two forward. Does it add any value? For us, at Binary Capital, it is always about the future and looking at next generation and multi-generational opportunities.

As this paper highlights, we are looking to invest in future opportunities, themes and strategies. The way we manage money is different from traditional wealth and DFM managers. We cannot stress this enough. We have a distinct bias and edge around our investments. We maintain that bias and edge for the reason: we believe in what we do with a very high degree of confidence. We pursue this edge with a real focus, intensity, all wrapped around proper and detailed thinking.

Disruption may be a new term in finance but the mechanics of such have been around for many years. It is how to capture the opportunities that is the key, and importantly capture them consistently in risk-adjusted returns for clients. We are proud of our record in this space, one validation of this is our performance record, both on an absolute and relative basis.

Complacency is rife in wealth and asset management in the UK on future opportunities. This is not something we will do. We are never complacent and we always look to see investments, models and strategies around all scenarios before we commit to areas we wish to invest in. We invest with conviction backed up by full research and analysis. We invest with high integrity, exceptional attention to detail and a very low ego.

Uniquely against our peer group, we see disruption investing as an asset class. Therefore we invest into such an asset class and monitor accordingly. We see this disruption theme continuing for the rest of this decade. As we have articulated in this paper, there are significant investment opportunities available to us now to take advantage of thematic disruption. We believe in the endeavour, the power of human achievement and progress to continue to disrupt the old, and to play a part in new industries, sectors and opportunities. The opportunities for out-sized returns in being exposed to such disruptive exposure is real, is ever present, and is something we wish to not just play a part in, but be a core being in our work for all clients.

This is a journey. This is our journey.

Thank you for reading. We welcome your comments, feedback and engagement at [email protected]

www.binarycapital.co.uk Disclaimer

The Information in this document is not intended to influence you in making any investment decisions and should not be considered as advice or a recommendation to invest. Any Information may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors and relevant offering material. Any investment decisions must be based upon an investor’s specific financial situation and investment objectives and should be based solely on the information in the relevant offering memorandum. Income from an investment may fluctuate and the price or value of any financial instruments referenced in this document may rise or fall. Past performance is not necessarily indicative of future results.​ ​ We assume no responsibility or liability for the correctness, accuracy, timeliness or completeness of the Information. We do not accept any responsibility to update the Information. Any views, opinions or assumptions may be subject to change without notice.​ ​ Binary Capital Investment Management Ltd is incorporated in England under company number 06692644, registered office, 25 Green Street, London, W1K 7AX. ​Binary Capital is a trading name of Binary Capital Investment Management Ltd. ​ Binary Capital Investment Management Ltd is authorised and regulated by the UK Financial Conduct Authority (reference number 507900). Principal place of business: 25 Green Street, London, W1K 7AX.

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