Accelerating technological change has profound implications for investors. We specialize in positioning clients to take advantage of that change.
The World is Changing
Artificial intelligence and machine learning, autonomous mobile robotics, blockchain and digital finance, energy production and storage, and synthetic biology. These are just some of the technologies that are profoundly transforming the world in the coming years and decades.
While the opportunities for investors are immense, so are the risks. Innovation does not happen in a vacuum but is part of a continuous cycle of creative destruction whereby new products and services eliminate the need for old ones. While this is ultimately a healthy cycle akin to how wildfires benefit woodland ecosystems, the coming technological disruption will be profound. Indeed, we believe that many public companies operating today will face obsolescence in the near future. The impact on investors cannot be overstated.
So how should investors navigate this tumultuous environment? That is where we come in.
How We’re Different
Donnelly Investments has a unique investment offering focusing on individual securities.
In light of the existing and increasingly widespread technological disruption, the traditional 60/40 split between fixed income and mutual funds/ETF in a portfolio isn’t going to cut it. We believe that investors need to be extremely discerning in selecting individual securities that are well positioned for the future. The research-driven approach at Donnelly Investments does just that.
Volatility doesn’t scare us.
Most firms have a fundamentally flawed approach that confuses risk with volatility. This results in overly coddled portfolios that prioritize clients’ short-term emotional comfort over maximizing their long-term returns. We reject this approach, even while protecting client assets needed for the short term. Our view is that volatility should be embraced as a normal and expected part of investing for the long-term portion of the portfolios we construct and manage—we see volatility as the emotional price investors pay for higher returns.
We have the courage of our convictions.
The bottom-up research at Donnelly Investments allows us to have the courage of our convictions by keeping us sharply focused on the signal within the noise. And there is a lot of noise. Short-term macroeconomic and cyclical panics generally don’t phase us. We construct portfolios with a “buy-and-hold” approach and generally only sell or trim a position once it hits our price target or if we believe there is a better long-term expected return on capital elsewhere.
Sophisticated tax planning and estate planning make Donnelly Investments unique.
Most investment-focused advisors are frankly very weak on planning. In contrast to the average advisory firm, Donnelly Investments makes minimizing taxes central to everything we do. And our background in law allows us to provide comprehensive planning on various complex tax and estate planning strategies that make a significant difference for the protection of a client's assets. Additionally, we have significant experience in tax and estate planning for non-traditional family structures, LGBT tax and estate planning, and generational wealth and estate planning and management.
Diffusion of Innovation is a foundational theoretical framework which states that the adoption of new technologies follows the s-shaped curve, whereby adoption of new technology is slow to start, but accelerates exponentially, and then slows again with widespread adoption, or saturation. This adoption curve is why technological change happens slowly—then all at once.
Our Research Process
We have deep understanding of the adoption curve.
While markets are efficient over the long term (i.e., market prices will eventually reflect intrinsic value), pricing dislocations and other inefficiencies are common in the short term. We believe there is a natural dislocation at the front end of the technology adoption curve because most investors project trends linearly. Unlike the vast majority of financial advisors, we focus on taking advantage of this dislocation to achieve long term returns.
Identifying commercial applications.
Our approach to the selection of individual securities starts with understanding the transformational technologies that are at the front end of the adoption curve. We identify commercial applications where disruptive new technologies will create products and services with value propositions that are an order of magnitude (i.e., 10-times) better than those generally available with legacy businesses and technologies. We focus on commercial applications with large, trillion-dollar-plus addressable markets.
Comprehensive, bottom-up research.
We conduct extensive bottom-up fundamental research into companies that we believe should participate in or benefit from the development of these new commercial applications resulting from accelerating technological change. We evaluate companies on various quantitative and qualitative factors, including company culture, competitive advantages, engineering talent, management quality, and unit economics. We specifically identify opportunities from founder-led companies where the founder-CEO maintains a significant equity position. These companies are often relatively early in their corporate lifecycle.
Fundamental discounted cash flow analysis.
We forecast a company's cash flows out 5-years and apply a conservative terminal valuation multiple (e.g., the historical average of the S&P 500) to those cash flows. We generally require a projected doubling in valuation over five years before we consider investing in a company. This process is highly selective, and very few companies meet our stringent investment standards.