Lens: A piece of glass or other transparent substance, with two curved surfaces, or one plane and one curved surface, serving to cause regular convergence or divergence of the rays of light passing through it.
This summer, I visited Israel on a short trip. Jerusalem was a revelation; steeped in history and religion, the passion of believers from the three monotheistic faiths has to be seen to be believed. I also spent a day wandering around Tel Aviv, Israelās vibrant and rapidly modernizing capital.
Itās fascinating to stumble upon objects, seemingly discrete, yet on closer inspection turn out to be bizarrely connected. Some of you who reside in or have visited Singapore may have walked the streets of Tiong Bahru. One of the oldest housing estates in Singapore, it literally means āNew Cemetery.ā In the 1930s, the Singapore Improvement Trust cleared the area to develop mass public housing in Singapore. The construction style is a mix of Streamline Moderne and local Straits Settlements shop house architecture. Streamline Moderne is a late type of Art Deco architecture and design that emerged in the 1930s, emphasizing curving forms, long horizontal lines and natural elements. The first streamline buildings evolved from the work of New Objectivity artists, a movement connected to the German Werkbund.
Tel Aviv is often referred to as the White City. Over 4,000 buildings were built in an architectural style called the Bauhaus (literally ābuild houseā) or International style from the 1930s by German Jewish architects. Founded by architect Walter Gropius in 1919, the Bauhaus school in Germany would go on to shape modern architecture, art and design for decades to come. The school sought to combine design and industrialization, creating functional things that could be mass-produced for the betterment of society. The design innovations commonly associated with Gropius and the Bauhaus were already partly developed in Germany before the Bauhaus was founded by none other than the German national designers' organization Deutscher Werkbund. In a way, Tiong Bahru has a deep-rooted connection to Tel Aviv.
Last week, while listening to a podcast by Roman Mars (ā99% Invisibleā), I learned another fact about the Bauhaus. The popularity and influence of the Bauhaus beyond Germany owe a great deal to lesser-known photographer Lucia Moholy. Her photographs are some of the finest documents of the Bauhaus architecture and its products, but she lost control of her negatives during WWII and she was written out of history. Fortunately, the negatives of her work survived and helped further the spread of Bauhaus school, which might have otherwise disappeared behind the Iron Curtain. Had it not been for her camera and her photographic lens, we might not have seen Bauhaus proliferate as much as it did.
In the 1930s, Single Lens Reflex (SLR) cameras started to get popular. Photographers could view through the lens and determine precisely both the focus and depth of field. Over the years, the Germans, Americans and Japanese contributed immensely to technological advancement in lenses and overall camera functionality. For decades, possessing a good camera was essential for any budding photographer. However, in the past decade, smartphones have almost negated the need to buy a camera. Built-in cameras in smartphones have improved dramatically over the past five years. At first it was the megapixels (graphic resolution) but increasingly attention has focused on aperture, zoom capabilities and optical image stabilization.
The age of social media has increased the desire to present our best photos and videos online. More advanced applications in augmented reality, 3D image mapping and motion capture will demand phone cameras that deliver quality similar to that of SLR cameras. Innovation from smartphone companies will have to go beyond increasing megapixels. The constraints imposed by smartphone- makers on the camera module and lens-makers are the form factor of thickness and weight and, of course, the cost.
The only feasible solution to achieving those outcomes under these constraints will be installing dual cameras at the rear of the phones. By incorporating two channels to collect picture details and light, phones with a dual-cam design can significantly reduce the z- height (the thickness of the camera module), but deliver similar or even better performance than a single camera. Dual-cam smartphones can offer higher resolution and better image quality compared to single-cam models and are also thinner.
In technology hardware, few companies retain sustainable advantage over long periods of time. From 2008 to 2015, smartphones were the brightest spot in the tech industry. New brands popped up like weeds in an unkempt garden, particularly in China, where adoption grew dramatically. Recall the Xiaomi phenomenon. It raised its last round of funding at a valuation of $45 billion. For a few years, it was the hottest phone around. In the second quarter of 2016, its phones are almost nowhere to be seen. Recent reports suggest the value of that business has plummeted. Nokia (NOK, Financial), BlackBerry (BBRY, Financial) and HTC are other global mobile communication brands that have disappeared from contention. Such is the nature of the hardware business.
In 2015, even Apple (AAPL, Financial) suffered a slowdown in sales, hurt by high-end saturation, intensifying competition and a slowdown in China. Firms making components for smartphones also felt the downturn, and their share prices sold off aggressively. What the markets failed to realize, in my view, is that as overall volume growth slows, brands have to provide better features to entice consumers to upgrade. Hence the necessity of improving the camera functionality.
If dual cameras become a standard feature over the next couple of years, lens-makers and camera module-makers could reap the biggest benefits. I believe Taiwan-based Largan Precision Co. Ltd. (TPE:3008, Financial) (Largan), a top five holding in the portfolio, will likely be one of those beneficiaries. The reason is obvious. As you add another camera, the number of lenses per phone doubles. Smartphone growth might slow, but adoption of dual cameras will mean a potential doubling of lenses used, despite the maturity of the smartphone market.
Started in 1987, Largan has invariably been at the forefront of technology development in the smartphone lens industry. Similar to many other component-makers, adherence to strict quality requirements, cutting-edge R&D and an ability to scale up operations to meet demand are differentiators that have led to market-share consolidation. Largan remains one of the largest and most efficient firms in that chain.
How soon dual cameras will be introduced and how successful consumer adoption will prove to be are difficult to estimate. Huawei (SZSE:00250, Financial), the Chinese brand, has selectively introduced the feature this year in some models. Larganās management never discloses much information, let alone information about the future plans of their clientsā product introductions. But I take comfort in the fact that in the past 18 months Largan has embarked on building the single largest lens-making factory in its history. If dual cameras do get introduced in the next couple of years and consumers adopt them, I believe the upside to growth and margins may be spectacular.
RISK CONSIDERATIONS- The Fund invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations.
Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
The small- and mid-cap companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger companies and may be more volatile; the price movements of the Fund's shares may reflect that volatility.
Because the portfolio may invest a substantial amount of its assets in issuers located in a single country or in a limited number of countries, it may be more volatile than a portfolio that is more geographically diversified.
The views expressed are those of the portfolio manager as of August 2016, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.
As of July 31, 2016, the Fund had invested 4.06% in Largan Precision Co.
Securities mentioned above but not held in the Fund as of July 30, 2016, include Nokia, BlackBerry, HTC and Apple.
