Investment Insight |
The end of Technology? Not so fast
It seemed like the news everyone has been waiting for. A vaccine candidate with more than 90% effectiveness against the virus. Perhaps unsurprisingly, this was followed by a heavy rotation in financial markets as investors dumped technology shares and swooped on beaten-up value shares including travel (e.g. Southwest Airlines) and shopping centres (e.g. Simon Property) that could bloom on the vaccine induced rebound.
Not so fast… unexpected consequences surface nearly daily and while a vaccine is great news for shares otherwise affected by the virus, the technological advancements and behavioural changes brought about by COVID-19 are likely here to stay. Furthermore, the road to recovery will be anything but smooth and the announcement of a vaccine does not yet mean global herd immunity.
At NZ Funds, one way we make sector allocations is via our global investment partners. This includes our partnerships with Suvretta Capital and Emerson Point Capital. Both hedge funds undertake fundamental bottom up research to identify the best companies within the strongest sectors. Their goal is to generate returns higher than that market but with lower risk.
The volatility in 2020 has created huge opportunities for active managers. Suvretta Capital strives to own great companies in solid industries and has successfully generated 12.0% returns year to date to the end of October, compared to the United States share market which is up 2.8% over the same period. Suvretta Capital has generated four times the return of the United States share market with only half the risk.
A key to Suvretta’s success has been the selection of technology shares in its portfolio, including Adobe and Amazon.
Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions. Adobe’s outlook during uncertain times is strong given monthly subscription prices are low and their products are helping users maintain relationships with their end customers. We do not see this theme ending even if a vaccine is announced.
The current environment has bought forward three years of e-commerce adoption in just one year, with Amazon being the dominant e-commerce retailer in the United States. Prior to COVID-19, e-commerce represented about 15% of global retail sales and Amazon captured 50% of the United States market and 10% of the global e-commerce market. Amazon’s goal is to grow globally in a market worth over US$22 trillion.
Emerson Point Capital’s goal is to invest based on a deep understanding of a company and industry, not just extrapolating recent trends or assuming normalisations. Their use of checklists instils process discipline, encourages thoroughness, and helps minimise unforced errors. This has allowed Emerson Point Capital to generate returns of almost 11.0% year to date compared to United States shares 2.8%. Like Suvretta, Emerson Point Capital has achieved this while only taking half the risk of the share market.
Emerson Point Capital also invests in technology conglomerate Sony Corp, a collection of high-quality assets with durable growth prospects. Sony generates nearly 65% of its operating profits from its entertainment assets, spanning video games (PlayStation, the #1 global console provider), music (Sony Music, one of the three major labels which control ~65% of the Recorded Music industry) and film and TV production (Sony Pictures).
Sony’s gaming and music assets are its crown jewels, as both are unique, intellectual property protected assets with high barriers to entry, operating in growing markets with few competitors. The likelihood of any disruption in the outlook for Sony from a vaccine is low. In fact, Emerson Point Capital is particularly excited about Sony’s upcoming PlayStation 5 gaming console launch coming in mid-November.
The global technology sector is heavily concentrated in the United States, and we expect the ongoing shift toward mobile and cloud computing to continue supporting the sector. NZ Funds’ client positioning in technology is large and clients’ portfolios are predominantly invested in active rather than passive management exposure meaning the best companies within the sector are selected, not just the sector as a whole.
The recent volatility is typical of the market’s behaviour following an all-time high. We view the past few months as a healthy consolidation of the initial leg of a bull market that is likely to run for years, not months. Any share market weakness from the election or otherwise we believe would be an opportunity to invest. This includes our views around technology.
Not so fast… unexpected consequences surface nearly daily and while a vaccine is great news for shares otherwise affected by the virus, the technological advancements and behavioural changes brought about by COVID-19 are likely here to stay. Furthermore, the road to recovery will be anything but smooth and the announcement of a vaccine does not yet mean global herd immunity.
At NZ Funds, one way we make sector allocations is via our global investment partners. This includes our partnerships with Suvretta Capital and Emerson Point Capital. Both hedge funds undertake fundamental bottom up research to identify the best companies within the strongest sectors. Their goal is to generate returns higher than that market but with lower risk.
The volatility in 2020 has created huge opportunities for active managers. Suvretta Capital strives to own great companies in solid industries and has successfully generated 12.0% returns year to date to the end of October, compared to the United States share market which is up 2.8% over the same period. Suvretta Capital has generated four times the return of the United States share market with only half the risk.
A key to Suvretta’s success has been the selection of technology shares in its portfolio, including Adobe and Amazon.
Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions. Adobe’s outlook during uncertain times is strong given monthly subscription prices are low and their products are helping users maintain relationships with their end customers. We do not see this theme ending even if a vaccine is announced.
The current environment has bought forward three years of e-commerce adoption in just one year, with Amazon being the dominant e-commerce retailer in the United States. Prior to COVID-19, e-commerce represented about 15% of global retail sales and Amazon captured 50% of the United States market and 10% of the global e-commerce market. Amazon’s goal is to grow globally in a market worth over US$22 trillion.
Emerson Point Capital’s goal is to invest based on a deep understanding of a company and industry, not just extrapolating recent trends or assuming normalisations. Their use of checklists instils process discipline, encourages thoroughness, and helps minimise unforced errors. This has allowed Emerson Point Capital to generate returns of almost 11.0% year to date compared to United States shares 2.8%. Like Suvretta, Emerson Point Capital has achieved this while only taking half the risk of the share market.
Emerson Point Capital also invests in technology conglomerate Sony Corp, a collection of high-quality assets with durable growth prospects. Sony generates nearly 65% of its operating profits from its entertainment assets, spanning video games (PlayStation, the #1 global console provider), music (Sony Music, one of the three major labels which control ~65% of the Recorded Music industry) and film and TV production (Sony Pictures).
Sony’s gaming and music assets are its crown jewels, as both are unique, intellectual property protected assets with high barriers to entry, operating in growing markets with few competitors. The likelihood of any disruption in the outlook for Sony from a vaccine is low. In fact, Emerson Point Capital is particularly excited about Sony’s upcoming PlayStation 5 gaming console launch coming in mid-November.
The global technology sector is heavily concentrated in the United States, and we expect the ongoing shift toward mobile and cloud computing to continue supporting the sector. NZ Funds’ client positioning in technology is large and clients’ portfolios are predominantly invested in active rather than passive management exposure meaning the best companies within the sector are selected, not just the sector as a whole.
The recent volatility is typical of the market’s behaviour following an all-time high. We view the past few months as a healthy consolidation of the initial leg of a bull market that is likely to run for years, not months. Any share market weakness from the election or otherwise we believe would be an opportunity to invest. This includes our views around technology.
Source: Bloomberg
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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