Ben Rogoff of Polar Capital
Investment themes and ideas should take precedence over valuation, according to Polar Capital’s Ben Rogoff, who warned that a “value first” approach could result in buying less-than-attractive stocks.
In particular, he highlighted the importance of not investing in tech companies in the “final stage of the lifecycle”, which may appear cheap on a price-to-earnings (P/E) basis and have delivered strong growth over the years, but have gradually become stagnant.
The manager, who runs Polar Capital’s £41m Global Technology fund, its closed-ended counterpart the £2bn Polar Capital Technology Trust and the $401m Automation and Artificial Intelligence fund, which was launched in October 2017, likened his process to an everyday retail experience when addressing roughly 420 delegates at AJ Bell’s Investival conference this month.
“When we walk into shops, fortunate enough to have money or plastic in our pockets, we do not select goods on the basis of how much they cost. We try to identify what it is we need and want and then we work out if it is at the right price.”
He said he has frequently witnessed fellow managers claiming to be “value first” and screen-dependent, but he took issue with that approach.
“For us, the first step you take is identify what the key trends and themes are that you need exposure to in the portfolio; meet the companies, get comfortable with the stocks and the themes, and then ultimately work out if you are happy with the ticket price.”
He said fund managers often boast about running their winners but he said a disciplined approach to cutting the losers in a fund, and “recycling” those holdings back into the portfolio, was “one of the best ways of winning in the stockmarket”.
Given the technology life cycle, he said avoiding value traps was a crucial element to being a successful tech manager, as was not investing too soon into a theme, and remaining cognisant of the non-linear way that change occurs.
“If you had done that in the 1990s in the internet, you would have been forgiven because look what it has done 20 years later.”
While most of the first-generation internet companies fell to zero after the dotcom bubble, Google entered the frame – which no one had heard of in the late 90s – and “scooped it all”, and is now responsible for 90% of all online search activity.
When Google listed in 2004, it was trading on a forward price-to-earnings ratio (P/E) of 80x with a market capitalisation of £23bn.
“It was not a very popular IPO. In fact, it was downsized – with fewer shares sold than were in the original plan. Partly because it traded on a forward P/E of 80x,” said Rogoff.
“What we now know is that Google has more than $100bn of net cash on its balance sheet and today, would trade on a P/E of less than 1x if you went back to the day of its IPO, because change happens in a non-linear way.”