Mr Judith, DNB Asset Management has a successful tech fund, DNB Technology. What makes its strategy special?I would say that fund managers need to have strong nerves along with an excellent knowledge of the sector. Sometimes they have to swim against the current to be successful over the long term. Anders Tandberg-Johansen and his team have recently demonstrated what this means. Even though the markets were in turmoil, the team knew how to distinguish the important information from the hype.
The same situation applied at the beginning of 2012, when we reduced our position in Apple and picked up more Nokia. Apple shares rose to $705/share and Nokia plunged to a low of $1.63/share, and it was not easy to wait out the situation. But now, at the end of February 2013, Apple shares are at $442 and Nokia is at $3.83. The fund managers earned well on the subsequent Nokia sale. As you can see, patience and market savvy pay off over the long term.
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Invitation to our lunch presentation
Technology: Innovation meets returns. In future as well?"
19 March 2013 in Le Méridien Parkhotel, Wiesenhüttenplatz 28–38, Frankfurt am Main, Germany, 12.30–2.30 p.m.
Please contact us for further information.
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The fund has outperformed over a ten-year period, but 2012 was a below-average year. What happened?
If you look at the balance sheet on a year-by-year basis, you will see that last year, our portfolio actually performed 6.3% lower than its benchmark. At the same time, you have to admit that trends like the ‘cloud computing boom’ and ‘the run on smartphones’ were the decisive growth themes that caused investors to lose sight of some solid value shares in the tech sector. This put temporary pressure on our positions, but we were so convinced we were right that we stuck to our guns during the course of the year. Around Christmas, we were rewarded for our tenacity – December 2012 and January 2013 marked a return to outperformance.
Since the beginning of the year, the fund has delivered 6.65% after costs, putting it nearly 3% ahead of the index. In December, REC was the top performer at 33%. While demand for polysicilium has remained constant, the competition has had to scale down. Nokia and Netgear have increased by 15% and 10%, respectively. On the one hand, the Windows 8 phones have exceeded expectations (which were lukewarm to begin with); on the other hand, Nokia successfully concluded new licensing agreements in China and Russia. We have also profited from Nokia’s deal.
What do fund managers look for when selecting stocks?
Attractive ratings, strong management qualities, good competitive positioning and trends are what count. These are all key elements of our Bottom-up Stock Picking process, which also determines the sector positioning. The top overweights – Pactera Technology (7.9% of the fund volume), Gameloft and Opera Software – underscore the fact that this process has earned its name. We believe that the current market price does not properly reflect the companies’ strong growth prospects. Both Opera and Gameloft are perfectly positioned to benefit from smartphone growth: the demand for gaming, mobile browsing and mobile advertising products is on a strong upward trend.
Which tech values are you optimistic about for the near future?
I think that value stocks in the tech sector are poised to experience a permanent revival. And anyway, we have kept Google (6.3%), Apple (5.4%) and Microsoft (5.3%) in the portfolio. However, since Apple is responsible for over 10% of the index, it is slowly but surely becoming a candidate for our list of top underweights. We have another underweight with regard to the benchmark: 68% of our investment is in North America. And while we also remain underweighted in Asia, we currently have overweighted Europe.
As far as you are concerned, what are the most important developments in the tech sector?
A prerequisite for the successful management of stocks in the technology, media and telecommunications areas is the ability to recognise and properly assess long-term developments – the so-called mega trends. It is also important to recognise the significance of these trends for the companies in the sector, and to choose those companies who will benefit the most from the anticipated development. The assessment of these companies is an additional criterion that many of our competitors tend to downplay.
One mega trend, for example, is television via the Internet. This will allow providers to track consumer behaviour and tailor their marketing to individual needs: ‘mass customisation’, which will allow mass products to be adjusted to customer-specific requirements. This method offers enormous revenue potential to companies. Google, Apple, Microsoft and Samsung all want to be the leader in this market. Television is expected to become a seamless experience that takes place on all devices: you can begin to watch a film at home on television, then go out and continue watching on your mobile device or iPad – starting where you left off. In this way, providers are transferring the YouTube concept to across-the-board media consumption.
The rising number of smartphones in the ‘emerging markets’ is a mega trend that will lead to a dramatic increase in data communication. Manufacturers of network equipment, such as Netgear, will benefit from this trend. Advertising on mobile devices will also become more attractive, which in turn will benefit Google.
Another important trend is the conversion to cloud computing. For example, this will allow computer game developers to distribute their content freely to a variety of end devices with no fixed cost barriers – to the detriment of console manufacturers. We are also continuing to monitor the growth and commercialisation of social networks and the conversion to the digital provision of messages and the resulting decline in demand for printed materials.
In your opinion, which tech sector companies are the most interesting ones?
The development of HiSoft and VanceInfo was particularly interesting: both companies were already showing strong fundamental data, high upside potential and attractive ratings. In November 2012, the two companies merged to form Pactera. Because the global IT consulting business is holding its high growth rate of around 30% – and remaining highly profitable in the process – Pactera is an exciting value.
Another interesting company is Gameloft, the world’s largest developer and publisher of video games for mobile devices. The company recently presented record profits and turnover – very impressive. One of its keys to success is that, due to the general pervasiveness of mobile end devices, the entry barriers for new products are relatively low. And low fixed costs mean high profitability. The company is safeguarding its excellent market position via the intelligent cloud solutions mentioned above and a demand-compatible product range.
About the fund manager
A portfolio manager at DNB Asset Management since 1998, Anders Tandberg-Johansen has many years of experience in the technology and telecommunications areas. Before starting at DNB, he worked as a sell-side analyst for Norwegian technology values at Enskilda Securities. Mr Tandberg-Johansen has a Master of Science degree in Business Administration from BI Norwegian School of Management in Oslo, Norway.
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