DNB Technology - Portfolio Manager's commentary 08/2014

Fantastic 2013; 2014 also decent, a good year but more in line with the markets.

2013 has been an exceptional year with a performance of almost 40 per cent. This year a bit more normal with seven per cent return so far. More generally speaking, I would say that large companies have been performing very well: we have Apple, Microsoft and Hewlett-Packard as very strong performers this year. And we have also big deviations between the different sectors, telecommunications being the weakest and technology being the strongest.

There has been a lot of talk about bubble pricing. What is priced high what is priced low Sverre?

There has been a lot of talk around the pricing of the technology sector. If you look at the overall tech sector, it is priced in line with the overall market at 16-17 times earnings but it is growing faster, so we think that’s fine. We think it is an attractive place to invest. However saying that, there are certain areas within the technology sector - cloud computing and parts of the Internet - that trade at elevated multiples. Those stocks corrected sharply at the beginning of the year and have regained a little bit now, but we still think that they are grossly overvalued. However they represent only a very small part of the technology sector, so one shouldn’t draw the conclusion that the overall sector is expensive.

Apple, one of the world’ s most recognised brands. Still growing?

Apple is a very interesting company, both in terms of the products but also in terms of valuation. Apple is now trading at between 11 and 12 times this year’s earnings, which we find very attractive for a company growing earnings at close to 10 per cent annually. One of the very positive aspects: Apple has very high customer retention; very few people are leaving them to move to the Android Ecosystem. This year in particular, there is a very interesting product cycle with phones with larger screens as well as a watch coming later this autumn, which we think is not fully reflected in the earnings estimates. The combination of estimates moving up and low valuations is, we think, very valuable for the stock.

You have been buying a lot of Oracle this summer, and also Yahoo is one of your favourites.

Oracle and Yahoo are two very different investments for us. To start with Oracle, as Anders mentioned, we think it is one of the large cap US companies which are very attractively priced. It is priced at around 12 times earnings, and earnings are growing in the 5 to 10 per cent range currently. There are excess worries around the competition for cloud computing, but we think that they will hold their share and do well over the coming years. That makes this a very attractive investment for us. Yahoo, on the other hand: we own that for their ownership stake in Alibaba group. Alibaba group is the largest e-commerce company in China and it is coming to the market in the next weeks. We think that the valuations of Alibaba group are not reflected in the Yahoo share price. We think that there is low risk and high upside in Yahoo at these levels.

There are a lot of things going on over the world. Crisis in Ukraine and Russia, and China is not necessarily doing that well, can technology stay away from the broad market?

There is a lot of instability around the world. About Ukraine and the Russian crisis: I think the risk for tech, which is a very international sector, is obviously there. The main risk will likely be that market share could shift from Western companies to Chinese companies and that there will be a closer tie between Russia and China if this crisis persists. So that is obviously a risk. When it comes to the Chinese market, in particular the macro risk has been around for some time. We think it is still around. We still invest in attractively priced Chinese companies and companies with exposure to China that have a favourable valuation. But there is obviously a macro risk from the Chinese end markets.

Are you positive to technology going into the second half of 2014 and also with regard to outperformance?

As Sverre mentioned earlier, when it comes to pricing, the sector has still a very high risk premium, which is good. Interest rates are still very low and the larger companies within tech are very attractively priced compared to the structural growth we see in the industry, so we are still on the positive side when it comes to valuation and the opportunities in the sector.