110. Investing in big tech and the golf gadget you might like for Christmas

17 December 2020 (pre-recorded 15 December 2020)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Sam Slator (SS): I’m Sam Slator from FundCalibre and today I’ve been joined by Jeremy Gleeson, manager of the AXA Framlington Global Technology fund. Hi Jeremy.

Jeremy Gleeson (JG): Good morning Sam.

[INTERVIEW]

[0:12]

SS: So the big US tech stocks had a wobble in November, do you think this is the bursting of the tech bubble or is that a temporary thing that’s happened?

JG: Yeah. So to be fair actually some of the tech names have been having a bit of a shake out since September. There was certainly a rotation taking place in the market and that played out in September, October and the early part of November. But actually, once we got there some sort of clarity through on the US elections, the technology sector did reasonably well. And had had a reasonable rally.

And with regards to the rotation, you know, we do expect to see these from time to time. You know, they’ve been a standard form of the market over the last few years where we’ve seen tech perform well and then go through a period where there might be a rotation into other sectors or other styles in the market, maybe more value-oriented from time to time. So, you know these rotations are healthy. I actually like to see these rotations take place from time to time. Given our mindset as being long-term investors it actually gives us the opportunity to step up and buy a few things that we might’ve missed the first time round when these rotations happen. So I think that’s all that’s happened over the last few months is that there’s been a bit of a rotation. The fundamentals of the technology sector remain very strong and that’s been supported by recent earnings reports from companies that we invest in.

So in answer to your question, I don’t think there’s a bubble bursting here. You know, technology companies have been somewhat more resilient this year than a lot of companies in other sectors and the share prices have reflected that. And you know, I continue to believe that these companies have got good opportunities ahead of themselves as well. I think the adoption of technology will continue into 2021 and beyond.

[2:12]

SS: And, while most investors are probably aware that the big tech companies dominate in the US, they also dominate in countries like China and Taiwan. And they’ve been driving returns in those markets too. Are they the same kind of big tech though? Are they like Amazon and Apple, or are they sort of different?

JG: Yeah, that’s a good question. So yes, in China, less so in Taiwan. Maybe I’ll just go into a little bit of detail there. You know, the leading tech companies in China – probably the two that spring to mind are Alibaba, which is an e-commerce giant. So very similar to Amazon but largely serving just the Chinese market. And very similar to Amazon they’ve also got into cloud computing as well. And they’ve also got into financial services too, which is something that Amazon hasn’t done in the US. So they’re kind of, sort of spreading tentacles into a whole variety of different end markets, but they started off as an e-commerce company. And in Tencent, it’s like a social media company really, it’s a communications platform, but also with that heavy emphasis on gaming and Tencent, sort of, they’re sort of the roots of that company were in online gaming. So maybe a bit more similar to like a Facebook or a Google. Tencent also has ambitions in financial services, very similar to PayPal. So you can pay for things online using your Tencent account. So those Chinese companies are definitely very US-like and some are taking the opportunity of serving a huge population in China who can’t get access to some of those US services that we can get access to over here.

In Taiwan it’s slightly different. So I guess the largest tech companies in China are very much more in manufacturing related areas, such as manufacturing semiconductor chips, or manufacturing computers or manufacturing some of the devices that we probably have around us right now, our  iPhones, our iPads, you know they’re made in China, but there is a Taiwanese company called Hon Hai, which is behind a lot of that. So those Taiwanese companies are sort of benefiting from large scale. They tend to be lower margin businesses because they’re manufacturing companies, but they play into sort of large scale manufacturing. Of those companies we own Alibaba, we own Tencent, to also own Taiwan Semi (TSMC), which is the largest semiconductor foundry in the world. And we’ve actually owned TSMC since I’ve been running this portfolio in 2007. So it’s one of our longest held positions in the fund overall.

[5:28]

SS: What about smaller tech companies, are there opportunities there as well?

JG: Yeah, very much so. We’ve always tried to drill down the market cap spectrum to see what opportunities there are in smaller cap tech as well. I think it’s really important to distinguish between early-stage tech and small cap tech. When I look at small cap companies, I’m not necessarily looking at companies that had been sort of founded in the last few years and have got a product which is still yet to be commercialised. I’m looking at small cap companies, which have a strong value proposition with an established product, with customers. They just haven’t grown into being a mid-size or large cap tech company yet. But you know, successful companies in their own right, already demonstrating their worth, but ones in which we think have still got a lot of potential to grow over time.

[6:28]

SS: And which subsector of technology do you think is the most interesting at the moment?

JG: There’s lots, it’s always difficult to sort of like drill down into one particular theme or subsector of the technology universe because there’s just so much going on all the time. And, you know, within the fund, we get exposed to the whole variety of different types of opportunity that are taking place and being driven by the technology sector. I guess some of the easiest ones to maybe highlight given where we are today is around digital payments and companies enabling the ability to pay online. There’s a lot of merchants out there who have not needed that sort of facility up until literally this year. And, you know, that that’s enabling companies like Visa and Fidelity Information Services and Global Payments to provide the sort of tools and the resources required in order to not just facilitate a payment online, but to do all the other bits that happen in the background when a customer is ready to pay for something. And that ties in security and fraud prevention and checking that, you know, the appropriate taxes might get paid in the right jurisdictions. There’s a lot of different pieces to the puzzle which are required when a merchant goes from accepting physical cash at their stores to accepting digital payments online. And clearly PayPal is a big beneficiary of all of that as well.

[8:08]

SS: And what’s your outlook for technology in 2021, do you think it can continue to do really well?

JG: Yeah. So the challenging thing right now is because there are so many uncertainties still, you know, where we sit right now in December 2020, you know, the macro for 2021 is going to be dictated by, you know, the progress of the pandemic, how quickly, you know, the vaccinations can be adopted, you know, how quickly immunity can be formed and how quickly sort of economies around the world can reopen as a result of all of that. So that’s the macro backdrop.

But ultimately I believe that, you know, in 2021 that technology will continue to be adopted. A lot of the realisations of the benefits of technology have been coming through this year and that will spill over into next year and the year after, and a lot of the trends and the themes and the opportunities that we see are still multi-year, still at relatively early stages of adoption, have many years of growth. So we do think that 2021 will be a positive year for the technology sector, but with those caveats that I mentioned before. We still think long term, the technology sector is very, very exciting and the companies we’re investing in have got very good long-term growth opportunities, but, you know, clearly there might be some macro-economic headwinds depending on the pace of recovery in the economy, in the global economies, in the coming months in particular.

[9:46]

SS: What’s the one bit of tech you’d like for Christmas?

JG: Good question. Wow. That is a good question. I’m going to say something quite, probably quite dull actually for many, many of your listeners, but I wouldn’t mind some, a new Garmin watch to help me out on the golf course.

SS: How do they help you on the golf course?

JG: Well, they’re GPS enabled and…

SS: To find your ball?

JG: That too, yeah, definitely. But you download the maps of the course that you’re playing and the GPS technology will then tell you how far away you are from the green, how far away you are from bunkers or ditches, or any other information like that, anything to help you sort of, try to sort of get your, get the number of strokes down. That would be, it’s probably a bit of a geeky specialist item of tech, but I think it’s something that my golf could certainly benefit from.

SS: That’s great, thank you very much.

JG: Thank you very much.

SS: And if you’d like to find out more about the AXA Framlington Global Technology fund please go to fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast.