30 September 2020 | www.moneymarketing.co.za
@MMMagza
First for the professional personal financial adviser
WHAT’S INSIDE
YOUR SEPTEMBER ISSUE
UNPACKING MODEL PORTFOLIOS A careful and considered approach should be taken when deciding which model portfolios to use
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COVID-19: LIFE INSURANCE INDUSTRY ‘PREPARED FOR THE UNPREPARED’ MoneyMarketing's guide to investing offshore in volatile times
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Why the pandemic is changing how customers think about life insurance
Page 29
Is it too late to invest in tech stocks?
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You can’t really talk about investing in technology without acknowledging what we’ve been through as a society over the last six months,” says Anchor Capital fund manager, Henry Biddlecombe, adding that COVID-19 has caused companies to adopt technology on a scale that would never have been the case before the pandemic ensued. He points out that year-to-date, the S&P 500 is flat, while the broader tech sector is up by more than 20%. “It’s what I’ve termed the ‘Zoom effect’ because I think this trend is nicely represented by Zoom’s share price that is up 300% relative to a flat market. This has left a lot of investors not quite grasping the valuations in that space, and feeling a little bit left behind, thinking that it’s too late to invest in technology.” But, as Biddlecombe explains, there is no such thing as the ‘Zoom effect’ but rather a continuation of a trend that has been in place for the last decade. To illustrate this, Henry Biddlecombe, he compares Fund Manager, the performance Anchor Capital of the tech-heavy
FIGURE 1: SECULAR OUTPERFORMANCE
Nasdaq to the S&P 500 over the last 10 years (Figure 1). “The Nasdaq has outperformed by around 200% – and that’s life changing for an investor.” However, he points out that tech stock valuations have been pushed into uncomfortable territory. “In the current dynamic, you’ve got shorter-term and longer-term driving forces acting against one another. In the short-term space, we’ve seen defensive rotation into tech stocks. People are buying technology companies because they’ve been less impacted by the pandemic and there have also been elements of FOMO (fear of missing out) – and that’s pushed valuations into full territory.” But one shouldn’t be distracted from the more important longer-term driving factors, he says, making the point that in the present dichotomy between shorterand longer-term factors, an active management strategy is favoured. “I think active managers like us are in a good position to identify those strong secular growth stories while remaining cognisant of the valuations.”
Biddlecombe lists three factors that he believes will continue to drive performance in the tech sector: Research and development Technology companies are spending more than any other sector on growth and innovation. In the last ten years, five of the largest US tech companies – Alphabet, Amazon, Microsoft, Facebook and Apple – have spent over $900bn or around one third of South Africa’s GDP every year on new initiatives and new ideas. These five companies also earn an average return on invested capital (ROIC) of 20.5. The high rate of reinvestment as well as the high return on investment together will make shares compound in value. “It makes sense that these companies are benefiting from the future because they’re spending the money to create that future,” Biddlecombe says. Network effects Tech companies demonstrate a superior economic dynamic through what are termed network effects. “As technology companies become bigger, so they become more efficient and they start to grow more quickly,” he says, using Amazon as an example. “When Amazon garners more sellers, so the platform becomes more attractive to buyers, and conversely, as Amazon gains more buyers, so the platform becomes more attractive to sellers. Over time, Amazon can extract more economic value from the platform.” Continued on page 3
