Technology stocks have had a great 2020, but even enthusiasts would probably admit that we may be nearing the peak of the short-term cycle.
That said, many of us will continue to build our exposure to the big multi-decade tech driven cycles, in most cases by focusing on collective funds as a way to improve diversification. This month I have some suitably adventurous alternatives to the popular choices in my portfolio, such as Scottish Mortgage Trust (SMT).
This impressive investment trust holds some fairly idiosyncratic positions. If we look down its top holdings there are hefty bets on Tesla (10.8 per cent), Amazon (7.3 per cent), Alibaba (6.3 per cent), Tencent (6.2 per cent), and Meituan (4.3 per cent) — five holdings that add up to 35 per cent of the fund.
To date, the fund’s managers James Anderson and Tom Slater have delivered on those bets, especially when it comes to the expanding list of privately held companies in the fund. But if some of the quirkier components — perhaps Tesla — make you a little concerned, you might take a look at Manchester and London, a global growth equity fund.
This investment trust is, I would argue, a much simpler way of speculating on a core handful of big global tech platform and aggregator platforms. Like SMT, it is actually a growth equity fund which happens to be obsessed with tech, though that doesn’t stop the manager Mark Sheppard from venturing into stocks such as LVMH or Disney.
What differentiates this much smaller fund, with a market cap of £240m, is that it takes a very concentrated bet on just a handful of well-known global tech platform stocks. The top five holdings are Microsoft at 14.5 per cent of the fund, Alibaba at 14 per cent, Amazon at 14 per cent, Alphabet at 8.8 per cent and Adobe at 7.8 per cent. That means the top five account for 60 per cent of the portfolio, while the next three biggest holdings, Facebook, Salesforce and Tencent, add up to another 19 per cent.
Another distinguishing feature is that its manager, Mr Sheppard, has lots of skin in the game, since he owns about half the fund, which started many decades ago as a family investment vehicle before becoming a global growth vehicle in the last decade.
The fund also eschews unlisted private equity businesses (unlike SMT) and makes innovative use of puts and calls to generate a steady income: this is running at just over 2 per cent a year compared with SMT’s sub-1 per cent dividend yield.
In performance terms, Manchester and London is a considerable distance behind SMT. Over the past five years the fund has produced 145 per cent NAV returns (versus 328 per cent for SMT) and over the past year 18.8 per cent versus a stunning 108 per cent for SMT. Those returns are impressive, but the latter has made much bigger gains in part because of holdings such as Tesla — which attract more than their fair share of critics.
I’d continue to hold Scottish Mortgage, but will look to use Manchester and London as a useful diversifier, giving me much cleaner, more concentrated access to giant tech platforms, especially in growth markets such as China.
I am also focused on the life sciences revolution, especially in genomics research and cancer treatments, where I believe we are on the brink of a huge leap forward. You can access these ideas through listed biotech stocks and their accompanying funds such as BB Biotech, but I think the most interesting ideas are in private venture capital.
I’ve consistently aimed to have between 10 and 20 per cent exposure to this difficult-to-access, illiquid space, mostly via listed UK life sciences business Syncona, an investment trust. This is a FTSE 250 company, building a portfolio of early-stage businesses as well as later-stage companies that have either listed or are about to.
Ideally, though, I would not be so reliant on one firm and its managers’ decisions. One alternative I am looking at is a listed biosciences investor called Arix, which came to the market in 2017.
By my count, it has 11 businesses in its portfolio, many of which seem focused on cancer treatments, while the fund boasts a total market cap (at 149p a share) of just above £200m. Managers recently gave some very clear guidelines for its expected portfolio returns over the next two to three years: two to three initial public offerings and at least two exits, an annual internal rate of return target of 15-25 per cent and a net asset value of £500m by 2023.
These sound challenging and the market has had its doubts over the past few years, resulting in discounts that have remained stubbornly in the 40 per cent region. But that all changed in November when it announced that one portfolio business VelosBio (where it has a 7 per cent stake) had been sold, netting a profit of £142m or a 12 x return. That is equivalent to a 89p increase in NAV share on one deal alone. Another portfolio company, Artios, has announced a strategic collaboration with pharmaceutical company Merck.
Given these developments, analysts have suddenly started revising up their estimates for Arix. Peel Hunt set a new target price of 267p, while Shore Capital has a revised 226p fair value assuming a 15 per cent discount, which also includes its estimate of 137p of cash.
My last, even cheaper, technology alternative play is Prosus, a Dutch listed technology VC investment fund — and probably the biggest European tech leviathan you’ve never heard of.
Trading at €92 a share on the Dutch exchange and valued at around €150bn, it came to market in 2019 via parent Naspers, which retains a controlling stake in the business. Many moons ago, this South African media giant invested in China’s Tencent, before it became a giant.
It still holds a 31 per cent stake in Tencent, but over time has built stakes in other valuable tech businesses, as well as a bigger portfolio of early-stage venture capital tech investments in classifieds, food delivery and fintech — and has now placed all of them inside Prosus. The portfolio includes businesses I’ve never heard of (Zooz, for instance) plus a few outfits that I think could be huge wins, such as fintech PayU in India and online education businesses including Udemy and Code Academy. I counted 28 of these smaller ecommerce focused platforms.
Prosus invested $1.3bn in its venture portfolio in 2020 alone, helped by cash on the balance sheet of $8bn. So in one stock you get a diversified portfolio of early-stage ecommerce businesses plus a handful of mature global companies.
My rough calculations make Prosus worth between $230bn and $250bn, versus a market cap of €150bn. There are perfectly sensible reasons for the discount, not least the dominance of Naspers in the shareholder list plus the usual question marks over investing in China and early-stage private investments. But risks aside, I will be buying Prosus for that supersized bet on China tech and for the focus on ecommerce.
David Stevenson is an active private investor and has interests in securities where mentioned. He is a non-executive director at Gresham House Energy Storage. Email: email@example.com. Twitter: @advinvestor
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