Successfully investing in a ‘winner takes all’ sector requires you to not only find these winners, but to be patient enough for the secular trends driving them to fully play out, according to Walter Price, manager of the £1.3bn Allianz Technology Trust.
Price said that users of technology, both consumers and enterprises, tend to gravitate towards a single company in a niche – often simply due to word of mouth. As such, “there is a natural increase in market share that comes from the winning companies”.
“There's a gravitation towards the companies that are winning,” the manager said. “Number two and number three tend to struggle to be successful.
“When we say a winner’s game, we want to identify those winners and we want to own them early, and we want to own them for a long period of time.”
Co-manager of the trust Mike Seidenberg said that on top of this, the secular winners often play out over longer periods, with a stronger advantage, than investors ever realise.
“That value creation isn't about the stock just doubling,” he said. “They can then go on – if it's a good enough company – to create 5x or 10x worth of value.”
However, when gains of this magnitude are available, it is rarely a smooth ride as valuations often get ahead of themselves.
Price said that periodically “they get overvalued and so we may take our positions out or reduce them significantly, but we'll try to add back to them”.
Over the last six months, the top-performing Allianz Technology Trust has underperformed the wider market as many investors rotated towards more cyclical stocks in anticipation of a wider economic recovery.
Performance of the trust in H1 2021
Source: FE Analytics
But Price said this proved to be a good opportunity to pick up some of the highest-rated technology companies that took a hit in the rotation.
Seidenberg said that another core tenet is finding the right management team who can pull off an idea: “Good ideas are a dime a dozen and execution around them is rare.”
“We really are focused on how companies execute and that really boils down to people,” he said. “It's a cadence of how companies operate. It's the ability to get in there, sell somebody something, make them happy, and then earn that right to sell them something again.
“What you find is that good management teams – once they establish that cadence – they just kind of get it done.”
Some of the biggest holdings within the Allianz Technology Trust have been some of the biggest technology winners over the last decade, such as Amazon, Microsoft and Alphabet.
But despite the enormous size of these companies, the managers said they still have further to grow due to the large opportunity in their cloud services businesses. They argued that strong secular tailwinds mean they will be able to sustain their growth through to 2030, with Price noting that the shift from on-premises enterprise spending to cloud spending is still very much in its early days.
Source: Allianz Technology Trust, Corporate Reports, FactSet, Piper Sandler Estimates
“We've been talking about cloud for a long time, but we're really early in that transition,” he said. “That's a secular tailwind that's going to blow for the next five years at least.”
The most obvious beneficiaries of this transition area are going to be the cloud ‘titans’, namely Amazon, Microsoft, Alphabet (Google) and Alibaba.
But Price noted there is a second generation of software companies that will also stand to benefit from this growing enterprise IT spend.
“There’s software that's born in the cloud that helps you run your company better,” he said.
“Everybody knows salesforce.com and to a lesser extent, Workday and Adobe – some of these companies that help you run your company with software that's resident in the cloud.
“Whether it's Asana or whether it's HubSpot or whether it's Twilio, we're into the second generation of those companies in our portfolio.”
This plays into a major focus of the trust: which technology companies are the most vital to businesses and people today.
“I think there are a hundred companies that people are using to run their company in the future and those companies are establishing positions and this new infrastructure,” he said.
US-based cloud data storage firm Snowflake is one company in particular that the managers believe can grow to many multiples of its current size.
The company’s prospects were enough to attract renowned value investor Warren Buffett to participate in its IPO last year, despite his apparent aversion to high-flying technology stocks.
Price believes that more and more companies will soon begin to realise that Snowflake offers one of the best ways to store their data, because they will not be dependent on their own infrastructure.
“You can bring in data from many different sources, it is secure and it is privatised – but it is also shareable. I think that’s a very attractive concept,” he finished.
Allianz Technology Trust has delivered a 375 per cent return over the last five years, compared with 259.8 per cent from the IT Technology & Media sector and 91.39 per cent from the MSCI All Companies World Index.
Performance of the trust over 5 yrs
Source: FE Analytics
The FE fundinfo four-crown rated fund is trading at a 5.6 per cent discount to net asset value (NAV) and is not geared.
It has a performance fee of 12.5 per cent of outperformance against its benchmark multiplied by the weighted average number of shares in issue and the NAV at the year end. This is capped at 2.25 per cent.