Last week, Morningstar ran our annual investment conference, on subjects ranging from Brexit and risk management to the cost of funds and the future of advice. Read on for our coverage of the Morningstar Investment Conference UK in our special report: What the Experts Say.
Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ben Rogoff, Manager of the Polar Capital Technology Fund.
Hi, Ben.
Ben Rogoff: Hi.
Wall: So, we've just heard from you in the morning in our investment conference, and you gave the outlook for the tech sector. I suppose we better start with the big three, Facebook, Google and Amazon. What are your thoughts?
Rogoff: Well, we like them all. All huge beneficiaries of cheap compute, beneficiaries of the cloud and of course, the proliferation of smartphones that – about 2.2 billion people in the world have smartphones and all of those people are a fair game to each of them as customers.
So, I mean, running through them each in turn, and Google, obviously, dominates advertising, online advertising, and $70 billion-odd being done today and lots of apps that people use all the time. And I was looking at some stats recently and it's almost like 90% of all the mobile clicks in the U.K. now are coming from Google. So, Google is becoming a kind of near monopoly really in helping people find information and transact on the internet.
Facebook, very controversial stock when they came public, but actually demonstrating the value of Metcalfe's Law where the larger the network – or the more people on the network, the more valuable the network. So, 1.6 billion people now are monthly users and more than 1 billion every day. So, one-seventh of the world's population is coming onto Facebook every day. This is a fairly staggering stat and kind of goose pimply moment. So, companies monetising slowly but surely through various channels, Facebook, Instagram and over time WhatsApp and Oculus Rift which will be their virtual reality product that's coming soon.
And then Amazon, well, Amazon is amazing, biggest active bet in our portfolios. The company today dominates two huge categories, the e-commerce category everyone knows about, growing vastly faster than e-commerce. E-commerce is still a teens percentage of overall retail sales. So, years of growth we think ahead. And then they have this kind of Prime offering which demonstrates the network effect. More people every month are joining the Prime, getting the delivery the next day and that's driving more sellers to the network and then more people and more sales. So, the network is becoming enriched by Prime.
And then there is the whole cloud business. So, Amazon Web Services is their public cloud business. Today it is really dominating the cloud and that business will be probably the first company – first enterprise technology company to make its $10 billion within 10 years, faster than Oracle, faster than Apple and really dominating the cloud and we're hugely excited about the cloud because the cloud is going from 15% of compute today to well we think 30%, 40%, 50% onwards over the next few years and so really nothing to lose and everything to gain from the new cycle.
Wall: Of course, it's not a portfolio of three stocks. There is more in the fund.
Rogoff: For sure.
Wall: And you have talked just now about new technologies. And for a lot of people that may mean, okay, is he going around and looking at these small startups? But that's not what you mean by it, not necessarily small but new?
Rogoff: Yeah. Well, I think the most important thing for the people to understand about how we run our portfolio, how we invest is that we're growth-centric. So, we ultimately go where the growth is. So, what's staggering about Google is, this is a $70 billion-plus business on revenues and still growing and it's still growing faster than most companies. So, I think we're kind of market cap agnostic. We're really just going for growth at values that we can make sense of that we can justify. So, we do find small-cap ideas but right now we're at relatively modest percentages.
When you think about the Internet as being the most fertile place for us to invest, the real beneficiary of all this cheap compute, really we see those big franchises obviously as pseudo monopolies now being built and it's really kind of making it very difficult for small caps. So, last year 80% or I think 82% of all the incremental spending that went online in the U.S. was captured by Facebook and Google, which makes life difficult for small caps. So, we will buy small caps, but they will have to be niche companies. What we're really excited about are companies that have the potential to transform large market opportunities and they tend to be mid and large-cap.
Wall: And these of course are those disruptive technologies, aren't they, that everyone is talking about, stocks that you may not traditionally think of tech. They may sit inside commerce; they may sit inside services; but actually are experiencing huge growth opportunities because of the way they are digitalising business.
Rogoff: Well, that's a great way of putting it. So, this is a digital – are digitalizing – or – that's a horrible phrase – much of the global economy and users love it. Ultimately, the smartphone is the vehicle, the vessel, for this change and the cloud being the back end of it.
So, yeah, I mean, it's always been kind of a cat and mouse thing with index people about what is and what isn't a tech company. But I think it's so much more difficult today because in the past it would have been newfangled technologies coming along, where they were too small for the index people to understand them and today it's all about, as you say, a digital transformation.
So, Amazon, for example, is not considered a tech company. It's a retailer. So, that's why it's our largest active bet in both of our portfolios because it isn't in the benchmark. And very recently, eBay went into the benchmark incredibly 14 years or whatever since the tech bubble, but when it went in, and it took that long for the index people to get around to reclassifying it.
So, yeah, I think there is a huge disparity or mismatch between what is and what isn't a tech company. So, we are looking in retail e-commerce where a lot of the companies are not. LinkedIn is not considered a tech company but has reinvented the recruitment market. TripAdvisor is not considered a tech company but it's reinventing the travel market. So, it's exactly that blind spot really, that vacuum, that we're hoping to expand into.
Wall: And of course, as an active manager you can do so.
Rogoff: Well, we do. So, in our UCITS portfolio we've roughly two-thirds of the book is active. We don't build a portfolio relative to a benchmark, particularly at a time where the benchmark feels, I would say, troubled by the change that – the focal point of compute is shifting from the enterprise to the internet and web-scale companies like Amazon and Google and Facebook are benefiting really disproportionately from price deflation and 2.2 billion people, or whatever the number is, are potential customers.
Unfortunately, it takes time for the benchmarks to catch up with that dynamic. So, we don't build the portfolio based on the benchmark and that's reflected in our active share.
Wall: Ben, thank you very much.
Rogoff: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
