After more than 25 years in the industry, technology fund manager Paul Wick can spot a fad a mile away. He tells reveals how he makes the right picks in tech stocks and how he’s playing the iPhone era.
- Age: 54
- Company: Columbia Threadneedle
- Location: Palo Alto, California
- Sector: Equity – Technology
- Fund: Threadneedle (Lux) – Global Technology
- Investment style: Conviction-weighted portfolio investing in technology companies with attractive valuations and sustainable growth
Picture a technology fund manager and you’ll probably imagine a tech obsessive who has more gadgets than they know what to do with. But that’s not Paul Wick’s style.
The tech veteran has seen trends come and go in his 26 years in the industry. He’s not interested in the flavor-of-the month stocks; he wants the winners of the future.
‘I’m more of an investor than a tech guru. I’m just wired to be more interested in investing rather than technology for its own sake.’
In fact, Wick might never have become a technology investor had it not been for a colleague at Seligman Investments retiring back in the early 90s, when Wick was a young high yield bond manager.
‘They thought I was a smart guy with a lot of energy, and at the time the technology sector was very small and quite research intensive.
‘No one else wanted to manage that fund,’ the Citywire A-rated manager jokes. ‘I had all of a two-week period to come up to speed.’
It proved a wise move. Over time, the 40 Act Columbia Seligman Communications and Information fund has grown to $4 billion and Wick has been a leader among his peers. Seligman is a subsidiary of asset management giant Columbia Threadneedle, and in 2014 Wick took on the management of the Luxembourg-based Threadneedle Global Technology fund as well.
Over the course of his three years at the helm, he has managed to achieve a 63% total return, compared with the MSCI World Information Technology benchmark’s rise of 54.4%, and the sector’s average manager’s return of 35.7%.
Hitting the sweet spot
Despite a recent period of ‘treading water’ as the market got distracted by geopolitical tensions between the US and North Korea, Wick is feeling optimistic. The fourth quarter is normally tech’s sweet spot, driven by a huge sales period in consumer electronics and Apple revealing its ‘annual refresh.’
Its chief executive Tim Cook recently unveiled the $999 iPhone X, which Wick is particularly excited about.
Alongside the new features, including augmented reality display features and 3D sensing technology, the new smartphone introduces a number of design and technology features that Apple’s competitors will inevitably follow.
‘Quite a few of the fund’s holdings are set to benefit from these trends and report strong earnings results,’ Wick says. That includes Applied Materials, a firm which produces semiconductors and OLED displays, and radio frequency chip makers Skyworks Solutions, Qorvo and Broadcom.
Though an underweight position at 5.2% of the portfolio, Apple is Wick’s third largest holding as of the end of July.
‘We remain positive on Apple, given its huge installed base, high customer loyalty, growing service business like the App Store and Apple Music, reasonable valuation, and upside from possible offshore cash repatriation tax reform,’ he says.
A shining example of Wick’s investment philosophy is his take on two of tech’s most lauded and talked about companies: Elon Musk’s Tesla Motors and streaming pioneer Netflix.
‘I’d be so bold as to say Tesla Motors and Netflix are the two most extravagantly overvalued large-cap companies in tech,’ Wick says.
He has little faith that Tesla can burn through $5 billion in cash, sell hundreds and thousands of its Model 3 cars and turn a profit.
‘I think the competition is very good, and inevitably will catch up. [Tesla] are going to continue to have to raise money given how much cash they are burning. The amazing thing is the stock rallied so hard with the last capital raise, because they didn’t raise as much as feared. All they did was postpone the day of reckoning.’
Netflix also finds itself in a similar situation, having burned through $1.7 billion last year and now seeming to be on track to hit $2 billion this year.
‘They have been free-cash-flow negative in a material way for four years now,’ Wick says. ‘They have to keep raising debt. The content spend keeps going up, and they are bringing in roughly the same amount of new subscribers, or slightly less,’ he says. ‘Growth is slowing.’
He also warns against late stage IPOs, which occur when firms have had high private valuations but then fail to perform on the market. He points to examples such as flash storage system company Tintri, social media phenomenon Snapchat and meal kit firm Blue Apron.
Under the hood
Delving deeper into the fund’s 58 holdings, many of the stocks are not household names.
Nearly half of the fund’s assets are in semiconductors and semiconductor equipment; a major overweight position compared with the benchmark’s 15.3% allocation.
Wick believes that what differentiates his fund from those run by other managers, and particularly from passive funds, is that ‘they don’t anticipate the future.’
‘ETFs end up giving a lot of prominence to the most expensive companies in an index and the way the tech industry works is that people don’t stay on top forever. If I think back to 2000 for example, Intel and Cisco were duking it out for who had the most valuable tech company. Fast forward, Intel and Cisco have really gone nowhere for the last 15 years. They have been awful investments.
‘The ETFs are not anticipating what is happening in the future. We are anticipating the future and finding the highest reward-to-risk ideas in the tech industry.’
Semiconductors and small and ever-more complex chips can now be found in more and more products, including cell phones, computers, appliances, medical equipment and even cars. This, says Wick, has made the industry less cyclical.
The semiconductor industry has also consolidated as the technology has developed, so there are fewer venture-backed start-ups to challenge the main players. This hands the advantage back to large firms like Lam Research – Wick’s largest holding and performance driver. He has held the chip equipment maker since 2010, and it has been at the top since April 2014.
‘One thing we’ve liked about Lam is the capability of the engineering talent, the management team and the strategy. They have gained share in the industry relentlessly for the past 16 or 17 years,’ he says.
‘Relative to a lot of companies it’s not expensive. It’s a bargain compared to Rockwell Collins, 3M [Global Gateway] or Emerson Electric,’ he says.
Another chip company he’s buying into is Micron Technology, an Idaho-based leader in memory chips, for which he believes there is strong underlying demand.
In the neighborhood
One move that has given him an advantage over the average tech manager is settling into San Francisco’s tech kingdom, Silicon Valley. This allows Wick and his team of 11 analysts easy access to companies’ management teams, as well as to industry insiders such as venture capitalists.
It’s all about networking when it comes to digging through the vast and growing technology sector.
To stay on top of their game Wick’s team is constantly asking themselves: what are information technology purchasing managers looking for? What are they excited about? What features are lacking in existing products for network security?
‘We’re trying to find companies that have a lot of intellectual property, capable technologists and business people, people who can anticipate likely changes and maneuver accordingly,’ he says.
In a sector as dynamic as tech, keeping your eye on a firm’s intellectual property (IP) is core to making sure your holdings don’t fall behind the times.
Over the past year, Wick has had a negative view of British semiconductor company Imagination Technology. It owned the IP for graphics technology used by Apple, as well as for a microprocessor that other chip companies had started to embed in their own designs.
‘We felt that the company’s graphics IP had fallen behind. Sure enough, [in April] Apple announced that they were moving to an internal graphics processor for their new phones that didn’t use Imagination’s graphics IP. Imagination stock fell 65% in one day after Apple made the announcement.’
It’s that awareness that has helped Wick and his team stay ahead of the trends and what the market finds ‘sexy.’
Where some managers have seen businesses rise and fall, Wick has experienced whole subsectors come and go.
Relics such as magnetic disk drives had their own sub-systems of suppliers before they were vertically integrated into Seagate Technology and Western Digital.
‘At one point in time there were 11 or 12 public disk drive-related companies and now we have two. When I started in the business in 1990, there wasn’t an internet sector or a cell phone industry and of course now there is.
‘There wasn’t even all that much of a printer industry. It’s hard to believe. The pace of change when you step back and look at it is quite incredible.’
Wick’s stock-picking guideGOOD
- Significant, differentiated intellectual property, or an established company in an industry with high barriers to entry
- Consolidating industry with improving margins and pricing
- Fundamentally attractive industry
- Credible management with a good track record
- Strong current and future cash flow
- Company has pricing power
- One product or a fad company
- Questionable organic growth; for example, too many acquisitions
- Company in secular decline; for example, Blackberry
- Negative cash flow or losses
- Questionable business model
- Company run for the benefit of employees and management
This article was originally published in the October 2017 edition of Citywire Americas magazine. To subscribe and receive the magazine click here.