“This time it’s different” is a dangerous phrase in investment, but Margaret Vitrano, manager of the Legg Mason ClearBridge US Large Cap Growth fund, is adamant there are fundamental differences between the tech companies of today and those which crashed the market when the dotcom bubble burst at the turn of the century.
“Back then, companies had users and user growth but they weren’t making any money. The difference now is that businesses such as Google and Amazon are very profitable,” says Vitrano.
Some 37% of the fund's portfolio is in tech stocks – rougly in line with the benchmark, the Russell 1000 Growth index – and the biggest names in the portfolio will be familiar to most investors: Amazon (AMZN), Facebook (FB), Microsoft (MSFT) and Google-owner Alphabet (GOOG). The three-star rated fund has produced annualised returns of 20.3% over the past three years.
But, with markets turning more volatile and the economic cycle reaching its later stages, Vitrano is becoming wary. Tech valuations are no longer as compelling as they once were.
Fully Valued
A year ago, she was finding opportunities in the mid-cap part of the market, in names such as software firm Adobe (ADBE) and firewall developer Palo Alto Networks (PANW), but even they are now looking “fully valued”.
“Tech is still very good but it’s no longer extraordinary,” says Vitrano. Indeed, Apple (AAPL) has reported slowing sales in recent months and so, too, have semiconductor companies. “Over the last few months, we have been trying to make the portfolio more balanced.”
Vitrano is mindful of an economic slowdown. The trade war between the US and China could cause prices to go up, which would slow consumer spending, while the uncertainty around how the tariffs will play out is likely to stop businesses expanding and investing – both would likely weigh on GDP growth in the US.
That’s why she is looking to names such as Advanced Auto Parts (AAP), which was added to the portfolio in the first quarter of the year. The car parts provider stands to benefit as new car sales slow: “If you believe people will buy fewer cars then they need to fix things on the ones they have.”
Healthcare firms should also prove resilient, although they come with some political risk. United Healthcare is an insurance group “doing some really interesting things”. The firm, for example, is working to ensure its customers take any medication they are prescribed every day as that reduces the likelihood of them having to go to hospital, which keeps costs down.
Businesses such as payments provider Visa (V), which has been in the portfolio for 10 years, should also provide ballast in a slowdown. Even if consumers are spending on staple items rather than luxuries, it still benefits. Visa is also a major beneficiary of the structural shift away from cash payments to card and contactless options. “Around half of transactions are still made in cash so it still has a lot of headway to make,” she adds. Healthcare accounts for 11.2% of the portfolio, cyclical consumer firms 15.6% and financial services 11.8%.
Recent Additions
But Vitrano, who was previously an analyst in the tech sector for six years, remains positive on technology for now. She favours companies with subscription models – these tend to have a sticky customer base and high level of recurring revenues.
Recent additions to the portfolio include computer graphics firm Nvidia (NVDA) and cloud computing company Nutanix (NTNX).
Controversially, she has also been adding to her stake in Facebook, sensing an opportunity when the firm fell out of favour after the Cambridge Analytica scandal last year, when concerns were raised about user privacy. “We did some work on the durability of the business and found that, while it had been an unfortunate incident, user engagement on the site had remained consistent,” says Vitrano. “Hopefully the worst is behind them.” The holding accounts for 5.3% of the assets.
While many of the high-profile tech IPOs are too small for the fund to participate in (it focuses on companies worth at least $5 billion) she has invested in food delivery app Grubhub (GRUB), which listed in 2014. It’s a fiercely competitive space but one that has huge growth potential, she says.
While one eye is on providing balance and downside protection, Vitrano’s growth remit and US benchmark means she’s still keeping a hand in the technology sector. “We don’t invest in companies that are not profitable or don’t have a very clear path to profitability. We hope that will keep us out of trouble.”
