April 2018
Extended Horizons: A differentiated
Bruce Glazer
Portfolio Manager
Bruce is a senior member of the
Technology Team and a global industry
analyst. As portfolio manager, he over-
sees a global technology long/short fund
and two global technology sector port-
folios. He specializes in the business and
IT services sectors, with specific areas of
focus that include payment/information
processing and information technology
professional services.
1
Tax Aware: Extended Horizons utilizes a
low-turnover approach, with a focus on long
holding periods and the use of tax standing to
inform transaction decisions. Tax awareness
is monitored on an ongoing basis. Information
contained in this paper regarding the “tax
aware” nature of the approach is for infor-
mational purposes only and should not be
considered legal or tax advice. Please consult
your own independent tax advisors regarding
this information and your specific situation.
The approach is not actively managed to mini-
mize an investor’s tax liability. Tax laws also
may change without notice.
2
The characteristics presented are sought
during the portfolio management process.
Actual experience may not reflect all of these
characteristics.
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approach to technology investing
Key points
We believe:
The market tends to undervalue sustainable growth
Utilizing disruptive technologies can help companies advance their competitive
advantage, enhance barriers to entry, and maintain above-market growth rates
Taking a long-term view on durable business models can harness the power
of compounding
Investing in technology stocks for more than two decades has taught
Portfolio Manager Bruce Glazer the value of long-term thinking. While
many traditional technology investors focus on a stock’s near-term cata-
lysts, Bruce’s extended holding period enables him to concentrate on the
longevity of a company’s competitive advantages. He seeks companies
with underappreciated sustainable growth prospects that use disruptive
technologies to create durable business models. In his view, companies
with these characteristics, innovative offerings, and prudent capital alloca-
tion can grow consistently over time, with the potential to produce stable
returns for investors willing to invest with a longer time horizon.
With this in mind, Extended Horizons is designed to be a low-turnover,
tax-aware1 approach that seeks to harness the power of compounding.2 In
this paper, Bruce shares his investment philosophy and examples of his
approach in action.
Investment philosophy: Developing conviction for the long term
Strong conviction in a company’s business model underpins our willing-
ness to invest with an extended time horizon. Often our greatest source
of differentiation is not related to a near-term forecast or stock catalyst,
but rather our confidence in the long-term sustainability of a company’s
growth. When evaluating a business, we look for four key characteristics.
All investing involves risk. Investors should consider the risk that may
impact their capital before investing. The value of your investment may
become worth more or less than at the time of the original investment.
Please refer to the risk section for more information.
April 2018
In the end, our
goal is to develop
deep conviction in
a basket of steady-
growth, high-quality
companies that are
managed by thought-
ful stewards of capital
and can be owned
with an extended
time horizon.
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2 Wellington Management
Strong competitive moat
Ideally, we aim to invest in companies that either dominate or are gain-
ing share in their respective end markets. However, we think a company’s
ability to maintain its current share with low risk of competitive loss or
technological disintermediation is more important. We seek companies
that we believe benefit from a strong brand, network effects, or scale.
Stable growth
We tend to prefer companies with recurring revenue streams that are not
driven by product cycles or subject to wide cyclical variability. Rather than
focusing on finding the fastest-growing companies, we place greater value
on our ability to forecast future revenue with a higher degree of accuracy.
Low capital intensity
Because the stocks we invest in are typically not product companies, capi-
tal expenditures for manufacturing capacity and business expansion tend
to be low. Historically, this has typically resulted in stronger free-cash-flow
generation and a higher quality of earnings.
Thoughtful capital allocation
We look for pragmatic, dispassionate allocators of capital who we believe
lack the ego that might tempt them to emphasize growth over the creation
of shareholder value. We think a company is more likely to achieve our
return objectives when a sound business model is combined with prudent
management oversight.
As few investments meet the above criteria, we view our relationships with
the companies we own as long-term partnerships. Our preferred engage-
ments are those in which our conversations have been elevated beyond
current news flow and guidance, and in which management and the
board are receptive to our constructive feedback. In the end, our goal is to
develop deep conviction in a basket of steady-growth, high-quality compa-
nies that are managed by thoughtful stewards of capital and can be owned
with an extended time horizon.
Technology: The common thread
Although we are sector-agnostic, the common thread across most of the
companies we invest in is their differentiated ability to leverage technology.
We believe the most attractive investments often are not the companies
that develop a new technology, but rather the ones that are able to harness
available innovations to advance their competitive advantage, build deeper
barriers to entry, and sustain above-market growth rates for longer periods
of time. A company does not have to be the creator of a new technology in
order to use it in a disruptive way.
Credit bureaus and machine learning
Consider, for example, the use of machine-learning technology by the
credit bureau industry. Machine learning is a method of data analytics that
uses algorithms to enable computers to draw conclusions from complex
data sets, identify patterns, and generate predictive insights that improve
decision making. It is an iterative process, with performance enhanced by
the addition of more data. This technology has many practical applications,
including autonomous driving, disease discovery, speech recognition, and
homeland security.
April 2018 3 Wellington Management

We think many investors have overlooked how the credit bureau industry
has embraced machine learning to strengthen what we already believe to
be strong business models. Each of the three leading credit bureaus main-
tains massive data sets, comprising the spending and payment histories
of millions of consumers. They aggregate this information from financial
providers, and then sell it back to them with each request for credit. The
industry is a true oligopoly, with rational participants, high barriers to
In our view, IoT is entry, and recurring revenue streams.
fundamentally shift- Historically, credit bureaus have used their data to produce a three-digit

ing the way people numeric “FICO” score intended to give an objective determination of a
consumer’s creditworthiness. Now, using advanced analytics, they are able
pay for products to extract much deeper insights that in turn make their data even more
valuable. New models can provide a more accurate credit profile, depict
and services. changes in consumer behavior over time, and make future predictions.
We believe this will create a virtuous cycle in which the credit bureaus are
able to continually identify new markets and sources of revenue for their
improved data sets which could result in accelerating growth and more
robust free-cash-flow generation.

Card networks and IoT

Similarly, we believe the credit card networks are underappreciated benefi-
ciaries of the increased number of everyday items being connected to the
Internet. The concept of devices such as watches, thermostats, automo-
biles, parking meters, and home appliances communicating via the Web is
commonly referred to as the Internet of Things (IoT). There are currently
more than eight billion connected devices, 3 a number forecast to grow to
75 billion or more by 2025.4 To date, many investors have focused on the
devices themselves or the underlying technologies on which they are built.
We think the payments industry, specifically the existing credit card net-
works, represents a lesser recognized opportunity to invest in this secular
growth story.
In our view, IoT is fundamentally shifting the way people pay for prod-
ucts and services. Worldwide, there are roughly four billion credit cards5
accepted at over 40 million merchant locations.6 However, consumers can
now also make purchases using their smart phone or digital assistant,
enable their refrigerator to reorder its contents, pay parking meters with
apps, and exchange money with friends at the push of a button. With IoT,
each device essentially becomes a de facto credit card. In other words,
the “War on Cash” continues as previously cash-dominant areas shift to
digital forms of payment. In fact, though roughly US$17 trillion in pay-
ments worldwide still use cash and checks,7 digital transactions are now
growing five times faster than other methods.8 We believe this expansion
of IoT-enabled payments should create lasting opportunities for growth for
3
Gartner, January 2017.
existing credit card networks.
4
IHS Markit report, April 2016.
5
The Nilson Report, World Databank,
Visa/MasterCard company reports and
JPMorgan estimates.
6
RBR London.
7
Visa.
8
eMarketer PRO, 13 June 2017; excludes travel and
event ticket sales.

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April 2018 4 Wellington Management

As these companies collect a small percentage of each digital transac-

tion, the above trends strengthen their already sound business models.
Moreover, the existing network providers are embracing these opportu-
nities by developing new payment solutions for consumers and helping
merchants design their businesses to become cash-free. In addition, their
industry is an oligopoly with high barriers to entry, as the incumbents have
spent decades building powerful two-sided networks comprising billions
of consumers and millions of acceptance locations. Many new entrants
have therefore chosen to partner with the existing networks rather than
compete against them, further bolstering their competitive positioning and
growth profiles.

Conclusion
More than two decades of experience investing in the technology sector
informs my belief that the market tends to undervalue sustainable growth.
Gaining conviction in the strength of a company’s business model and
management team allows us to invest with a longer-term outlook, using a
low-turnover approach that aims to capture this sustainable growth and
benefit from the power of compounding. By focusing on companies that are
harnessing technology to create defensible businesses in structural growth
markets, it is our goal to identify a concentrated portfolio of stocks that can
be owned with an extended horizon.

The examples discussed within are presented for

illustrative purposes only and are not to be viewed
as representative of actual holdings. It should not
be assumed that any client is invested in the (or
similar) examples, nor should it be assumed that
an investment in the examples have been or will be
profitable. Actual holdings will vary for each client
and there is no guarantee that a particular client’s
account will hold the examples presented.

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April 2018
risks
Principal risks
Concentration risk – Concentration of
investments in a relatively small num-
ber of securities, sectors or industries,
or geographical regions may signifi-
cantly affect performance.
Currency risk – Investments in cur-
rencies, currency futures contracts,
forward currency exchange contracts
or similar instruments, as well as in
securities that are denominated in for-
eign currency, are subject to the risk
that the value of a particular currency
will change in relation to one or more
other currencies.
Equity market risks – Equity markets
are subject to many factors, including
economic conditions, government reg-
ulations, market sentiment, local and
international political events, and envi-
ronmental and technological issues.
Foreign market risks (includes
emerging markets) – Investments
in foreign markets may present risks
not typically associated with domes-
tic markets. These risks may include
changes in currency exchange rates;
less-liquid markets and less available
information; less government super-
vision of exchanges, brokers, and
issuers; increased social, economic,
and political uncertainty; and greater
price volatility. These risks may be
greater in emerging markets, which
may also entail different risks from
developed markets.
Issuer-specific risk – A security issued
by a particular issuer may be impacted
by factors that are unique to that issuer
and thus may cause that security’s
return to differ from that of the market.
Liquidity risk – Investments with low
liquidity can have significant changes in
market value, and there is no guarantee
that these securities could be sold at
fair value.
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5 Wellington
Manager risk – Investment per-
formance depends on the portfolio
management team and the team’s
investment strategies. If the investment
strategies do not perform as expected,
if opportunities to implement those
strategies do not arise, or if the team
does not implement its investment
strategies successfully, an investment
portfolio may underperform or suffer
significant losses.
Smaller-capitalization stock risk –
The share prices of small- and mid-cap
companies may exhibit greater volatility
than the share prices of larger capital-
ization companies. In addition, shares
of small- and mid-cap companies are
often less liquid than larger capitaliza-
tion companies.
Additional risks
Convertible securities risk –
Convertible securities may be
exchanged or converted into a pre-
determined number of the issuer’s
underlying shares, the shares of
another company, or shares that are
indexed to an unmanaged market index
at the option of the holder during a
specified time period. Although to a
lesser extent than with fixed income
securities generally, the market value of
convertible securities tends to decline
as interest rates rise. Because of the
conversion feature, the market value of
convertible securities also tends to vary
with fluctuations in the market value of
the underlying shares and thus is sub-
ject to equity market risk as well.
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Management
Real estate securities risk – Risks
associated with investing in the securi-
ties of companies principally engaged
in the real estate industry such as Real
Estate Investment Trust (“REIT”) secu-
rities include: the cyclical nature of real
estate values; risk related to general
and local economic conditions; over-
building and increased competition;
demographic trends; and increases
in interest rates and other real estate
capital market influences.
Risks of investment in other pools –
Investors in a fund that has invested in
another fund will be subject to the same
risks, in direct proportion to the amount
of assets the first fund has invested in
the second, as direct investors in that
second fund.
Past results are not necessarily indica-
tive of future results
There can be no assurance nor should it
be assumed that future investment per-
formance of any strategy will conform
to any performance examples set forth
in this material or that the portfolio’s
underlying investments will be able to
avoid losses. The investment results
and any portfolio compositions set
forth in this material are provided for
illustrative purposes only and may not
be indicative of the future investment
results or future portfolio composi-
tion. The composition, size of, and risks
associated with an investment in the
strategy may differ substantially from
the examples set forth in this material.
An investment can lose value.
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