The popularity of 5G as an investment theme has surged, with several wealth and asset managers expecting massive growth opportunities coming from the sub-sector.
According to Yan Taw Boon, Hong Kong-based portfolio manager at Neuberger Berman, the 5G sector alone is expected to grow to $13.2trn by 2035, driven by the need to upgrade connectivity systems to better process data.
“We are consuming a lot more data now, so we need to create a very robust infrastructure, and there’s a lot of money being poured into this area,” he told FSA.
Opportunity set
Boon co-manages the Neuberger Berman 5G Connectivity Fund. Although it was only recently that 5G became a popular investment theme, the firm first launched the 5G-focused strategy in early 2018 in Japan, which has grown to at least $4bn.
After that, the firm launched the strategy in Taiwan as an onshore vehicle last year, which has grown to NT$2.8bn ($95m) in assets, according to Morningstar Direct. It was only in April that the firm launched a Ucits version of the fund, which is available to retail investors in Singapore and professional investors in Hong Kong.
To make sure that the strategy captures the 5G theme, the fund’s investment universe only includes companies that have at least 50% of their future earnings exposed to the theme.
“Many companies claim that they have some exposure with 5G, because 5G is going to impact many industries. But we have to make sure our investments have thematic relevance,” Boon said.
The timeframe of future earnings will depend on which investment bucket a company belongs to.
Boon identifies three buckets within the 5G theme, which are infrastructure (base stations, data centres and optical networking), devices (mobile phones, sensors and components) and applications and services (cloud, software and network security).
The timeframe for future earnings growth is the shortest for infrastructure – at around one-two years, while the devices bucket has a two-three year timeframe. The applications and services bucket has the longest timeframe of around three-five years.
“Infrastructure is already rolling out now, that is why we use a shorter timeframe,” Boon explained.
Fast-changing
Boon noted that the opportunity set within the theme is fast-changing. For example, the infrastructure bucket alone made up around 75% of the fund’s assets six months ago. Now, all three buckets each have weights of 30-34%.
“There were more opportunities back then when we were still in the infrastructure roll-out phase. Device proliferation hasn’t really started to take shape,” he explained.
“But now we are entering into the very early stages of 5G smartphone proliferation. For example, around 50-60% of the phones sold in China are now 5G-enabled.”
The number of companies within the investment universe has also grown to 300 from just 150 two years ago, Boon said, adding that he expects the number to grow to 400 over the next two-three years.
Out of the 300 companies within the investment universe, the fund only invests in around 40-60 names.
Boon prefers quality names and avoids companies with high debt ratios, low profitability and governance issues.
“But that does not mean that we will ignore every single low quality company, as some companies may have turnaround stories,” he said.
For example, network infrastructure company Lumentum, did not have “great financial metrics” a few years ago.
“But during the last couple of years, they invested in new technologies and divested old operations. Now, a majority of their revenues fall under optical networking components, which is used in 5G data centres,” he said. Now, Lumentum is one of the fund’s top 10 holdings, accounting for at least 3% of the portfolio, according to the fund factsheet.
