Global Technology: An Oasis of Investment Opportunity in a Low-Growth World

MANY INVESTORS EXPECT GLOBAL ECONOMIC EXPANSION TO BE SUBDUED FOR SOME TIME. IS TECHNOLOGY INVESTING ONE WAY OF CAPTURING GROWTH IN THIS ENVIRONMENT?

Yes, I believe technology is one area able to drive its own growth through innovation, new products, and product cycles as well as market share gains. In a low-growth world, this is where the growth can be found. Overall, most industries and individual companies are going to find it difficult to achieve much expansion over the next decade if you accept, as I do, that macroeconomic growth is likely to be modest. We are seeing this in Europe and the U.S.—even China has slowed down. There are limited prospects for this situation to change dramatically—technology is an oasis of growth in a global economy that lacks it.

Bearing this world view in mind, we have a preference for the faster-growing companies. We favor platform companies on the Internet like Google and Chinese group Tencent. We also invest in companies operating in new areas of technology such as cloud computing, which is delivering computing technology over the Internet and has an element of both infrastructure and software. We also have exposure to companies that are transforming industries, such as Tesla Motors in autos. We have avoided enterprise hardware and other related technology equipment names given their slowing growth due to the disruption caused by emerging technology companies.

HOW IMPORTANT IS CLOUD COMPUTING FOR THE FUTURE DEVELOPMENT OF THE INDUSTRY?

The new group of software companies operating their businesses through the cloud delivery model are competing strongly with some of the major incumbent software firms, which have huge revenue streams. For the established software firms, generally speaking, it is a time of enormous disruption. The financials for incumbent software firms over the last two years have resulted in very little growth in new business. While established software companies benefit from the considerable streams of business from servicing the maintenance needs of existing clients, they struggle to add any new customers. This is because implementing a new cloud-based delivery model requires thousands of people working on giant projects, which is damaging to a company’s workflow.

The challenger software companies using the cloud to deliver their services are successful because implementation in terms of installation and updates can be performed quickly and with higher customization, which results in lower churn of the customer base. They are likely to grow for years to come, and—over time—the market cap differential between these firms and the more established players could be flipped on its head. Sometimes it is important to pay attention to the obvious signs right in front of you. To me, the possibilities for cloud computing come into this category. Years ago, at the time when the potential of the PC was obvious to many, there were tiny firms operating in this industry that, over a period of 10 to 15 years, grew to become the huge, household name technology firms of today. I see the same opportunity in cloud computing.

TESLA MOTORS IS ONE OF THE LARGEST HOLDINGS IN THE TECHNOLOGY STRATEGY YOU MANAGE. WHAT DO YOU LIKE ABOUT THE COMPANY?

I believe Tesla Motors—a U.S. firm that manufactures luxury electric cars—is one of the most innovative companies in the world. In my opinion, the company’s CEO Elon Musk is a successor to Steve Jobs in terms of innovation and transforming an industry. Not only is he an expert in technology but, similarly to Steve Jobs, he is also an innovative thinker in terms of marketing, consumer focus, and inspiring loyalty among employees. These are all aspects that make a technology company special, and Elon Musk has infused these attributes into Tesla.

The total addressable market of the auto industry at over US$1.5 trillion globally also provides an enormous runway for growth for an innovative company like Tesla. There is an internal energy at Tesla unlike anywhere else—certainly not in the auto industry. It is relatively unique, even among technology companies. Tesla did the hardest thing first: It made one of the best cars in the world on a shoestring budget. It just so happens to be electric. In 20 years, I would be very surprised if the vast majority of cars are not electric. Tesla’s cars will be cheaper and better than the existing options.

Tesla has similar characteristics to other innovative technology firms. It offers an improved product and is not encumbered by a big dealer network. As for the incumbent automakers, history would suggest these companies will struggle. Past events have taught us that whenever we see structural changes in an industry, the leaders usually come from the outside. It is just too hard for incumbents to change and adapt—these companies have too much to protect, are usually beset by infighting, and are timid in terms of embracing change. These companies do not want to cannibalize their existing businesses.

THE CHINESE MARKET HAS SEEN A LOT OF VOLATILITY IN RECENT MONTHS. HAS THIS AFFECTED YOUR VIEW OF CHINESE TECHNOLOGY STOCKS?

No, it did not affect our view of the companies that we like in this market. In fact, we took advantage of this volatility to top up our holdings in select Chinese technology companies. Investors must understand that technology is a volatile industry, but it is also a high-return industry—one where taking advantage of the volatility can result in positive returns. I would much rather buy the companies we like on pullbacks periodically than just see them go up in a straight line. In the past, we have seen periods of strong performance coming out of volatile spells such as the one we saw over the summer, and I would expect to see a similar trend this time around.

THE SLOWDOWN IN THE CHINESE ECONOMY IS ANOTHER WORRY FOR INVESTORS.
DO YOU SHARE THESE CONCERNS?

Yes, the Chinese economy has slowed, but despite fears over its economic health, China remains one of the fastest-growing global markets. So I am optimistic about the outlook. The shift away from investment spending and toward domestic consumption is the right path to take. I truly believe many investors underestimate the potential arising from China’s growing middle class. The Chinese technology stocks we hold are well placed to benefit from these trends.

WE HAVE TALKED ABOUT THE INVESTMENT POTENTIAL IN THE U.S. AND CHINA. WHAT TECHNOLOGY OPPORTUNITIES ARE YOU FINDING IN EUROPE?

There are a few companies we own in Europe, operating in businesses including chip design, semiconductor capital equipment, and the provision of IT for the travel and tourism industries. These are really good companies in each respective field. Looking at software and the Internet, however, Europe has not developed a culture similar to California’s. Therefore, the technology leaders in Europe are largely the same as in the U.S. Part of the reason we have seen juggernauts emerging in China is because the Chinese government blocked Western companies’ access to this market, so it forced internal innovation. This did not happen in Europe.

TECHNOLOGY FIRMS CAN SOMETIMES TAKE MANY YEARS BEFORE THEY START RETURNING CASH TO SHAREHOLDERS. HOW DO YOU VIEW THIS AS AN INVESTOR?

Each technology company has its own stage of life and should aim to make decisions in light of this. The more mature and well-established companies return more in dividends as opposed to stretching for growth that is going to be difficult for them to achieve. On the other hand, many of the younger companies need to be investing this cash to continue fostering innovation. The problem comes when companies still believe they can grow, even though their time in the sun has passed. By and large, most companies do not get this right. Many fail to accept that they are a mature business. However, with skillful management, the transition from growth company to a mature incumbent that is managing costs and returning cash to shareholders can be made successfully.

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