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Ben Rogoff, fund manager at Polar Capital Partners, kicked off Day 2 of the Morningstar Investment Conference with a presentation on the new cycle in the tech sector that did justice to the speed and enthusiasm with which the sector itself is usually associated. His key takeaway was that investing in technology is not for the general or index investor; you really need to pick companies that are poised to take advantage of the latest technology developments and achieve growth.
We are at a new cycle for the technology sector, which will be nothing like the previous one, was one of Rogoff’s starting points. The 1990’s, he explained, was all about building up company’s IT capacity. Currently about 80% of companies’ IT budgets goes towards maintaining that infrastructure and this is an expense corporates will be looking to reduce.The subtext of the new cycle in technology is all about “reallocating your IT budget,” explained Rogoff.
He went on to explain how cloud computing, virtualisation and mobile technology are the pivotal new developments that will benefit from this trend. That threatens incumbent traditional enterprise companies in the current environment. As Rogoff put it, their market shares and profitability are “dropping like a stone.”
So three key technologies to look out for. Firstly, cloud computing. The principle way to drive down cost in IT is to reduce clusters of hardware and begin consuming software as a service (SAAS). Unfortunately this bodes poorly for workforce employed in IT, which makes up 3% of the UK workforece. Internationally, and in emerging markets in particular, the combination of rising wages and the existence of technology that reduces labour costs presents an opportunity for tech investors, Rogoff pointed out.
Rogoff anticipates that more and more companies will became fans of the idea that you can concentrate your IT resources in one or two data centres and deliver it to users across the world, meanwhile cutting the percentage of IT people working on the ground. This process turns IT into a service, rather than a good which needs to be purchased, installed and maintained. This dynamic can materially increase the size of the overall IT market and materially disrupt the business model of incumbents, is the view that Rogoff takes. He also anticipates M&A occurring in IT/cloud computing space at an unprecedented rate.
His second key theme was broadband application, facilitating the transition from offline to online in anything from advertising to reading novels. Internet-based news and advertising have been taking market share from newspapers, and from television.
The proliferation of software as a service is something Rogoff is most excited about. This is a process in which the traditional licence-based software markets of today will be replaced by delivering software via the internet and effectively taking away a link in the distribution chain. As such, this is going to be “very tricky” for incumbent IT providers.
Rogoff’s third key theme, mobile computing, is yet another nail in the coffin of incumbent players on the IT market. Smart phones, tablets and the iPad are effectively ending the PC and Intel monopolies, observed Rogoff. Battery life has become a more important consideration than who has made the chip on your machine. Wi-Fi is quickly becoming the norm and Wi-Fi providers are the ones to watch now. Rogoff made a crucial point here: when things change in the IT sector, they change for good. Innovators find themselves in a dilemma, as they need to both produce new products all the time and reconcile with the fact that product prices in this sector are constantly falling.
Speaking of large incumbents that have become uncompetitive, Rogoff highlighted Nokia as a case study. Nokia is like “the maker of the black and white TV the day colour TV was invented,” he said. Nokia doesn’t have 32% of the smart phone market at present, it has 32% of the non-smart phone market, he added, noting he counts a smart phone as a computing device that people can also make calls on.
This brings Rogoff back to his initial point – the tech sector does not perform uniformly. Value is not a good metric to track; rather it is all about growth potential, which leaves tech investors owning shares that may be more expensive than the average, something of a valuation conundrum, in Rogoff’s words.
To a question from the audience about opportunities in the tech sector outside the US, he said: “Europe is a sad state of affairs” but he expects to see more money moving towards Asia. That said, “China is the wild west,” he said, you need a “shotgun approach to investing there,” due to high risks so Rogoff recommends investors don’t have more than 50 basis points in any one Chinese tech company.
