One of the newer entrants to the technology sector, this £5.7m fund was launched in December 2015 and is managed by Alistair Unwin, with Alex Portz as assistant manager. Mr Unwin explains the aim of the fund is to invest in “a relatively concentrated portfolio of technology companies [40-60 stocks] to provide exposure to long-term secular technology themes that we see disrupting global economies and markets over the coming decade”.
He adds: “We focus on companies that are able to generate sustainable profits from these transformational trends, and focus on the fact that an exciting technology trend is not necessarily the same thing as a profitable technology investment.”
The fund has no regional restrictions and the process involves the team screening “qualitatively and quantitatively for firms with pricing power that offer leverage into powerful technology trends”.
Mr Unwin says: “We put particular emphasis on the competitive environment in which a company operates – in some areas scale matters a great deal to economic returns, but in others owning a niche IP or software can be extremely valuable if there is limited competition in a small market. Valuation remains the hardest task in technology investment as a high multiple can be appropriate for a company that can grow profitably for many years and a low multiple may still be too generous for a company becoming technologically obsolete. We use scenario-based discounted cashflows to find opportunities that offer compelling risk-reward profiles and remain patient in the face of market fluctuations.”
At just six months old the fund’s process has not undergone any changes, although the manager notes the ideas for the portfolio have “evolved over the past two years since I joined Neptune, and we have undertaken a large amount of work looking at the history of technological change and adoption and how to profit from it”.
He adds: “We have also developed the concept of technology risk – the real world risk that technology disrupts the status quo in non-technology industries in the future. We have seen this with Amazon’s impact on traditional retailers, but we can see many other areas that are struggling to adapt to the secular growth of technology. We embedded this view into our stock-selection process at Neptune as an additional risk management tool.”
| EXPERT VIEW - Jon Beckett, consulting CIO and financial author |
Verdict Neptune’s technology fund only launched in December 2015, so not a lot of time to assess. On paper it has a concentrated portfolio to capture long-term risk from technology disruption. Neptune focuses on sustainable profits, screening qualitatively and quantitatively for companies with pricing power, using scenario-based DCFs and compelling risk-reward profiles. The portfolio targets low turnover of less than 20 per cent. This is an interesting new proposal as many stock names are less familiar and smaller in size. The risk aspect is fairly unique and one that institutional buyers can perhaps capitalise on as the fund matures, at which point it may become more suitable for retail investors. |
Mr Unwin points out the team’s work on technological disruption across sectors has more influence than macroeconomic factors, and it does not target country exposure.
Since its launch to June 16 the fund has delivered a reasonable 2.4 per cent, although this lags the 5.3 per cent gain in the MSCI World Information Technology index and the average 4 per cent return by the IA Technology and Telecoms sector, data from FE Analytics shows.
Mr Unwin says: “We had a tough February when some of the growth stocks we hold were sold aggressively on global macro concerns, but we were able to add to some of our positions at lower prices and many of these have subsequently rebounded strongly. We have suffered from holding some of the Chinese internet names such as JD and Baidu, which have underperformed on Chinese macro concerns and some stock-specific issues.
“E-commerce and the rise of the Chinese internet economy looks in good health to us and the companies’ issues appear transient, so we have been adding to our positions. We have also suffered slightly from being underweight the IT Services space as some of the larger names [IBM, Accenture] have performed well.”
On a positive side he points out that some of the top performers for the fund this year have been “niche, IP-heavy suppliers selling into the massive growth in global data volumes”, examples of which include Mellanox in data centres, Silicon Motion in memory controllers and Cadence Design Systems in semiconductor design tools. He explains: “We view firms such as these as selling the picks and shovels into the data gold rush. Some of our niche software names have also performed well: we added to our position in Marketo in the February sell-off and were rewarded when the company was bid for last month at a decent premium.”
