San Francisco City and County Employees' Retirement System Chief Investment Officer SFERS William J. Coaker Jr., CFA, MBA San Francisco Employees' Retirement System INVESTMENT COMMITIEE CALENDAR SHEET Investment Committee Meeting of October 21, 2020 DATE: October 21, 2020 TO: Members of the Investment Committee THROUGH: Jay Huish Executive Director FROM: William J. Coaker Jr. - CFA, MBA Chief Investment Officer SUBJECT: Science and Technology Revolution Overview The human experience is fast evolving toward an Era of Science, Technology and Innovation. The Era of Science and Technology will have more impact on the human experience than the transition from the Agriculture Era to the Industrial Age. The Industrial Revolution began in the latter part of the 18th century. Previous to then, people and business were primarily confined to the farms, growing food and traveling into town by foot or horse periodically to exchange goods produced by others. The Industrial Revolution brought enormous improvements in the human experience including modern transportation, communications, conveniences, entertainment, healthier food, medical improvements, and a significant rise in the quality and longevity of life. Innovations during the Industrial Age included the steam engine, railways, automobiles, electricity, the telegraph, telephone, radio, cameras, airplanes, the assembly line, and much more. Harnessing the possibilities of the Industrial Age enabled the U.S. to become the global economic powerhouse from late in the 19th century through the 20th century. The Era of Science, Technology and Innovation Microprocessors to Personal Computers to Software The very early seeds of the Era of Science, Technology and Innovation began in the 1960's with the development of the microprocessor. That made personal computers possible, which began being adopted in the latter part of the 1980's. Personal computers made software possible, and three decades plus later software remains the fastest growing industry in the global economy. Every business needs a suite of software solutions, including programs for Human Resources, Payroll and Benefits, Financial Reporting, Financial Planning and Analysis, Strategic Planning, Project Management, Sales and Marketing, Customer Experience, Internet Security, Applications Management, Data Analytics, Cloud Computing, Database Management, Spreadsheets and Word Processors, Creative Works, and more. DMDatabases.com estimates that there are 18.2 million businesses in the United States. Many businesses need multiple software solutions and large organizations utilize dozens of software packages. Of the . approximately 18.2 million businesses in the U.S, 18.15 million have fewer than 500 employees. Approximately 17 million businesses have fewer than 10 employees. Further, personal computers and mobile phones include loads of software programs. In sum, the need for software solutions is massive. Networks The next innovation was networks, created so organizations could share information and businesses could operate more efficiently. The Internet The next great innovation was the internet. The internet will be the time when "everything changed." For the first time in human history, learning was available to everyone from anywhere, and business opportunities went from local to global. Social Media Social media was the next great innovation in the Era of Science and Technology. Approximately 3.8 billion people worldwide are now connected via social media. Smart Phones The next large-scale innovation was smart phones. Approximately 5.1 billion people use a mobile device. Smart phones were founded in 2007, and in just 13 years approximately 2.7 billion of those devices are now smart phones. In the coming adoption of 5G, smart phones will become supercomputers. In about 30 years, supercomputers will have been transformed from spaces requiring a very large room to the size of a mobile phone .. Artificial Intelligence, Cloud Computing and the Digital Transformation Artificial Intelligence is the ability of computers to perform tasks that normally require human intelligence, such as visual and voice recognition, organizing data, analytical insights, and decision-making. The digital transformation is being enabled by the explosive advances in modern computing power and the colossal volume of available data. Further, with advances in data analytics and the power of modern databases, data does not need to be structured or well organized. 2 Additionally, with advances in predictive analytics, business leaders are able to utilize both structured and unstructured data to become more informed and better manage their business. Medical scientists for the first time are able to quickly assemble mass volumes of data - including physician notes, diagnosis, images, treatments, and results, as well as knowledge of biology and chemistry - to become more informed about their patients condition, potential therapies, and improve drug discovery, patient care, and save lives. Many people are concerned that computers will take the work done by humans and that there won't be enough jobs. Automation and artificial intelligence are estimated to displace about 40% of existing jobs. While many jobs conducted by humans will be automated, the Era of Science, Technology and Innovation will free people from work that requires mundane tasks to create, innovate, and interact. The impact on jobs will be as transformative as evolving from the Agriculture Era, when 60% of people worked on farms to the Industrial Age in which about 2% of humans now plow the land. There will be plenty of work to do. It's just that the types of work people do will change, and the types of work we do - being paid to innovate, create and interact -will be far more fulfilling than the work many people do now. Speed, Scale and Impact of Innovations Has Accelerated ... As shown in the attached presentation, the speed, scale and impact of innovations is accelerating. When airlines were created, it took 68 years for SO million travelers to utilize air travel. Automobiles and telephones took 60 and S2 years, respectively, to reach SO million users. Electricity took 46 years, Credit Cards needed 28 years, and Televisions took 22 years, to reach a base of SO million users. More recently, Personal Computers took 14 years, Mobile Phones needed 12 years, and use of the Internet took 7 years until SO million people were using these innovations. Recently, the speed of innovation is accelerating even further. In just the past lS years or so, new companies and products such as AirBnB, Facebook, lnstgram, the I-Pad and the I-Phone, Lyft, Snapchat, Square, Tesla, TikTok, Twitter, and Uber have already becoming very large. In 2004 it took Facebook 3 years to reach SO million users. More recently, it took We Chat just 1 year to reach SO million users, and most recently new businesses and services such as Pinduoduo, Meituan, Pokeman, and TikTok achieved SO million users in one month or less . ... And is Poised to Accelerate Even Further Looking forward, backed by the "emergence of cloud computing, the explosion of available data, and artificial intelligence, the next wave of innovations will be much more impactful than what has occurred thus far. Innovations poised to arrive in the next decade or two that will transform the human experience include improvements in human health, transportation, energy, education, finance, and much more. Just 60 years ago, companies in the S&P SOO spent an average of 60 years in the index. Now they spend an average of just 20 years in the composite, and by then end of the decade consensus expects that will drop to lS years. Cathie Wood, Founder, CEO and CIO at Ark Invest thinks the average company will soon spend an average of 10 years in the index. In sum, the speed, scale, and impact of innovation across every sector and business is accelerating. 3 Risks of Investing in Science and Tech The Era of Science, Technology and Innovation brings investors an enhanced opportunity to earn high returns, and it also comes with additional risks. Risks include the potential for regulation, anti-trust initiatives, and higher valuations. Importantly, investors need to be more adaptable, more nimble and less bureaucratic, visionary, and strong at selection, to succeed in this new era where disruption and opportunity take place quickly. Investment Returns in Science, Technology and Innovation Public Equity The past 10 years through June 30, 2020 the S&P Information Technology Index returned 20.5% annualized and the Nasdaq Biotechnology Index gained 18.3% per year, compared to the S&P 500 and the MSCI ACWI gaining 14.0% and 9.7%, respectively. On a compound basis, the Technology Index gained 545% and the Biotech sector returned 437%. Comparatively, the S&P 500 and the MSCI ACWI posted gains of 271% and 152%, respectively. Importantly, innovation is disrupting the business of incumbents while also creating new markets. Goldman Sachs computes that since 2014 companies leading in innovation outperformed the S&P 500 by 83% while businesses lagging in innovation underperformed the index by 61%. Many investors oftentimes think that Public Equity is a mostly efficient asset class and that it is unlikely investors can outperform in the asset class. I think differently - that Public Equity is an excellent source to post high excess returns. To begin, emphasizing investing in science, technology and innovation in Public Equity has produced substantial excess returns, as noted in the preceding paragraphs.