Picture: 123RF/IQNET
Picture: 123RF/IQNET

Technology shares in China and the US have delivered spectacular returns in 2020. Apple, which has a market capitalisation of more than $2-trillion, is up about 60% since the beginning of the year, while Amazon, with a market capitalisation of almost $1.6-trillion, has seen its share price surge almost 70%.

In this environment there is a huge requirement for top-line growth, and analogies have been drawn to the year 2000 when technology outperformance over wider indices was last so stark.

Many of the big tech companies have encountered increasing scrutiny, with Facebook, Amazon, Apple and Google all facing questions in front of the US Congress over the course of the northern hemisphere summer. A point of focus was their increasing dominance over their respective value chains, and the harm potentially anticompetitive practices could have on the consumers these companies serve.

As global equity managers we closely follow the fortunes of these so-called Faang stocks — Facebook, Amazon, Apple, Netflix and Alphabet (Google). After all, these are some of the most profitable businesses in the world. We do not think these shares offer bubble-like valuations in aggregate but would caution investors to look for clues to factors that will either limit their growth or challenge their profitability.

It is interesting to note that the Faang stocks account for a fifth of the entire S&P 500 Index, but as discerning stock pickers we have found many other compelling investments within the global equity universe. In these cases we can underwrite business models with less risk.

We envisage a difficult regulatory environment for a number of these supersized tech businesses. Instead, we have allocated the Ninety One Global Franchise portfolio’s tech exposure to capitalise on some of the most exciting structural trends to develop within the sector over the past decade.

Most notably, the rise of digital payments and cloud computing, which we access via our positions in companies such as Microsoft, Visa, Intuit and Autodesk. Microsoft and Visa have both already managed the regulatory onslaught and have refined their business models.

Another interesting position that we hold is in ASML. While this business shares some characteristics with mega-cap tech names in the US (supernormal earnings growth in the coming years versus the broad economy), there are important differences. We have a great deal of conviction in the revenue drivers underpinning that earnings growth.

ASML’s revenue growth will be driven by a product development cycle that is under way (the adoption of EUV lithography within the semiconductor industry). Another differentiating factor is that ASML is in a natural monopoly position, underpinned by technological dominance. This is quite different to some of the platforms and offerings which rely on consumer preferences and tastes.

Besides structural growth drivers in the technology space, we own what we call “counter-correlated businesses” that have also benefited from the drive towards home entertainment and remote working, sparked by Covid-19. Online gaming company EA Sports is one such company we own, whose business fundamentals have improved since the onset of the pandemic.

Financial data and software company FactSet is another good example. Asset management businesses have directed a lot of expenditure towards technology — not just Zoom and videoconferencing facilities — but to data providers such as FactSet. The need for people to work from home with easy access to data means more licences are sold, increasing the revenue of such companies.

While our exposure to the information technology sector has grown over time due to the structural growth trends on offer, we retain a material holding in more defensive areas of the market. We recognise the need to have balance in our equity portfolios. Factors such as the Covid-19 environment, economic slowdown and government policy action make little difference to the fundamentals of these companies.

Nestlé is one such a portfolio holding. It is essentially a recessionproof business, with strong consumer brands and an extensive distribution network. Roche is another good example. People who are on chronic medication need it, irrespective of economic circumstances. So, those business are attractive diversifiers in our portfolio.

• Rossouw is co-head of quality, and Cable head of SA quality, at Ninety One.

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