The technology sector has been on a bit of a tear and valuation concerns are on the rise, but Alan Tu forecasts more robust growth for the TD Science and Technology fund that he leads. Tu, based in San Francisco, is vice-president and portfolio manager, Global Technology Equity Strategy, for T. Rowe Price Associates Inc., a subadvisor to TD Asset Management Inc.
“Because technology is gaining share in the economy,” says Tu, “and the value that’s being delivered by digitalization of everything is accelerated, we still think there’s a lot of growth ahead of us.”
Of course, at times there’ll be pullbacks and rotations in the shorter term. Yet, “over a multi-year time period,” says Tu, “I still am bullish that we can continue to generate double-digit returns even in this environment that’s more frothy.”
How to Find Value in an Expensive Sector
With the premise of the technology trend continuing, the goal of the investment strategy is to identify companies that are ideally earlier in the life cycle and have the opportunity to become much larger over time. That time frame is a two-to-three-year horizon or longer when initiating positions in the fund. When the investment team looks at the price targets for companies considered to have high-durability for growth, they think that valuations are reasonable in some cases.
According to Tu, who has managed the fund since April 2019, the average portfolio turnover of approximately 75% is related to managing the positions and risk and does not reflect the core investments, that are typically held for much longer.
The predominantly bottoms-up, fundamentally driven stock picking is paramount to risk management and long-term performance in the mandate. During the research process, Tu draws on the experience of a broad, global team of U.S. and internationally specialized analysts.
In positioning the fund, risk management is paramount. “I think through history,” says Tu, “whenever technology gets into trouble, it’s when they over promise and under deliver. We’re focused on the fundamentals of the companies we’re invested in so they’re actually delivering the value that they promised.”
The Three Tech ‘Buckets’
The portfolio is made up of approximately 50 holdings, plus a “very long tail” of positions that include small private companies. Tu says the fund is very flexible and spans companies that might only be $1 billion in market cap, all the way up to the largest companies like $1 trillion Amazon.com Inc. (AMZN), which is among the top holdings. Characteristically, the fund is weighted about 75% in U.S. companies. Diversification across the subsectors and businesses is considered essential to risk management.
In terms of sector weights, with an approximate 65% weighting in technology, Tu focuses on the “three big buckets” – software, internet, and semi-conductor businesses. According to Tu, one of the reasons that software represents such a prominent role is that every business and enterprise is trying to develop a digital relationship with their customers. “I believe,” says Tu, “that we’re still in the early innings of that development. I think that’s a very mega trend when we have these Cloud software companies providing a lot of value and where we’ll see a ton of growth in the coming years.”
Stocks in Focus
The top holding, Zoom Video Communications Inc. (ZM) illustrates that investment approach. Zoom is an example of a company where the investment team got to know the management before the company even became public. “Zoom was a poster child of the coronavirus pandemic,” says Tu, “and we think the company’s global ubiquity and market share is extremely unique. Zoom and COVID-19 were a once-in-a-generation type of dynamic, but with their product-driven team and R&D engineering, the company continues to pay dividends as they expand to new products.”
Shopify Inc. (SHOP), a Canadian-based e-commerce platform for businesses, is favoured among the top holdings. “Shopify,” says Tu, “is really one of the most impressive management teams that we’ve invested behind. They really capture a lot of the invest style to power e-commerce for many small-to-medium size businesses, and increasingly larger ones as well.” In addition, the company is helping to enable e-commerce outside of the large platforms like Amazon.
Also favoured is Roblox Corp. (RBLX), a gaming company that predominantly focuses on younger players. “What’s very exciting about this gaming platform,” says Tu, “is that it’s much more like a social media company than a gaming one.” Differing from traditional game companies that have to come out with more and more games, Roblox has created a platform of games and experiences similar to YouTube. The content is created by other people and incrementally more users attract more people to create. Similar to social media companies, a lot of kids go on the platform just to hang out, even if they’re not interested in specific games. “So it just becomes much more sticky,” says Tu, “and less of an internet business and much more of a platform with many network effects.”
