Cloud computing, digital commerce and clever components are among the themes exciting tech experts
Thursday 09 Jan 2020 Author: Steven Frazer

Technology fund managers are hopeful that 2020 will hammer the final nail in the coffin of the cycle of venture capital-backed ‘unicorns’ – billion dollar companies that have dominated headlines in the tech space in recent years, but largely failed to create any value for stock market investors.

This could ignite a welcome return of focus for business and investment fundamentals following multiple high profile IPO disasters.

Companies such as ride hailing firms Uber and Lyft, messaging companies Snap and Slack, exercise bikes firm Peloton and dentistry company SmileDirect have all seen their share price fall following initial hype, while there was the IPO ‘that never was’ with flexible office space provider WeWork.

This should spark renewed appetite for well-run, disciplined technology companies in spaces with genuine, long-term growth potential.

Some of the favourite sub-sectors with technology fund managers include the ongoing expansion of cloud computing and software-as-a-service (SaaS) business models, digital commerce, cyber security, nascent artificial intelligence (AI) applications, increasingly complex microprocessors and further adoption of robotics and automation into industrial and consumer sectors.

‘Businesses do need to go public, but many cannot justify their valuations,’ says William de Gale, the former BlackRock manager who is now running BlueBox Global Technology Fund.

‘Companies just need to grow up,’ de Gale says, before admitting that the failure of WeWork’s IPO was ‘one of my happiest moments’.

Walter Price, who runs the Morningstar five-star rated Allianz Technology Trust (ATT), confesses his own relief that the unicorn era is seemingly winding down, returning to a focus on ‘fundamentals and making profit from growth’.

GROUNDED IN REAL RETURNS WORLD

It is easy to be seduced by visions of possible technology-infused futures. We’ve all seen the sci-fi films, where people travel in self-driving vehicles between super connected homes and workplaces while armies of domesticated robots are there to serve our every whim. 

But while mining minerals on Mars might be the ‘moon shots’ that fire the imaginations of people like Elon Musk, Ray Kurzweil and other visionaries, most technology fund managers keep their feet rooted on firmly on solid ground.

‘One of the hard things we do is concentrate on profit and growth,’ says Allianz’s Price, and with good reason.

‘Without technology [companies], there has been no earnings progress for 10 years,’ says Polar’s Ben Rogoff.

BlueBox Global’s de Gale makes a similar point: ‘All the operating profit growth from the S&P 500 over the last eight years is tech, there’s been zero progress from anywhere else.’

WHAT’S EXCITING TECH INVESTORS?

De Gale favours semiconductors, saying they are ‘at the bridge of digital and analogue worlds’.

The fund manager, who last year published his book The Successful Technology Investor, is a long-term shareholder in semiconductor manufacturer Texas Instruments. It makes power management integrated circuits to help devices that use batteries have a longer charging life and charge faster.

He says it is just the sort of ‘dull but increasingly useful’ technology that throws off huge amounts of cash over years for the company.

The semiconductor space is also popular with Allianz’s Walter Price, as well as Ben Rogoff, who runs the Polar Capital Global Technology Fund (B42W4J8), the Polar Capital Automation & Artificial Intelligence Fund (BF0GL54) and the Polar Capital Technology Trust (PCT).

Companies like Taiwan Semiconductor, Advanced Micro Devices, Qualcomm and Samsung feature in their portfolios.

CLOUD COMPUTING ATTRACTIONS

Last year William Geffen, son of Neptune founder Robin Geffen, took over the Liontrust Global Technology Fund (BYXZ5N7) and he has found himself looking at Disney, certainly no traditional technology name, but the company importantly owns its intellectual property and data.

‘I believe this will allow Disney to go from a loosely-connected collection of film/TV studios, merchandise shops and amusement parks into a fully cohesive, constructive and collaborative media company for the modern world,’ he says.

Getting the most from its IP and data will mean leveraging cloud technology, its new TV streaming service Disney+ being a great example.

Netflix, the streaming market leader, would never have got off the ground without the cloud and superfast connectivity yet it emerged as a real threat to the entire traditional broadcast industry, now valued at £144bn and having created huge wealth for shareholders.

Jeremy Gleeson, who runs the AXA Framlington Global Technology Fund (B4W52V5), rejects the notion that Disney+ and Netflix cannot prosper side-by-side, believing that the market for streaming TV is large enough and diverse enough for both.

‘A young family may well get Disney+, or those that want specific content like the Marvel or Star Wars franchises, but teens and younger millennials are likely to favour Netflix still,’ says Gleeson.

But this is just scratching the surface of the cloud computing opportunity.

‘20% of the world’s computing today is in the cloud… it’s going to 80% or 90%,’ says Ben Rogoff. Polar’s data sources suggest that by 2021, 44% of application workloads are expected to run in the cloud, while SaaS could be a $325bn opportunity by 2022, representing 25% of IT spending.

UBS analysts see usage-based pricing disrupting a $150bn IT maintenance market.

‘The cost of computing is collapsing,’ says Rogoff, as suppliers with huge investment firepower bring scale and processing power. This includes Amazon’s hugely successful AWS, Microsoft’s Azure AI and analytics muscle, and the fast growing cloud services being offered by Google parent Alphabet.

DISRUPTIVE TECHNOLOGY

‘Artificial intelligence technologies will be the most disruptive class of technologies over the next 10 years due to radical computational power, near-endless amounts of data, and unprecedented advances in deep neural networks,’ predicts research group Gartner.

If truly self-driving cars are to ever get on the road (probably still years away) they will require the combination of cloud-delivered AI and clever hardware. But the direction of travel is clear. ‘Humans must be legislated off the road,’ says Rogoff.

This brings additional opportunities for investors in increased M&A as sub-sectors consolidate and thanks to security tailwinds from potential data breaches, regulation, digitalisation and cyber warfare.

‘11% of our portfolio is in IT security,’ says Allianz’s Walter Price.

Rogoff says he looks first for excellent companies, then worries about the valuation. He comments that stocks can often look expensive but says some aren’t when considered on a long-term view.

The impact of the underlying change involving technology is massive. It has only just got started and will continue for many years to come, concludes de Gale.

‘It seems very likely that the technology industry will continue to eat the other sectors alive.’

Investors should therefore ensure they have some exposure to tech in their portfolio, otherwise they could miss out on significant money-making opportunities.

Our top picks for investing in the technology sector:

Allianz Technology Trust (ATT). Holdings include Microsoft, Facebook, Paycom Software and Teradyne

Liontrust Global Technology Fund (BYXZ5N7). Holdings include Microsoft, Fortinet, Amazon and RingCentral

Polar Technology Trust (PCT). Holdings include Alphabet, Alibaba, Tencent and TSMC

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