Making the sense of the rotation from growth to value
The intense style rotation from ‘Growth’ to ‘Value’ that we witnessed in January 2022 was ferocious,...
Who doesn’t wish they had the nous to suss out Google as a star performer back when Larry Page and Sergey Brin were inventing its first incarnation—bizarrely called BackRub―as young 20-somethings at Stanford.
But investing in technology no longer means finding the next Facebook while its founder is still working in a garage and wearing tracksuit bottoms. Instead, trend hunters need to check out businesses in the healthcare, energy and manufacturing space, in addition to the more ‘traditional’ avenues.
Think about all the tech developments you take for granted these days, which used to be A-MAZ-ING.
For instance, say you’re exploring a new city and you get lost. Ten years’ ago, if you didn’t have a map on you, you were stuck relying on well-meaning strangers’ vague left/right/straight ahead instructions – which invariably turned out to be wrong.
These days, just pull out your phone and bring up Google Maps. Likewise, the old-fashioned, drunken pub squabbles about a film or a sports team (I’m sure the first Star Wars film came out in 1975; No, I’m sure it was 1977 etc etc) are now relics of a bygone era … just “Google it”!
Of course, behemoths such as Google, Amazon and Microsoft have been gathering up all this harmless data about you for years, designing digital ads and product placements that are cleverly crafted to appeal to your particular interests and whims. Their revenue and profit growth depend upon it.
The thing is, in a sector that thrives on innovation and invention, these capabilities have become old news. Both customers and investors need something more if they’re going to help catapult a company’s stock price into the stratosphere.
So how do you know where to put your money?
Enter a handful of experienced fund managers in the sector, who are as much about excluding the losers as they are including the winners – those with strong growth profiles with solid fundamentals.
Jeremy Gleeson, lead fund manager of FundCalibre’s Elite Rated AXA Framlington Global Technology, believes one part of the answer is to avoid the slow growth ‘old guard’ tech companies.
He says money spent by enterprises on maintaining legacy systems is declining, which is reflected in the revenue of firms such as IBM (down 15% in 2015), while ‘new technology’ spend is increasing rapidly.
In this sphere, Jeremy likes companies such as Salesforce.com, who develop cloud-based marketing and data solutions, and whose share price rose 32% in 2015 versus IBM’s 14% decline, he says.
On the other hand, the tech sector can throw up more than its fair share of ‘blue sky’ companies at the other end of the spectrum, with grand ideas but no income and growing development costs. Steering clear of these is also a core pillar of Jeremy’s strategy.
Meanwhile, James Thomson, fund manager of Rathbone Global Opportunities fund, also Elite Rated by FundCalibre, says his top three contributors to returns in 2015 were Betfair, Amazon and Rightmove. Rightmove and Betfair are cases in point when it comes to identifying digital disruptors outside the specialist tech sector.
James describes the property listing website, Rightmove, as “the best investment of [his] career”, saying it now provides real estate agents with an average 70% of their leads and dominates the UK market.
When Betfair launched its online gambling operations in the UK, it quickly differentiated itself from competitors with innovations such as its ‘Cash Out’ and ‘Price Rush’ products, he says, both of which offer customers additional betting features.
Another fund actively looking for digitally disruptive companies outside the tech sector is Elite Rated Polar Capital Healthcare Opportunities. Its co-manager, Dr Dan Mahony, prefers to be underweight in the pharmaceuticals sector relative to the fund’s benchmark index but likes to invest in businesses he believes are using technology creatively to innovate in the healthcare space.
He mentions a product called ‘Invisalign’, which is being used in dentistry for braces, as an example. Basically, you go to the doctor or dentist, have your teeth scanned, the scan is emailed to California, and someone 3D prints your brace and sends it back to you! A couple of weeks later, as your teeth move, you do the same thing again. There are a few regulatory issues around 3D printing in other areas of healthcare, but it will surely be used more and more in the future, Dr Dan predicts.
New kid on the block Neptune Global Technology fund, managed by Alistair Unwin, selects tech investments through a geographic lens and, in addition to the US, is interested in developments in Japan and Asia. A sentiment which is shared by Praveen Kumar, fund manager of the Baillie Gifford Japan Smaller Companies fund, which looks for high growth start-ups run by young, ambitious entrepreneurs.
Attitudes to risk taking and entrepreneurship are changing in Japan, Praveen believes, with an increasing number of founder-managed companies now coming to market. He likes companies such as Broadleaf, which has developed a cloud-based car parts ordering system to increase productivity in the automotive industry.
As always, I’d remind readers the tech sector overall tends to be extremely volatile and it’s not an area where I’d personally park a significant portion of my savings. Given the diversity of developments in new and interesting areas, however, it’s always worth keeping an eye on the latest trends.
This post is amended from a FundCalibre blog originally published on Mindful Money, 28 January 2016.