The biggest technology wipeout since the tech bubble in 2000 is producing some “amazing opportunities” to choose quality technology stocks that are being dragged down in value, according to John Donnelly, managing director at New York based asset manager Jennison Associates which has around $214 billion of assets under management.
Sentiment is “absolutely horrible” right now towards technology stocks, Donnelly said, speaking at Conexus Financial’s Fiduciary Investors Symposium held between May 23-25 at the Chicago Booth School of Business, in a panel discussion looking at technology and its role as an enabler and a disruptor.
But with hundreds of billions in value wiped from the NASDAQ this year, Donnelly said there are particularly good opportunities for investors in software. Cloud computing is “less than 30 per cent penetrated by any measure” and there is strong, ongoing growth in giants like Amazon Web Services, Microsoft Azure and Google Cloud Platform, he said.
Despite falling in market capitalisation, the world’s top 25 software companies have strong revenue, high customer retention rates and the ability to grow with their existing customer bases “without adding one dollar of sales and marketing,” Donnelly (pictured) said.
“These are still the best business models on the planet,” Donnelly said. “That didn’t change just because we had a liquidity induced bubble.”
E-commerce is a tougher area, he said, with a plunge in low-end consumer spending after strong sales during the pandemic. Consumers are returning to physical stores now that lockdowns have been removed, and there is a shift from buying goods to experiences as consumers are fatigued on buying goods, and these trends are working against e-commerce, he said.
“So the growth in e-commerce is going to be more linear and you don’t have that accelerating S-curve type growth where you hit the adoption point in the curve,” Donnelly said.
Subscription businesses like Netflix are also “more penetrated than people think” leading to weaker growth in subscribers, he said.
Donnelly also pointed to enormous promise in blockchain and the applications that will be built on top of it, although we don’t yet know what the winners will look like, he said.
“There’s too much young talent going into the space for this to not be real,” Donnelly said. “There will be a killer use case that evolves, and comes out of nowhere. We don’t know exactly what it is today. And when that happens, there will be a lot built on top of it and then the use cases will start expanding.”
technology as a disruptor
Also speaking on the panel was Brandon Gill New, director and co-head, multi-strategy investing and digital assets, at $25 billion Canadian Pension Plan OPTrust
OPTrust has a digital assets sleeve with a team of three, which Gill New described as a “risk mitigation strategy” in anticipation of digital assets being a “very disruptive asset class to capital markets” and an important asset class for the fund to better understand.
“It’s not about just Bitcoin, it’s about all of the technology behind it that is actually quite innovative,” Gill New said. “There is a serious amount of momentum behind it and it is a bit of a revolution that’s bubbling up and we want to make sure that we understand that really well, and we’re mitigating any risks in our portfolio certainly around that.”
The tokenisation of private assets is set to dislocate and disrupt real estate markets and other private markets, she said, with tokenised real estate holdings no longer requiring a single cashed-up buyer.
“You can actually chop that up into little pieces and actually, you know, invest in real estate in a very liquid way and that’s obviously something that our real estate team needs to understand,” Gill New said.
The disintermediation of asset exchanges and the displacement of brokers is also a significant trend the fund’s private equity and private markets team needs to understand, she said.
Ali El-Annan, head of technology at SWIB which has around $165 billion in assets, described how the asset manager had created a data science team which produces various analytics and automates aspects of the fund’s asset allocation process.
“You’ll hear me use the word ‘automated’ a few times, [about] different things in our asset allocation process, and what that does is, it reduces operational risk,” El-Annan said. “It frees up our investment staff to focus on things more investment related.”