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Tapping the intelligence revolution
Named by Nasdaq in September 2014 as an ‘ETF Insider’, Kevin R. Kelly, founder, chief executive officer and managing partner of Benchmark Investment is well known for his thought leadership on markets, e-commerce, 5G and cloud technologies, and retail. As index portfolio manager of Benchmark’s SCTR index series, he also oversees Benchmark’s SRVR index, which provides the technology needed to power investment products and asset mandates for leading institutions globally. The index forms part of the firm’s established partnership and collaboration with index provider Nasdaq Global Indices.
Focused on capitalising on the build out of 5G technology, online commerce, artificial intelligence, virtual reality, augmented reality, blockchain and the Internet of Things, Kelly says the SRVR index is centred on investment in the intelligence revolution that is taking place, superseding the computing and industrial revolutions that came before it.
“If we look at where we are in history, we are entering the next industrial revolution that will take a great deal of technological infrastructure to power it,” he tells Asia Asset Management. “The SRVR index is the foundation of the intelligence revolution at a time when our economy depends on an increasingly sophisticated backbone of servers, fibre optic cable, data centres and wireless towers to process critical information and data.”
“It is called the SRVR index because servers are rendered useless without the index’s missional critical infrastructure that makes technology work,” he adds.
For Kelly, the build out of data centres and cell phone towers looks set to be unprecedented if we expect to have autonomous driving vehicles and drones delivering our groceries – with the caveat that development of 5G and cloud infrastructures will depend on local and federal regulations. He also highlights factors globally where different timetables, leasing, entitlements, permitting, and development requirements exist, not least relating to the green or climate agenda, to further develop technology infrastructure.
Suffice to say the potential for investment in 5G technology is huge. “A 4G macro tower can cover a square mile, while at the 5G tower, one small cell, can cover only one-tenth of that distance. This is the trade-off of going from 4G to 5G. If you are going to get more data to travel faster, it cannot go as far, so in order to compensate for that trade off, carriers [known as mobile network operators or MNOS] are going to have to put up ten times the amount of antennas, small cells, and towers. Essentially, they are going to need to increase capacity,” he explains.
“Furthermore, a 5G packet of data is very sensitive, and while we know it cannot travel far, it also cannot travel through walls, people, cars, among other structures, so data can be easily lost. That is where fibre, the key factor to 5G comes in,” he adds. “Generally speaking, once a 5G packet of data is picked up, it must then be placed in the safest and most reliable form of information transportation, or as we like to call it, the railroads of the future, which is fibre.”
“Every single city, in every major metropolitan area, in every country, has a big development pipeline ahead of them in terms of getting ready for the ‘techceleration’ [technology acceleration] of our daily lives predicated on cell towers, data centres, and fibre optic cable networks,” he says.
Kelly has no doubt as to whether the growth will sustain, as he forecasts beyond 5G towards ever more sophisticated technologies in future. “The precursor to 5G was 4G, the precursor to that was 3G, and before that was 2G. The growth in the intelligence revolution is now becoming exponential, as technology is truly borderless,” he says.
“The ‘5G revolution’ is really just a sub-set and a precursor to 6G, 7G and 8G. When we go from the ‘cloud’ to ‘edge’ to ‘mist’ computing, we are going to need safe and reliable forms of communication and infrastructure. Growth is sustainable in the future for that reason,” he adds.
Kelly also points to the fact that with technology infrastructure being highly specialised and hard to replicate, local business models and properties, with significant barriers to entry, including those relating to government regulation and tenant relationships, are going to succeed in future for those very reasons. This is in addition to the significant upfront capital commitment for building and managing technology real estate, as well as ongoing maintenance.
According to Kelly, one of the best ways for investors to access the space is through the equities of established technology infrastructure providers listed in global markets within Benchmark’s SRVR index.
These incumbents have a significant advantage over new entrants. As he sees it, tenants are risk-averse about outsourcing intellectual capital and customisation needs. When they decide to outsource data centre space, power, and cooling requirements, they are likely to choose established providers with long operating histories because the risk of choosing a new and potentially cheaper provider with limited operating history is too great, particularly for companies where the reliability of their daily business is critical to operations.
Benchmark’s focus is on the infrastructure side of the 5G and cloud space, although there are opportunities available in the hardware, software and semiconductor arena. “We do not focus on those as we think they can be ripe for disruption. All the SRVR index constituents typically have a unique trifecta of dividend growth, significant cash flow generation, and strong balance sheets that is rare to find in technology, thus the index contains high quality assets with stable cash flows,” he says.
The coronavirus pandemic has “changed our lives for good”, according to Kelly. “It has shown that we need clean and reliable internet daily to function as a society. The SRVR index is like digital water providing our lives with reliable technology on a daily basis,” he says.
The change, he says, has really been felt in the organisational structure of enterprises, with every single organisation, be it a small school or a large university, or a small business or large multinational, requiring a distributed computing fabric for essential workloads. And to Kelly, it appears that investors have taken note.
“Traditionally, technology infrastructure was treated as a non-core property type or holding. Given how dependent economies are on tech infrastructure, the asset class has now become mainstream. Almost every day you can read about how private investors are trying to access the digital infrastructure, but the premier way to do this is through the publicly traded names, some who have 20-plus years dominating the space,” he says.
“Businesses across the world are evolving and executing their digital transformation journeys in a race to disrupt or risk being disrupted. The ability to seamlessly connect with business partners and transfer data in real-time is becoming increasingly important so investment into the foundation of technology will continue,” he adds.
Asia’s ETF market
Kelly is optimistic about Asia’s exchange-traded fund market, noting that the continent is providing some of the most exciting opportunities globally.
“The use of ETFs as part of a mixed strategy of passive and active portfolio management is likely to grow rapidly in Asia, driven by organic growth among local investors and strategic asset allocation among players from outside the region,” he says. “This can only be compounded by the growth of the ecosystem surrounding the ETF market where market makers, exchanges and investors are only set to grow, making the value chain even more enhanced.”
“I am also excited that Asia is home to a vast swathe of religions, languages, festivals, ethnicities, climates, demographics and forms of government, which we believe will continue to lead to exciting developments and companies,” he adds.
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