Sarasin & Partners has expanded its thematic range with the launch of a Digital Opportunities fund, which has shunned the mega-cap tech stocks in favour of a concentrated portfolio of emerging small- and mid-cap contenders in efforts to "find the next $1trn company".
Launched this month, Sarasin Digital Opportunities will hold between 20 and 30 companies in digital sectors such as cloud computing, digital commerce and analytics, and will be managed by tech sector specialist Josh Sambrook-Smith.
Speaking to Investment Week, Sambrook-Smith (pictured) explained that the portfolio owns no mega caps and holds two $100bn-plus large caps, which will soon both be removed from the portfolio.
At present, he estimates the average market cap to be around $28bn, falling to $20bn when the large-cap stocks are removed, with a mode average - the most frequently occurring - of $4bn.
Sambrook-Smith said the concentration of the fund, which compares to an average of 62 holdings across competitor tech funds, according to Sarasin research, is set on the basis that "the amount of risk you are taking on a 60 to 70 stock portfolio is not dramatically different to one with 20 to 25 stocks".
He added: "Most active funds do not have very high active share… and have too many stocks in them. The managers' attention is just diluted across all these different stocks and the performance is diluted by that."
As a result of this trend across competitor funds, Sambrook-Smith said firms build portfolios "very close the benchmark", and end up "with a really big weighting to the mega caps".
He added: "You are doing a disservice to investors by just investing in the obvious Microsoft, Google and Facebook. The managers are not taking a risk and missing out on better opportunities.
"My ultimate career goal is just to find the next Google - the next $1trn company.
"If you are a technology investor, then you absolutely have that chance. Because in this space, there are so many companies that are potentially moving in that direction.
"Investing in the FAANGs, you are not going to get the really outstanding returns that you might get if you started to take a look a little bit further down the market cap spectrum, [where] you will find a company that will be the next Google, Facebook and Amazon."
‘Sweet spot' opportunities
As a result, the fund is benchmark agnostic and, from a regional perspective, has the vast majority of its exposure to the US, where Sambrook-Smith sees the best opportunities of this kind.
Accepting that there is a risk at the smallest end of the market cap spectrum in the tech sector, with numerous past examples of firms promising innovation and mass-market disruption having failed to live up to expectation, the manager said he was targeting firms in the "sweet spot" of their development.
He explained: "There are all these companies at the very beginning of their lifecycle, which are a bit more conceptual and not very well established, but they might be the next big thing. But at the other end, you have got the mega caps that have done really well.
"In the middle, you have the sweet spot companies, which have exited the venture capital (VC) phase and are established businesses with a strong book of customers.
"Because they are innovating and disrupting, and the product or service they are selling is completely original, they are hoovering up market share. That is the best place to concentrate your firepower."
The fund will also be targeting IPO opportunities amid a "healthy pipeline of the sweet spot companies that are exiting the VC stage", which have "been on the radar" of major competitors or "emerging in the trade press", for example, he explained.
Citing an impending "private form" of IPO from cloud data platform Snowflake, Sambrook-Smith added: "These are corporate companies coming to market that are pretty well established already. They are growing and they have really interesting long term potential."
Sarasin Digital Opportunities integrates Sarasin's in house stewardship and ESG processes, but the firm is developing analysis specific to ESG issues arising in the tech sector as a result of digitalisation, such as polarisation of earnings in the labour market, Investment Week understands. Sarasin is expected to share some of the findings of this analysis in the coming months.
The fund is domiciled and registered for sale in the UK, and the platform fee for share class P has an annual management charge of 0.75%.