Henderson Global Investors Stuart O'Gorman has revealed which stocks he is backing to turn his Global Tech fund's performance around after going through a rough patch driven by the 'Apple Effect'.
In his most recent webcast update, the co-manager of the
'Overall, both funds [Horizon and its OEIC-version] were behind the index and this has been a problem for the tech sector in general over the past three years. A lot of this is due to the Apple Effect. However, we do seem to be beating most other tech funds with a lot less risk.'
The Luxembourg-domiciled Henderson HF Global Technology has indeed lagged its benchmark over the past year, returning 25.76% to the end of June while the MSCI ACWI/Information Technology TR index has risen 31.62% over the twelve month period.
The veteran tech manager says the internet theme has proven to be a long term strong performer over the past few years with companies like SanDisk, SAP and Facebook providing decent returns.
'We had predicted that there would be a correction in the more sexy names in the market, but we are still pretty confident to see a divergence in companies with strong growth; the things that really just grow without any sign of profitability, will start to get hurt,' said O’Gorman, who has been with Henderson since 2001
Cannabilisation fearsIn the near future, O’Gorman expects a further increase in competition, which could have some negative short-term effects.
'There is a risk that the tech sector eats itself, because everyone is well funded and everybody thinks they can win. With regards to long term outperformance, I am still happy for this year. We will have to see how the next two quarters play out,” said O’Gorman, who has 16 years of investment experience.
Looking at the internet, specifically at advertising, O’Gorman views keyword search advertising to be the best value advertising.
'The value of getting a customer to a website is still monumental, because they are actually willing to transact.
The fund will therefore continue to hold positions in Google and Facebook, but also in rational commodities and connectivity shares such as SanDisk and Qualcomm.
Beware of hype and value traps
O’Gorman is concerned about a bubble in specific companies, especially ones that lack a rational approach to running their business. Chief among, he said, are software solutions company ‘salesforce.com’ and business analytics company ‘Tableau.’
'We did warn that there might be a bubble in some of the valuations, and it did eventually come true. In a lot of these stocks, the price earnings multiples have now gone up, which is quite terrifying, because it shows you how a lot of those companies just invest for growth,' O’Gorman argued.
He added that investors should be wary of comparisons between these companies and some of the sector's blue chips.
'Those companies are being compared to the next Microsoft or Oracle, but what many people forget is that when Microsoft and Oracle were at this stage, they were actually generating money and real earnings.'
Initially these stocks have the ability to do well because their capital costs are close to zero, especially with QE measures helping stimulate profits, but as soon as these measures cease these stocks will do very badly.