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Portfolio Manager Monthly Insights
Jason Miller, MBA, CFA
Vice President, Portfolio Manager
Mackenzie Ivy Foreign Equity Fund
RELX – A return to normalcy, improving growth trajectories, and the future of AI
RELX plc has been an Ivy holding since 2021. While RELX could be described as a UK market darling, in part due to its artificial intelligence (AI) exposure, this wasn’t always the case. Our purchase was premised on the simple idea of a return to normalcy after the COVID-19 pandemic. In 2021, the market was not pricing in a return of the face-to-face exhibitions business; this segment was left for dead. We believed we were buying the remaining businesses – all experiencing improving growth at attractive returns – for a fair price and getting exhibitions for nothing. Before getting to RELX’s AI exposure and our thoughts on the opportunity, some background and history will illustrate why RELX is a strong fit for the Ivy model.
RELX operates four businesses: Risk, STM (Scientific, Technical and Medical), Legal, and Exhibitions. The first three segments sell a combination of publications, reference data, analytical tools, and software to a variety of professionals. Risk sells products targeted at insurance, fraud, identification, among others. STM sells mainly to universities where the products are used by academic researchers. Legal, the segment where there’s the most AI excitement, sells to law firms. These three segments all exhibit attractive profitability profiles with stable market shares and resilient growth. In some industries, RELX is the dominant leader, such as in insurance, while in others such as legal, it’s a strong number two (to Thomson’s Westlaw). Exhibitions is somewhat differentiated compared to the other business segments operating a face-to-face business model in trade fairs and global events.
The attraction to RELX came not just from the COVID-induced circumstantial opportunity but a complex outcome of history, corporate culture, and business model. During the 1990s, RELX’s publishing business aggressively raised prices on its customers. This caused a revolt, leading to what is called Open Access and a global political debate about the funding of research. At the same time, the internet caused headwinds for the print business. Facing challenges like this, some companies may have opted for a bold and exciting single masterstroke acquisition. However, under CEO Erik Engstrom, RELX has been carefully investing in the business to raise its growth profile. This includes investing in R&D and making bolt-on acquisitions. In comparison to larger scale M&A, this may seem unexciting. Yet since Engstrom took over RELX in 2009, the shares have compounded at 16% versus the MSCI World Index at 11%.
As for RELX’s AI exposure, in the mid to late 2000s, RELX had one of the largest high-performance computer infrastructure clusters available. RELX’s data scientists employed machine learning and other tools in its risk business to make predictions around insurance, fraud, and identity. While its computing scale is currently dwarfed by that of the hyperscalers, RELX’s heritage of operating computer infrastructure and employing machine learning technology remains. Initially these technologies were used primarily in the risk business, and as time passed the use case expanded to the legal and STM businesses as customers looked for more analytical and digital tools. To stay on top of disruptive technology trends, RELX has its segment leadership meet regularly to share ideas. Fast forward to the 2020s, as AI progressed, the risk team helped the legal business become aware of the trends in generative AI. As a result, LexisNexis+, a subsidiary of RELX, was one of the first to market with a commercial generative AI product. The development of this product at RELX was organic, while in contrast, RELX’s competitor Thomson has been making large acquisitions.
While the trend in AI appears positive, our own view of where this goes is less certain than the market’s, so we reduced our position in RELX. We agree that the legal business should be a prime case for the application of generative AI technologies, translating to improved growth for the industry as productivity benefits are shared between lawyers and providers. The market has consequently bid up the front-end price to earnings multiple on RELX’s shares. Yet there are reasons to be cautious. Recent studies from academics show that generative AI hallucination rates (when a response generated by AI contains false or misleading information, but the AI system presents it as fact) remain high despite closed environments. Lawyers who have their “names and legacies on the line” are likely to be conservative when trading off the productivity benefits versus the potential career risks when considering using generative AI. Further, there is the potential for a large one-off mistake that could cause harm to the provider’s brand. So, while this technology has a strong chance of revolutionizing many industries, including our own in the investment management space, the precise impacts remain difficult to predict.
Despite the reduction in our position, we continue to hold RELX’s shares. The core business model tenets at RELX remain more valid than ever: it operates as a #1 or #2 in a variety of resilient industries with improving growth trajectories that require nominal capital outlays. Management has been astute in navigating the potential disruption brought about by generative AI technology. The company has also found success in navigating the decades long transition away from print while also dealing with the pressure brought about by Open Access. With the NHL playoffs nearly behind us, with hopes still high for those of us with Prairie roots, an analogy might be that management can compete for both the Art Ross Trophy and the Selke Trophy. For readers unfamiliar with hockey, this would be winning for offense (scoring the most points) and winning for demonstrating the most skill in defense. Relating this to RELX as we look ahead, its ability in combining the opportunities within AI, a strong business model and high-quality management, it doesn’t make sense to sell just yet as we believe the business still has encouraging growth prospects.
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