Mega-cap technology companies have led market performance in recent years and have been among the main beneficiaries of the Covid-19 pandemic, as people around the world have spent more time at home.
Nevertheless, issues over regulation, deglobalisation and consumer privacy have come to the fore, threatening the market share of these large players.
As such, GAM Investments’ Mark Hawtin – who oversees the $457.6m GAM Star Disruptive Growth fund – believes investors will begin to move away from these names to a next generation of technology companies with better growth prospects.
Hawtin said: “We believe the best time to invest in disruptive trends is when companies have essentially won the war, but investors are still sceptical.
“The Q3 earnings reports from these ‘big tech’ companies led to share price decline and perhaps reflect the acceptance of the positioning in these names.
“They are widely owned and therefore it is harder for shares to continue to appreciate in spite of continuing growth because of a combination of the law or large numbers and over-ownership.”
He added: “This is a clear case of it being better to travel than arrive. The market is finally taking stock of the extraordinary year-to-date moves and pausing for breath.”
Performance of NYSE FANG+ index YTD
Source: Bloomberg
Year-to-date, Amazon is up 78 per cent, Apple is up 58 per cent and Facebook and Alphabet are up 38 per cent and 19 per cent respectively.
And investors are likely to begin looking elsewhere to companies poised to benefit from new and accelerated trends.
“New investment focal points such as healthcare, the automation of knowledge work, industrials and transportation benefit from these technologies,” he said.
“We remain convinced that these themes will possibly see greater growth than the now incumbent meg-cap names over the next decade.”
Hawtin said the new wave of innovation which he describes as ‘Digital 4.0’ and includes 5G, big data, Internet of Things (IoT) and artificial intelligence (AI) as the areas of biggest opportunity. Meanwhile, increased regulation and issues of consumer privacy represent two significant headwinds, according to Hawtin.
The next wave of tech companies will be greatly aided by digital trend acceleration, something which has been one of the key themes of the Covid-19 crisis and highlighted by Microsoft chief executive Satya Nadella in a recent earnings call.
“The next decade of economic performance for every businesses will be defined by the speed of their digital transformation,” said Nadella.
Greater uptake of e-commerce will also be a characteristic of this trend, with Sheryl Sandberg, Facebook’s chief operating officer, with adoption of online increasing at a rate of about 1 per cent per year pre-Covid to 4 per cent in the first 100 days.
And companies that help facilitate the digital trend acceleration may be well poised to benefit.
While companies such as Google and Amazon will face competition over the next decade, their investment in cloud software offers significant protection.
“Google notably broke out its cloud revenues for the first time,” said Hawtin. “At $14bn annualised, this is higher than we had expected and puts it in a respectable third place behind Microsoft with an approximate $24bn cloud run-rate.
“Amazon Web Services leads by a clear margin at almost $50bn.”
He continued: “Together these three are still less than $100bn combined so the opportunity for cloud infrastructure is still huge in our view.
“Of the $4trn spent globally on IT every year about 25 per cent or $1trn can be attributable to infrastructure, potentially addressable by the cloud.”
Performance of fund vs sector since launch
Source: FE Analytics
Since launch in February 2011, Hawtin’s GAM Star Disruptive Growth fund has made a total return of 437.40 per cent compared with a gain of 269.74 per cent for the MSCI World Growth benchmark and a return of 132.42 per cent for the average IA Global peer. The fund has an ongoing charges figure (OCF) of 0.86 per cent.