In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with Polar Capital fund manager Ben Rogoff about his three favourite technology investments.
Funds and Securities Mentioned in this Video:
Polar Capital Technology Investment Trust (PCT)
Polar Capital Global Technology Fund
eBay (EBAY)
Amazon.com (AMZN)
Salesforce.com (CRM)
Radware (RDWR)
Google (GOOG)
IBM (IBM)
Previous Videos from the “Fund Managers’ Favourites” Series:
- Fund Managers’ Favourites: 3 Extra Small-Cap Picks
- Fund Managers’ Favourites: More Small-Cap Picks
- Fund Managers’ Favourites: Small-Cap Picks
Video Transcript:
Alanna Petroff: Facebook has been grabbing the headlines these days, but there are plenty of other tech companies out there that are very worthy of investment. Joining me now is Ben Rogoff, he's a director from Polar Capital and he specializes in tech investing. We are going to be talking about his top three picks. So, Ben, thank you for joining me.
Ben Rogoff: My pleasure.
Petroff: Now, let's go over, first, seasonal investing. It's the summer now, it's warm thankfully, and you have some opinions about investing when it's warm outside I guess.
Rogoff: Yeah. Well, I think, there are these kinds of market maxims, if you like, that go: ‘Sell in May and go away,’ are actually based on some empirical evidence that says that, seasonally, it's a pretty tricky time to make money. Certainly in the past it's been a traditionally difficult time for markets and obviously that's playing out again this year. Obviously it’s focused very much on Europe, Spain and obviously Greece. So, yes volatility in markets and I think to some degree these maxims do become somewhat self-fulfilling and investors who might be looking at valuations and levels and thinking ‘that's looks interesting,’ might be somewhat deterred by where we are in that seasonal period. So we are still only at the end of May and we still got those tricky summer months to get through.
Petroff: Okay. So are you fully invested now? Or are you taking money out of the market right now?
Rogoff: We have taken some money out of the market in April, May ... early May I should say. [We’re] partly cognizant of those seasonal trends, but mostly because a lot of our contrarian indicators were suggesting that risk appetite was fairy full. It just felt like an appropriate time to take some profits, so it's been a great run.
Here we are today with markets sort of having given up more than half of the rally from the December lows. I personally feel that it is time to be -- or certainly the level is right to be reinvesting. So we are selectively reinvesting in the market. But I would say again with those seasonal headwinds in mind, we still have a little bit of fire power left should we get back. But when I look at some of the major markets, the UK perhaps is a very good example of that, we are really not that far off those previous lows, and so a number of companies that we really want to be invested in are now looking pretty attractive.
Petroff: Okay. So let's talk about the companies that you are really liking right now. You have three picks. So let's go over the first one, which is eBay (EBAY).
Rogoff: Sure. So eBay, I'm sure most of your viewers know the company. It's a very well known e-commerce provider, famous for their auctions but really not so much these days. Anyway, eBay has been a tricky stock relative to someone like an Amazon (AMZN) over the years which, by the way, we own as well. The reason being, primarily, that its marketplace, it's core business, had struggled to keep up with overall e-commerce growth.
So in the background, there was this very interesting asset, it was PayPal, which again many of your viewers will know. PayPal had been eBay-only payments application. But now has moved off eBay and we'll talk about that in a second. Very attractive asset, but the core asset wasn't really behaving. In more recent time, new management, but also the advent of tablets--tablet computing with the iPad--we believe has given the marketplace business a boost. So now it looks to us like that business can grow again back in line with e-commerce, which continues to grow very nicely its share of US retail sales. So with that in mind, plus this wonderful PayPal asset where we feel people will start to transact in bricks and mortar in stores with PayPal over time. We think is an interesting set up.
Petroff: Now let’s go over your second choice, that’s Salesforce.com (CRM).
Rogoff: Just saw the company earlier this week. We have been invested in the company since its IPO. For those who don’t know this company, it’s an enterprise software company, that delivers its software not via compact disc or CD-ROM I should say, but the cloud. So they have the software hosted in their data centers and they use the Internet to deliver that to people who have browsers. It started off as a small/medium business, a focused company, but now it’s moving into enterprise. The company signed its biggest ever deal two quarters ago. My sense is that the cloud, this idea of delivering applications via the Internet, is hitting a very key inflection point and this company is the poster child, in my mind, of that trend.
Petroff: Okay that sounds good. Now Radware (RDWR) is your third choice and that’s based in Israel. So I haven’t heard of that. You’ll have to tell me a bit more about that one.
Rogoff: Certainly, so Radware operates in data centres. So it sells equipment into data centres, which is where a lot of the computing is gravitating towards because of the cloud. What Radware does is they sell something called an application delivery controller, an ADC. But effectively what that is, it’s a box with software on it. It sits in front of the server and it makes sure that the applications that are being delivered from the server will be resilient. So if tons of people come along and try to use the application at the same time, it won't fall over, the server won’t fall over. So it’s a bit like a safety valve in the data center, in a sense.
Radware is a number two, number three player depending on what geography you look at. The stock is very poorly covered, less than GBP 1 billion market cap. I think only three or four analysts cover the stock. Growing like a weed and rumours of an interesting tie-up with Juniper would really get this stock moving, but we feel that even without that, the valuation is very attractive.
Petroff: Also, potentially a buyout candidate.
Rogoff: Yes, I think so. It’s in a strategic area. I mean, ultimately one of the things that excites us about the tech space today is this concept that we are going to move away from enterprise-based computing to data centre or cloud computing. Radware fits very nicely into that theme. So consequently, yes, I would have thought that it could be easily be a takeout target.
Petroff: Okay, now let’s discuss the three key risks, one key risk per company.
Rogoff: Sure.
Petroff: eBay first.
Rogoff: Yeah, eBay’s key risk will be that the market, or I should say that the macroeconomic conditions, deteriorate. E-commerce trends deteriorate with that. That would drag down the core business, which would somewhat upset the sum-of-parts calculation that we have put together.
Petroff: New entrants potentially in the PayPal space.
Rogoff: Yes, that’s a very fair point. I mean PayPal is in pole position if you like as an alternate payment provider, but there are obviously lots of others, like Google (GOOG) for example, trying to get in there and it’s still very early days.
Petroff: Salesforce.com?
Rogoff: Well there I think the risk would be primarily related to market sentiment. I mean, the company at two billion or thereabouts run rate is still growing bookings at 29% in a very difficult macro. But when we had that difficult period back in ’08, ’09, a whole bunch of secular growers that we favour did struggle to keep those growth trajectories at the same rate because of the macro. So I think with Salesforce.com, the key risk there is that the macro slows their rate of growth.
Petroff: Okay, and Radware?
Rogoff: Radware, again some of the same, company also will feel the impact of a very bad macro environment and then there is the whole kind of just potential risk-off attitude from investors. It’s a smaller cap company and often small-caps trail in a tricky take because investors gravitate around those stores of wealth, like the IBM’s (IBM).
Petroff: Okay. Thank you very much for joining me today.
Rogoff: Pleasure.
Petroff: That was Ben Rogoff from Polar Capital and to see more Fund Managers’ Favourites, you can look at the links below this video.
