Many longstanding financial advisers may be wary of investing in tech funds, given the stocks' notorious volatility 17 years after the dotcom crash.
For Richard Clode, portfolio manager on the global technology team at Janus Henderson Investors where he helps run two retail funds with two other managers, in total managing £4.5bn, there are certain factors to look out for.
Having been hired straight from university to work in the tech sector at Herald Investment Management (and only a couple of years after the original dotcom bubble burst), he works with those more experienced hands looking for stocks where the market might have missed something, or where there is still strong growth but the stock is not hugely overvalued.
Tech stocks, in general, trade at a 14 per cent premium to global equities. Mr Clode said: “Quality consumer companies trade on the same multiples as a lot of these tech stocks. We look at a company where we have an upside to earnings expectations, and you’re not having to pay for it, and it happens to be a tech company.”
Fangs
Much of the attention is inevitably focused on Fangs – Facebook, Apple, Netflix and Google (although that acronym is changing to include Microsoft and Alphabet). Rather than going on “hype and expectation”, Mr Clode said that his team goes where they think “growth potential is underestimated, and we think in five years’ time they will still have growth”.
“We’re not going to build it up and then pull out. Who knows if you’re going to get [that type of investment] right. We’re trying to reduce the volatility of clients investing in tech; clients who have wanted to invest in tech but don’t want to have the very volatile up and down years.”
The funds he helps to run invest in Facebook, because despite the recent setbacks and the potential for regulation, it still has plenty of long term potential. Even though the stock fell 10 per cent following the Cambridge Analytica revelations, and potential regulatory implications, it rose 55 per cent last year.
He said: “WhatsApp [which is owned by Facebook] is the biggest messaging site in India. We still think they have a good position of user growth. And they still haven’t monetised heavily in Europe – we still think they’ve got some levers to pull. In the US they’ve gone a bit overboard, but they still have some levers.
“Netflix has been a relatively cleaner story. It hasn’t been targeted by [US president] Donald Trump in a tweet – we think it’s a fantastic company.” However, the company has high valuations so Mr Clode does not think it is worth buying into that stock.
The funds have about a 20 to 25 per cent turnover, with the entire fund turning over every four to five years. Mr Clode tends not to be very reactive to a stock if it is poorly performing: “If you don’t think the investment case is broken then you wouldn’t sell it.
“If you were in a Russian stock and they invaded Crimea and you think this is good long-term, but they face sanctions then you’re forced to sell it.”
Both funds have 50 stocks. “Running a tech fund, we understand the obsession with Fang. We don’t invest in all of them, only because we thought all of these other stocks were underappreciated. We thought it’s paying too much for Netflix but we hold the others because we thought there was a good investment case. There are a lot of exciting tech stocks that have created a great return for us.”
A lot of the big tech stocks are about to benefit from a beneficial tax regime, which means many of them will be bringing a large amount of cash onshore, putting it on their balance sheet, and some may be distributing it to shareholders. Apple’s intended dividend means its share price has held up well despite the recent trouble with the iPhone X, which had production issues relating to the Face ID.
In addition, Mr Clode is interested in the less flashy tech stocks, such as Microsoft and Intel, as tax breaks are also encouraging firms to invest in IT infrastructure that they may have been putting off for a few years.
Mr Clode said: “These are the stocks that are beating earnings and they’re not expected to beat earnings. If they can beat earnings they should go up.” The trick is finding stocks where the market has not already priced in a rise, if the manager expects good news: “That’s what keeps us in a job”.
Outlook
Looking to the future, Mr Clode said, was a near impossible task. “Technology moves exponentially, it doesn’t go one step at a time. It’s very hard for us to [imagine] where it’s going to go. There’s no pathway to machine intelligence and super intelligent robots. Maybe there will be a breakthrough that creates the algorithm and learns like a baby.”
It is impossible to say where processing power will be in the future, he said, so who knows where computing will take us.
Melanie Tringham is features editor at Financial Adviser
Richard Clode's Career Highlights
2014 – present: Portfolio manager, technology equities, Janus Henderson Investors
2012: Emerging markets research portfolio manager/technology analyst, Pioneer Investments
2010: Asian equity long/short technology analyst, Moore Capital
2007: Emerging markets technology analyst, Gartmore Asset Management
2003: Asian technology portfolio manager, Herald Investment Management
