Technology valuations are high versus the wider market.
The forward price-to-earnings ratio of the MSCI World Information Technology Index is 18.82, which is higher than that of the MSCI World Index (16.61), Mouthon said. On a price-to-book basis, the technology index is trading at 4.51x versus the world index at 2.30x.
“The problem is that most investors are comparing the technology sector now with what happened in 2000,” Mouthon told FSA on a recent trip to Hong Kong. “The big difference is the profitability of these companies.”
Mouthon said that in 2000, the technology sector’s profitability accounted for 0% of the MSCI World. Today, that is up to 6%.
Most of the internet companies during the tech bubble were valued on a per subscriber basis while generating very little revenue from those subscribers, he explained. The situation is different today, with infrastructure in place and billions of people using mobile devices.
In addition, the technology sector was trading at 44 times on a price-to-earnings basis during the tech bubble in 2000. Now it is hovering between 17 and 18, which is lower than the 19x level the sector reached in 2005.
“As long as we see price appreciation is going along with earnings appreciation, then we are going in the right direction,” he said.
He noted that the technology sector underwent a correction at the beginning of 2016 due to investors taking profits, something that could happen again. “But I believe in the upside trend of technology,” he said.
Other fund managers have been cautious on tech stocks. Andrew Swan, head of Asian and global emerging market equities at Blackrock, said in an earlier interview that he is cautious on the sector’s valuations, particularly in emerging markets.
Timing tech
Mouthon said an investment risk involves taking a position too early before a promising technology is commercialised.
For example, one “disruptive technology” that is becoming popular is quantum computing.
“It’s true that it is a fascinating space. But the reality is that probably for the next five years, there won’t be any commercialisation of a quantum processor or a quantum computer.
“It’s an area you need to follow but don’t spend too much time on because from an investment point of view, it’s useless.”
Another example of a popular early stage technology is the autonomous driving vehicle.
“In 2021 we may see the first autonomous vehicle, but would it be a mass market option at that time?”
To minimise this risk, the firm has a dedicated advisory board composed of independent technology professionals to help its investment managers with their top-down view of the sector.
Citing an example, one of the firm’s advisory board members is Antoine Bondeau, the CEO and co-founder of artificial intelligence firm Sentient Technologies.
Purity strategy
The firm invests in technology stocks depending on their “purity”, meaning how much of a company’s revenue is exposed to the theme the firm is looking at.
For example, for the Pictet Digital Fund, at least 20% of a company’s revenue should fall under a theme or sub-sector. Themes include social media, big data, and fintech, while sub-sectors include online advertisements or network operators.
The two managers of the fund, Sylvie Sejournet and Nolan Hoffmeyer, then analyse around 400 stocks and look at the quality of management, discounted cash flows and valuations.
Mouthon noted that Pictet’s digital fund is different from its robotics fund. The robotics fund is more focused on hardware technologies, while the digital fund has more exposure to software-related themes.
The three-year performance of the Pictet Digital Fund versus its benchmark
Source: FE. The fund and benchmark NAVs have been converted to US dollars for comparison purposes.
