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June 2023 Monthly Update

Updated: Jan 16

Strong positive returns again in June, over 1 year at 24.5%, outperforming the MSCI benchmark. Importantly, both funds are meeting their rolling 5-year return fund objectives (against benchmark). As we have repeatedly advised over the year, it is earnings growth that drives stock prices long term. Many were too focused on macroeconomic indicators that are notoriously hard to consistently get right. They lost sight of the fact that whilst share prices were broadly falling, earnings growth of highly profitable businesses benefitting from secular megatrends, were continuing to grow.

This ‘top-down’ focus with its abundance of negative commentary, led many investors to remain very defensive, missing +20% returns available from October’s 2022 lows. At Insync we retained our laser-like focus on this select group of high ROIC businesses, thus benefitting from their inevitable rise in price. Just 30 businesses globally across 16 megatrends.

Below is the third of a series of pieces on how AI impacts companies. We believe it will be the next major tectonic shift, like mobile and cloud, and will be the most compelling force powering technological innovation and our lives over the next decade. Interpreting where, when, and how its impact will be felt will be crucial for investors.

“[AI] will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.” - Bill Gates

Insync has invested in AI for years, but we believe that an inflection point has been reached. It’s brought about by a new phase in the creation of generative AI and large-language transformer models such as ChatGPT. This will be a highly disruptive to most industries. We are engaged in deep specialist research to gauge who will be empowered, what to avoid, and where the most significant value and differentiation lies. One of the key areas is in data. We now provide an example of a global business with a distinct data advantage making it a major beneficiary of the acceleration of AI.

AI Data Analytics Powerhouse

RELX has been using machine learning natural language processing for well over a decade, and they have been experimenting with generative AI for over 18 months. RELX employs 10,000 technologists spending about $1.6 billion a year on technology.

RELX specializes in gathering, analyzing, and delivering valuable knowledge and insights to businesses and professionals across industries globally. It offers a wide range of products and services in areas such as scientific research, legal services, risk management, and business information.

High-quality, diverse, and relevant data is essential for achieving accurate and valuable outcomes in Artificial Intelligence. Overall, RELX plays a crucial role in connecting people with valuable information and empowering people and organizations to make better-informed decisions.

In healthcare for example, RELX provides scientific, technical, and medical information to researchers and industry professionals, helping them access the latest findings and stay up to date with advancements in their respective fields. They help ensure that quality research accelerates progress for society by organizing the review, editing and dissemination of around 18% of the world’s scientific articles.

Source: RELX

In 2022, Elsevier a RELX subsidiary (an esteemed healthcare services journal and information provider) received almost 2.7 million article submissions. It then published over 600,000 new research articles, following their peer review with the global scientific community, accessing over 1.8 billion articles across all its journal platforms in the process.

Doing this without AI would require exorbitant cost and thousands of extra people, that no doubt would restrict both its breadth of peer review, timeliness and verified data sources. This would lead to higher prices, less benefits and be used by far less people in healthcare.

RELX also focuses on risk management. It provides data and analytics to help businesses assess and mitigate risks associated with areas such as insurance, financial services, and cybersecurity. Their insights enable companies to make more informed decisions, identify potential threats, and develop strategies to protect their interests.

RELX does business with 93% of Fortune 100 companies and 79% of the Fortune 500. This includes 7 of the world’s top 10 banks and 98 of the top 100 personal lines insurance companies. 85% of new US auto insurance policies issued to consumers in 2021 benefited from their insight and information.

Source: RELX

In the legal sector, RELX offers solutions that assist lawyers, legal professionals, and organizations in managing and accessing legal information, case law, and regulatory updates. This helps them make more informed decisions and better navigating complex legal matters more effectively.

LexisNexis, a subsidiary of RELX, seamlessly combines research content with practical legal guidance. It hosts 139 billion legal & news documents and records. On average, 1.9 million new legal documents are added daily from over 71,000 sources, generating 137 billion connections. In all, 33 million legal documents are processed daily. Again this exemplifies the power and benefit of AI delivered beyond the practical realms of human effort.

Source: RELX

Privacy, Security, Compliance. These are major issues in the generative AI world. Like Adobe, which we discussed in last month’s update, RELX provides leading businesses a safer, more confidential and secure AI environment in which to research and make business decisions.

Hallucinations are a big problem with ChatGPT. This is when the software basically stuff’s up. There was a recent situation in New York with a lawyer who experienced a major fallout with the courts because he made a filing full of mistakes. It used ChatGPT that accesses the broad internet. The advantage of RELX data is that they are using only their very large databases with verified information, which means that the lawyers can actually trust what they're getting.

RELX, like the other companies in the Insync portfolio, is a highly profitable company based on its ROIC, with a long runway of growth, modest levels of debt, substantial R&D and generates prodigious amounts of cash flow.

It is important to appreciate that whilst investors are fretting over when interest rates will peak, and its impact on the both the economy and company earnings, a select group of companies such as RELX, often deliver excess relative returns versus the benchmark. This is especially so during historical periods of monetary tightening and general gloomy headlines. Their results are unsurprising as they often maintain, even strengthen their strong competitive advantages during these periods. This enables them to consistently generate economic value even as the cost of capital is rising.

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