Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Richard Clode, Manager of the Janus Henderson Global Tech Fund.
Hello.
Richard Clode: Hello. Good morning.
Wall: So, tech fund, what does tech stock mean to you? Because it's pretty open to interpretation these days, isn't it?
Clode: I think technology has changed in many ways over the last 20 years and it's just become a bigger part of our lives and as a result, it's disrupting larger portions of the economy. I think we've seen what it's done to retailing. We've seen what it's done to the traditional media industry. And now, with artificial intelligence it's impacting the consumer companies, industrial companies, healthcare companies and financial services as well.
And so, our definition of a tech stock has to change. But we are still looking for the same things, which is, great growth opportunities, secular growth longer-term, some key barriers to entry that mean that that company can make profits longer term and then not to overpay for it. And again, I think, there will always be hype in technology. That hasn't changed. And our job as technology managers is to protect the clients from that and the volatility that comes from that sort of hype.
Wall: So, with that definition in place, does that mean that Amazon is still very much a tech stock rather than a retail stock because of the growth opportunities there?
Clode: Yes. And the way they are using technology to create that disruption and to disrupt these new areas like healthcare, like the cloud and now increasingly financial services, too. Yes, they had to put in $150 billion of investment in the last 20 years to redefine that consumer experience, that retail experience, but also create the cloud infrastructure that they have today which is powering the vast majority of their profit growth with AWS [Amazon Web Services]. But yes, we very much see that as a technology company that leverages technology to then go, and as Jeff Bezos puts it, your margin is my opportunity, go and take profits from all these industries that have yet to be disrupted by technology.
Wall: And you said at the beginning that the growth sector has grown incredibly over the last couple of decades. How much of it is still, when it comes to making investment decisions, dominated by those FANG stocks, by those big classic now household names and how much of it is about kind of unearthing the new disruptors?
Clode: I think it's a bit of both. I mean, on the one hand, we've seen this winner takes most. There is this kind of network effect, platform effect of being a consumer-facing internet company, whether that be in social media or ecommerce and you are seeing the big getting bigger there. But on the other hand, there are more nascent sort of areas of technology and those companies will by definition be smaller and hopefully will then be much larger longer term and there are still a lot in the middle which I think people sort of forget about that they are always talking about this new great growth opportunity, these companies that know FANG, that a lot of what we do is in the middle where there's some unexpected earnings growth, having to pay too much for it and those stock can perform very nicely for you without having to pay Amazon like multiples or to be stuck in value traps. There's a lot in the middle.
Wall: And what about when it comes to IPOs? Because tech more so than any other sector seems to be getting new companies coming to the public forum. How do you decide as a tech investor whether to engage in those IPOs or whether to leave some of these quite incredible valuations alone?
Clode: Yes. And actually, surprisingly for a lot of people we are seeing some of these companies come to market at valuations below their last private round. And we feel that actually a lot of the hyped valuations have been in the private arena where there has been a lot of capital chasing a smaller selection of opportunities.
I think what we try and do is, we don't meet these companies for the first time when they IPO and they are being sort of made to look as beautiful as possible by the investment bankers. We spend a lot of time meeting these companies in private land, looking at some of the private rounds and not often participating.
I first met Jack Ma, I think, in 2006. And then when he IPOs in 2014, you have a lot more history than when the investment analysts are coming and saying ‘these guys can grow a certain amount and you should value this company a certain way’. We have the history of the corporate governance, of what they did with Yahoo! and SoftBank, the growth expectations we have seen about the Chinese internet companies and the sustainability of the franchise, we think that we have better sort of insights into that and can make our own judgements rather than relying on the sell-side for that. And I think we try and do that with all of these new IPOs that come and that's why we are actually very selective.
Wall: Richard, thank you very much.
Clode: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
