Where can one find opportunities to invest in bottlenecks?

Large profits have resulted from the quick development of emerging technologies like artificial intelligence, but some supply chain components are finding it difficult to keep up

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Global markets have seen numerous shocks and changes during the last ten years.

There will always be winners and losers from each shock. Consider Nvidia as an illustration. Few people could have predicted in 2016 that a company that specialized in producing gaming computer components would end up being the most valuable company in the world, but it has.

NVIDIA's valuation is a consequence of its special position. The company's chips, which were first developed to aid in the processing of computer graphics for video games, are now extremely useful for the creation of AI models.

In a market segment where demand for its products grew more quickly than supply, Nvidia was and continues to be a leader, occupying a bottleneck.

Watch the entire video here: The managers of Monks Investment Trust (LON: MNKS) are clearly drawn to these bottleneck companies because they have a special place in markets that will be crucial in a changing economy and demonstrate the potential to generate value.

The investment manager of Monks, Baillie Gifford, also oversees the Scottish Mortgage Investment Trust (LON: SMT), one of the most well-liked funds for do-it-yourself investors.

Although both trusts seek to invest in themes and businesses that have the capacity to transform the world, Michael Taylor, one of Monks' managers, stated that the two trusts employ distinct methods.

"Some do things that may not seem exceptional to you, but they do them well, and the returns to shareholders may very well be exceptional in the long run," Taylor stated. We look for and honor a variety of expanding businesses."

Its holdings demonstrate this diversity. In contrast to Scottish Mortgage, which has a more concentrated portfolio, Monks' top 10 names account for about 36% of the total.

Investing in growth in the hyperscaler era.

In general, monks' investments fall into one of three groups: cyclical growth, growth stalwarts, or rapid growth.

Publicly traded companies like Nvidia, Alphabet, Amazon, and other big-tech darlings like SpaceX are examples of companies with rapid growth.

Although these stocks have dominated overall index returns, more diversified trusts like Monks, which are focused on long-term growth, have found it difficult to outperform their index in recent years due to their rapid growth.

Additionally, the resources required to support big tech are under pressure due to its rapid growth, and certain parts of the value chain are unable to react quickly enough.

According to Taylor, this is the location of these bottlenecks and the potential for future value.

Funding the bottleneck in AI.

"Intelligence has historically been hard to come by. designers, programmers, and knowledgeable, competent employees. These individuals were part of the dominant business models, and they didn't require many physical items, according to Taylor.

But as a result of the AI revolution, necessary intelligence is becoming more widely available, and this trend might be about to reverse.

These opportunities for the scarcity of AI-centered resources are now physical rather than human. For instance, data centers and semiconductors are what Taylor is examining.

Consider the Japanese company Disco Corporation, which Taylor noted is located in a specialized area of the AI value chain. It produces machines that can cut, polish, and grind silicon as well as precision tools for the semiconductor industry.

Discos machines, which reduce silicon to a fifth of the width of a human hair, appear to be in greater demand as chips continue to get smaller. The company is in a good position to contribute to growth in this field.

Freeport McMoRan, a copper miner with a strong focus on the US, was another company Taylor chose. Increased electrification, which includes more AI-related infrastructure like data centers, is expected to boost demand for copper.

The bottleneck Monks has identified is the US tilt of Freeports. It is in a good position in the supply chain to supply copper to US businesses in a world of tariffs, according to Taylor.

However, he went on to say that these positioning advantages are insufficient for a company to succeed.

In the real world, not every company will grow or produce excellent results. In addition to selecting a bottleneck that will last over time, you must choose the right organizations with the right teams."

Unique opportunities arise from an aging population.

We are all getting older. Conversely, in certain developed economies, life expectancy is rising while the birth rate is falling.

Approximately 19% of British people were 65 or older in 2022, but estimates indicate that number could increase to about 27% by 2072.

Similar trends can be seen in the United States, where 18% of people are 65 or older and that number is expected to increase to 23% by 2050.

An aging population offers special opportunities as well as challenges.

As an illustration, consider the funeral industry, where demand for funeral services is expected to rise due to an aging population and a rising death rate.

Among the Monks investment firms that Taylor identified as growing at a "statesman-like pace" is Service Corporation International, which falls into the growth stalwart category.

The goal of Service Corp is to unify and professionalize the funeral business. Monks have owned the business for a long time because it is expected to profit from the rising death rate associated with an aging population.

This investment is "far from exciting, but it's steady, its dependable, and grows at an above-index rate," according to Taylor. Despite being the largest company in that sector, it only holds 15% of the market, so we anticipate that percentage to increase over time.

"We are confident that the duration of its growth is going to be remarkable, but the market is always expecting that kind of business to experience a fade in its growth rate," Taylor continued.

Growth can also be found in less obvious places.

Taylor pointed out that although the market's dominant narrative is about how AI will change (or possibly crash) the economy, the real world is far more complicated.

"Beyond artificial intelligence, there is a world of growth," he stated.

For instance, after the pandemic, funding for healthcare dried up. Healthcare companies faced challenges during that time, but there is now a fresh opportunity.

For instance, access to novel medications. The length of time it can take for recently developed medications to reach the market is a bottleneck because smaller biotech companies may find it challenging to handle the procedure.

Monks saw this growth potential last year and made an investment in Medpace, a company that helps smaller biotech companies shorten the time it takes for their medications to reach the market by designing, conducting, and analyzing clinical trials.

Monks' investment in Ensign Group is another illustration. This company specializes in managing assisted living, rehabilitation, and post-acute care nursing facilities. It now serves more than 300 companies that provide these services, and as the population ages, demand is expected to skyrocket.

Healthcare may not be as exciting as AI, but it still has the potential to tell a remarkable growth story and generate profits for investors who correctly identify the companies best positioned to take advantage of a world full of bottlenecks.