Liontrust Global Technology Fund

Q4 2020 review

The Liontrust Global Technology Fund returned 7.5% over the fourth quarter, outperforming the MSCI World Technology Index’s return of 6.8%, however the Fund lagged the IA Technology & Telecommunications sector gain of 12.5%*.

After bottoming out in March, global equities, led first by China then by the US and in particular US tech, have managed to relentlessly grind higher fuelled by a flood of central bank money alongside decreasing uncertainty, signs of economic recovery and then overall bullish sentiment. Despite a contentious US election cycle and a number of second and third “waves” of the pandemic, equities continued to grind higher in Q4 further boosted by positive Vaccine news from Moderna, Pfizer and AstraZeneca, reaching all-time highs in several major equity indices such as the S&P 500, although not, notably, in the UK where the FTSE 100 remains a good 10% below its pre-Covid level despite the global recovery.

The technology sector, while having a strong quarter in absolute terms, lagged the wider MSCI World Index (6.8% vs 7.8%) as the vaccine hopes favoured more cyclical and economic recovery plays such as energy, financials and travel stocks. The technology sector does however maintain its substantial lead over the wider market over the hole year with the MSCI World Technology Index returning 39.3% against 12.7% for the MSCI World Index.

As the broad market surged to new strengths, worrying signs of mania arose in parts of the market that have had disproportionate success this year with intense enthusiasm for EV (electric vehicle) stocks, SPACS (blank check companies for taking private companies public) and a new wave of record setting IPO’s.

Q4 saw the Fund return 7.5%, ahead of the MSCI World Technology Index’s 6.8% but behind its peer group average of 12.5%. For the full year of 2020, the Fund returned 43.9% compared to 44.4% for the Fund’s IA peers and 39.3% for the MSCI World Technology Index. While disappointing to marginally underperform our peer group average, it is pleasing to have beaten our high performing Index. The Fund also maintains a strong long-term track record of outperforming its peers, returning 102.9% over 3 years and 233.9% over 5 years, comfortably ahead of the peer group average of 93.74% and 201.6% respectively.

The best performing part of the portfolio in Q4 were our positions in cybersecurity companies, particularly those providing the next generation of solutions. This includes Cloudflare (+28.7%), Crowdstrike (+45.9%), CyberArk (47.9%), Palo Alto Networks (37.4%), Rapid7 (39.3%) and Zscaler (34.3%). These companies provide essential security software services to companies as they shift more of their key functions to the cloud, leaving them increasingly vulnerable to an extended number of attack vectors. As businesses have been forced to adapt and look to increasingly rely on cloud services going forward even after the effects of the pandemic subside, these best-of-breed cybersecurity companies stand to benefit greatly.

The three lowest performing positions in our portfolio were Alibaba (-25.1%), Salesforce (-16.2%) and Zoom Video (-32.1%).

Alibaba came under pressure after the failed IPO of the Chinese fintech juggernaut, Ant Financial. Alibaba not only shares a founder, Jack Ma, with Ant Financial, but also owns a third of its shares having spun it out. As the IPO approached, ANT Group’s valuation rose steadily as the IPO looked to be massively oversubscribed (an estimated $3 trillion of demand) for its $30bn raise. The valuation peaked out at an estimated $300bn (worth $100bn to Alibaba) when the Chinese regulator shut down the IPO (causing Alibaba shares to slide 8% on that day alone) after comments from Jack Ma about the state of the Chinese financial system were interpreted by the State as an out and out attack. Since then, the regulator has sought to punish not just Ant Financial but also Alibaba and possibly other Chinese tech giants with fines and investigations into anti-competitive behaviour. Jack Ma has since retreated entirely from public life. While concerning in the short term, we still find Alibaba’s proposition compelling, and believe, while the Chinese state may seek to punish Jack Ma and demand further contrition and  compliance from Alibaba, it is unlikely it will seek to cripple an important component of its digital economy and a key ally in the competition against the US in the race for technological supremacy.

Salesforce has lagged the market and its software peers in Q4 (and the year as a result) as it looks to close its largest acquisition to date, the $27.7bn purchase of Slack. Part of the potential drawback with Salesforce is its highly acquisitive nature under its founder CEO Marc Benioff, and its latest acquisition of a company that lacks a track record of profitability for what could be a rather inflated price has understandably caused concern. We would contend, however, that Salesforce’s acquisition history has actually been remarkably successful. For example, while still in early stages, the recent acquisition of Tableau now looks to have been done at bargain price given recent enthusiasm for high growth software companies, and the tie-in to Salesforce’s platform looks to already be paying dividends. Slack has no doubt achieved viral growth and could well be a valuable component of the salesforce portfolio when integrated alongside its various promising product initiatives.

The underperformance of our position in Zoom is largely a result of the timing of the purchases as we looked to build a very modest position while positive news of vaccine efficacy depressed sentiment on Zoom’s short-term potential. Zoom has achieved viral growth during the pandemic as the default video communications platform of choice. While it is unlikely to achieve such radical user growth again, we believe its position in both workflow and zeitgeist (as evidenced by the ubiquitous use of its name as a verb) is firmly entrenched and gifts the company with a number of exciting potential monetisation levers beyond simple retail and business communication subscriptions such as becoming an effective remote education platform and a venue for future virtual business conferences.

Q4 saw very few portfolio changes. The only change in the line-up was the removal of a very modest position in Jack Henry and Associates. While a great company, providing a range of essential technology solutions to financial services, and a solid holding in other Global Equity funds, we decided we had better uses for the capital within our portfolio, particularly behind recent positions taking advantage of promising trends within cloud computing services.

The outlook on equity markets appears to be growing ever more optimistic with the roll out of vaccines, and pockets of the global economy such as Australia and New Zealand seeing a resurgence as life gets back to “Normal”. Plenty of risks remain, however. The underlying global economy, while recovering, remains in a questionable state, large parts of Europe, and now the UK, entering their 3rd round of restrictions and lockdowns, new, more infectious, strains of the virus are emerging and the true extent of a bounce back is under question.

Within the technology sector itself, the market is reaching a worryingly feverish pitch, particularly within some of the more speculative spaces such as EVs (electric vehicles) and fintech (including all things crypto). Other signals of frothy behaviour include the increasing enthusiasm of inexperienced retail investors and (perhaps relatedly) a spate of incredibly high performing IPOs. The recent DoorDash and Airbnb IPOs returned 86% and 113% on their opening days respectively, capping off a remarkable year for tech IPO’s in general. While the latter is certainly a fantastic company and either, or perhaps both, may deserve these rather extended valuations, this enthusiasm amongst other signals is worryingly reminiscent of the 1999 dotcom mania.

However, there are key differences between now and then to bear in mind:

  1. The background economics are different, rates are now near zero in most developed markets now compared to mid to high single digit %’s back in 1999/2000 meaning that high growth companies (or companies who’s cash flow potential lies further into the future), many of which have had a pull forward in demand, should receive higher valuations.

  2. Technology companies, and their respective business models, are nowhere near as speculative as they were back then. The like of Google, Amazon, Microsoft and Facebook (and many others!) have all proved technology-based businesses can be extremely profitable and generate an incredible amount of shareholder value.

  3. Disruption is very real and having an outsized effect, with the best pulling well ahead of the rest. This should mean that high performing companies demand higher valuations compared to those who’s market position is increasing under pressure, with increasing threat of obsolescence.

  4. Valuations may appear high on a traditional basis such as P/E and P/B ratios, however with increasing emphasis on pre-tax and non-capitalised investments such as R&D, marketing and pushing outsized growth through temporary margin squeezing, these traditional metrics fail to capture the true picture. This can be seen not just in the rise of (non-capitalised) R&D spend but also in the lower cash-based valuation multiples.

  5. The mania, to what extent it exists, appears to be concentrated on a small handful of key names and spaces already mentioned. While no doubt a drastic unwinding of these stocks would impact other technology companies and the wider market, it is unlikely to impact the long-term success of these winning companies.

Tech’s incredible run of success and outperformance is also a source of concern for many investors. There is certainly a temptation to imagine that the best must surely be behind us and the time may have come to pivot to other sectors and exposures. We would caution against that, not least as such logic would have been equally tempting and yet very costly for many years prior. Indeed, the technology sector (MSCI Technology Index) has outperformed the wider MSCI World Index each of the past years of the last decade back to 2010. If, after any of those years, investors had decided that this was unsustainable and pivoted elsewhere, they would have been giving up a substantial amount of future return. While the time will inevitably come when tech has a bad year or two, it is undoubtably the sector best set to capture future growth and drive shareholder returns over the long term and any pivot away puts those returns at risk.

Many technology companies continue to be a fantastic place to invest, both benefiting from and driving trends that have been taking place for many years and, while accelerated during the pandemic, will continue to grow for many years to come. These include the rise of ecommerce, the shift to cloud software and cloud infrastructure, digital payments and next generation entertainment. Good technology companies have given portfolios invaluable resilience during the acute market downturn in March while also benefiting strongly from the recovery. They also provide strong and consistent growth in a low growth world where ultra-low interest rates reward companies exhibiting the potential for outsized future returns.

We believe now more than ever, it is important to actively seek and discern high performing companies from those whose value is more speculative, and that by focusing on a company’s key financial metrics supporting a strong investment narrative and a discounted cash flow valuation, we can continue to provide long term performance in this exciting sector through careful and attentive active management.

Discrete years' performance (%)**, to previous quarter-end:

 

Dec-20

Dec-19

Dec-18

Dec-17

Dec-16

Liontrust Global Technology C Acc GBP

43.9

23.7

14.0

28.4

28.2

MSCI World Information Technology

39.3

41.9

3.5

26.3

32.9

IA Technology & Telecommunications

44.4

31.0

2.4

23.8

25.8

Quartile

2

4

1

2

3

 

*Source: FE Analytics as at 31.12.20

 

**Source: FE Analytics as at 31.12.20

 

For a comprehensive list of common financial words and terms, see our glossary here.

  

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

 

Monday, January 25, 2021, 3:54 PM