The correction in August unsettled investors. Why should they buy technology right now?
One reason is the superior performance. During the last 30 years the Nasdaq index outperformed the S&P 500 on average by two percent every year. Another reason: Tech is not only PCs any more. It is everything, from cars, to homes, to phones. You have some totally new entrants in the car market, for example Google and Apple alongside Tesla. If you look at the homes, traditional home security companies are getting challenged by Google Nest. You have new players in most services, for example Uber in the taxi space or video services like Netflix. They all use datamining to create better services for users. Tech is basically eating into all industries, and will continue to do so in the future. It has only just begun. That is why you want to be invested in technology. It is a very diversified area. Over 20 percent of the world indices are TMT already, that is already bigger than the whole market cap of European stocks.
New players are rushing into the markets and replacing the old ones. There must be victims?
Some players will falter. Just remember the yellow pages industry. Until not so many years ago, investors failed to see that printed catalogs the disruption from Google and the sector were priced as if there would be no secular shifts over the next 10 to 15 years. With high speed broadband the same is about to happen to the traditional TV industry. The barriers to entry have come down dramatically and if you don’t create your own content, you will be in trouble. Eyeballs will shift to companies like Youtube, Apple TV, Netflix. The question is not if they will be hit, it is only a question of when.
How do you find the best investments if the technology space is so diversified and big?
This is hard work. I have been working in this industry since 1996. I have seen a lot of business-models and a lot of companies. We simply have a long experience in this industry, and this is a good starting point, when you screen for good stocks.
What is the biggest challenge in tech investing?
There are so many good stories out there, so much talk. The challenge is to get stay coolheaded and not to be too impressed. If for example 95% of the stock value is coming from cash flow to be generated from year 10 and onwards, we would be skeptical. Too many things can change during that timeframe. Compared to others, we are less willing to pay for future cash flows and focus more on the valuation multiples, cash flows and growth the next couple of years. That protects the downside risks.
But isn’t it also about recognising the potential of upcoming technologies?
Sometimes the second-best technology is becoming market leader. So even if you recognize the better technology early, you do not necessarily know if it is going to be the market leading technology. If you look at Steve Jobs, he was not the first to present a tablet solution, but he came to the market when the time was right, touch screens and batteries were good enough. The same for us: Sometime it is all about the right timing.