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Data is the new oil, but how do you invest in it?

Many of the world’s biggest firms, such as Apple, are already data behemoths - Getty Images North America
Many of the world’s biggest firms, such as Apple, are already data behemoths - Getty Images North America

Data is the world’s hottest commodity– but which companies are going to last the course and become enduring, profitable businesses?

As with a physical commodity such as oil or metal, data needs to be collected, stored, transported, refined and protected. An ecosystem of companies engaged in all these activities has developed – and is growing explosively.

Development of increasingly efficient storage and processing power brings exponential growth in data, and it’s estimated that every 18 months the amount in existence doubles.

“Big data” – meaning the collection and analysis of extremely large data sets to find trends – is not a new enterprise. One of its earliest applications was the Tesco Clubcard, launched in 1995, allowing the supermarket giant to gather and utilise data on customer spending habits.

Today, firms such as Google and Netflix have built gargantuan data sets about their users, which they exploit to target advertising, improve suggestions and decipher consumer behaviour.

Amount of data created worldwide each year is accelerating
Amount of data created worldwide each year is accelerating

Credit card and credit checking firms have built businesses on analysing their customers’ financial histories, and companies that offer “cloud”-based storage, such as Apple and Amazon, have also become custodians of enormous data repositories.

Ben Rogoff, manager of the £1.5bn Polar Capital Technology trust, said that since the initial excitement surrounding big data a few years ago, “people have come to realise that having big data is a pre-requisite”.

Instead, it is the analysis of that data to produce insights which companies can translate into additional sales, and its use in artificial intelligence systems – where computers are able to learn and make non-programmed decisions – where the value of data to companies is realised.

Tom Riley, manager of Axa Framlington’s Robotech fund, said that the firms set to profit are both those that can use data insights to improve products and sales and “the enabling companies which collect, process, analyse and move data”. Cyber security firms are a third beneficiary.

Outside of the major American technology stocks there are a number of companies worth considering.

Mr Riley highlighted two US-listed stocks that he owns in his funds: Splunk and Tableau.

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Splunk is an £8.5bn software business that focuses on capturing and analysing machine-generated data (information gathered automatically without human involvement).

It helps to “capture vast data sets and structure them in a way that’s usable for the customer”.

Splunk turns the data it captures into graphs, reports and other formats and clients include major firms such as Coca-Cola, Domino’s, ING and Vodafone.

Tableau is a £4bn company specialising in data visualisation software, with clients including Audi, Barclays and Nike.

“The traditional way a lot of us visualise data is to make a graph through Microsoft Excel,” said Mr Riley. “Tableau goes beyond that, and makes it easier to visualise and manipulate data.”

Both businesses have grown sales strongly over the past five years, but are currently loss-making. That means a “degree of faith is required” in their ability to keep growing sales without increasing costs, according to Laith Khalaf, of investment shop Hargreaves Lansdown.

Mr Rogoff suggested UK firms First Derivatives and Relx as good options for local exposure to the data industry. Both are owned in Polar Capital funds.

First Derivatives sells data analysis software called Kx. Originally it focused on finance and was used to analyse share price movements to catch insider trading in real time.

Now it has found applications in analysing market research, utilities and aerospace, among other sectors. Clients include HSBC and Airbus.

The stock is a top pick of Standard Life Aberdeen’s Harry Nimmo, the veteran UK smaller companies manager. It has a market value of £1bn and made a net profit of £9m in the year to February 2017 – from a turnover of £152m. It trades at a lofty price-to-earnings ratio of 74.  

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Information and analytics company Relx – formerly Reed Elsevier – has shifted from a print business to technology-led data and analytics.

Mr Rogoff explained that using proprietary data it has gathered, it plans to use artificial intelligence and other tools to change its services from being “a reference tool to a decision- making tool”.

The £18bn business posted a profit after tax of £1.2bn last year, from a turnover of £6.9bn. Its projected price-to-earnings ratio for 2017 is 21, according to information service Bloomberg.

If you don’t want to buy stocks, a broader technology fund can provide exposure.

Ryan Hughes, at investment shop AJ Bell, said: “There is one stand-out team, Polar Capital Global Technology. Mr Rogoff has been a technology investor for 20 years.” The fund charges 1.16pc.