In
April 2004, Merrill Lynch launched the Nanotechnology Index
(NNZ) to be quoted intraday by the American Stock Exchange.
First Trust also launched a Nanotechnology mutual fund,
FTNATX, this past March 2004. There is already a Munich
and Luxembourg based Nanotech mutual fund launched Nov.
2002 and Sept. 2003, respectively. However with the advent
of Merrill Lynch into the fray, it validates Nanotechnology
in the investment community. So the investment companies
are finally hopping on the nanotech bandwagon.
In
their Technology Strategy updates on nanotechnology, Merrill
Lynch says the criteria by which they choose companies to
be on the NNZ index is that the companies must indicate
in public documents that nanotechnology initiatives represent
a significant portion of their future activities. There
are currently 24 companies in their index but they admit
they will rebalance the list quarterly. It is unfortunate
that giants such as IBM, DuPont and HP who do a significant
amount of nanotech research are not included using those
qualifications. In addition, Flamel, listed on the NNZ,
is not the only publicly traded bio-nano company just like
Veeco on the NNZ list is not the only publicly traded instrumentation
company that supplies the nanotech research community.
However,
there are many nanotech companies that don’t want to classify
themselves as nanotech so as to maintain their competitive
advantage. In business, there is usually not a good reason
to publicly disclose your strategic activities to your competitors.
Some companies also don’t need to if they’ve always been
doing it.
Merrill Lynch is right about nanotech being an approach,
a concept which I champion and introduced to them. What
nanotechnology is really about, is a better approach to
what we’ve been doing all along but now we can now see and
manipulate even smaller things. It is akin to when Anton
Van Leeuwenhoek invented the microscope. This opened up
a whole realm of being able to understand nature better
by being able to observe cells and bacteria and blood capillaries
that could not be seen before. This ability to much better
see small things allowed new scientific breakthroughs in
biology and medicine.
When
science discovered the electron, it paved the way for new
technical breakthroughs in electronics which affects just
about everything. The term microtechnology or microelectronics
conjures up images of integrated circuit chips which affects
many industries also. Nanotechnology is the same. The term
nanotechnology makes those who understand microtechnology
more comfortable but the label is no less illuminating.
However, it is understandable that for most people, they
feel more comfortable having a label whether or not it really
means something.
Ideally,
there can not really be a nanotechnology index or nanotechnology
mutual funds because nanotechnology affects many industries
and markets. Similar reasoning as to why there should not
be an e-Commerce or Dot.com Index. If they really want nanotechnology
index, its impact would ultimately be reflected the overall
manufacturing indices. That being the case, there’s no need
for a nanotechnology index if there’s already a similar
indicator, even though it’s not born of the investment community.
Was there a microtechnology index? There is a similar argument
against nanotech mutual funds as with nanotech indices.
Merrill
Lynch talks about the nanotechnology sector being narrow
and full of pure plays. This is correct. However, this is
different from saying they are nanotechnology pure plays.
I have often been asked what companies are nanotechnology
pure plays. There is no such thing as a nanotechnology pure
play.
Right
now, people are classifying nanotechnology as a subset of
other sector activities. A more accurate classification
is to have sectors classified under nanotechnology, such
as the nanotech side of biotech, which some call Wet Nano
or Bio-nano. For the more well informed and astute, the
whole nanotechnology umbrella will soon disappear altogether
because the classification is meaningless.
The
companies in the NNZ are uncorrelated due to the fact it
is full of pure play companies and which explains their
stock behavior. Then how useful is the NNZ as an indication
of the nanotechnology investment environment?
For
the investment firms doing all this, the real money is not
in nanotech mutual funds or stocks. So why are they doing
this? Marketing.
I am preaching to the choir, but the value being pursued
here for an investment firm is to be perceived to be a knowledgeable
and credible player in an emerging trend, such as nanotechnology,
by producing something that appears as if it is bringing
value to the investment community. It tries to accomplish
this by educating the investment community through a nanotechnology
index and tech strategy reports. I suppose to some extent,
an educated consumer is your best customer. However, the
purpose for this education is to attract business, similar
to using supposedly objective analyst reports, to its real
money making activities in underwriting IPO’s and M&A’s.
By
the way, Merrill Lynch is one of the investment banking
firms underwriting the Nanosys IPO. However, Merrill Lynch’s
venture arm still has yet to invest in nanotechnology startups.
The
NNZ gets Merrill Lynch an ‘A’ for effort and timing but
there’s plenty of room for improvement. In the end, after
getting past the hype, what does it matter if you call it
nanotechnology as long as it works and makes money.
