Why would you describe this fund as a 'one to watch' and how could the strategy work in investors' portfolios?
Over the last two decades, tech innovation has been dominated by mega-cap technology companies and largely concentrated in the U.S. However, tech innovation is now broadening to smaller-cap companies and other countries, including emerging markets, due to two key drivers. First, technology adoption is rapidly accelerating in EM. Over the last five years, EM smartphone penetration has surpassed 90%, giving EM consumers access to fast, ubiquitous internet for the first time in history and giving rise to a new ecosystem of local ‘tech titans'. Second, growth of the public cloud has fueled significant innovation within software, including Software-as-a-Service ("SaaS"), causing the cost of starting a business to dramatically decline and enabling smaller companies with innovative technologies to compete with incumbents. Going forward, we believe the most exciting investment opportunities exist within this next generation of innovators - which we call "future tech leaders" - and believe that, by identifying the winners amongst them, we can deliver compelling long-term investment returns for our clients. The GS Global Future Technology Leaders Equity Portfolio seeks to invest in the most exciting technology opportunities globally with a bias towards smaller-cap companies (excluding companies with market caps >$100bn), making it highly complementary to most investors' existing tech allocations.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
The GS Global Future Technology Leaders Equity Portfolio delivers differentiated exposure to technological innovation as it is truly global in nature (with ~50% of the portfolio invested outside the U.S., including 20-30% in emerging markets) and reaches further down the market cap spectrum (with >60% of the portfolio invested in companies of <$50bn in market cap). We believe most investors are significantly exposed to mega-cap tech names since they're now such a large part of all market cap-weighted benchmarks, so in this fund we exclusively invest in companies with market caps of <$100bn at the time of purchase.
We have a large, experienced, tech-dedicated team of 17 investment professionals averaging 18 years of experience, who conduct deep fundamental research to identify exciting investment opportunities with many based locally in the countries we invest in. Our investment process is comprised of deep due diligence, in-depth valuation work, and an extensive program of meetings with company management teams to procure what we believe are the most compelling investment ideas for the portfolio. Our investment philosophy is to invest in high quality businesses trading at attractive valuations. We have a strong valuation discipline, particularly compared to many tech investors, and believe this serves our clients well over the long-term. As the business models of the companies we invest in are inherently less mature than their mega-cap counterparts, there will undoubtedly be periods of heightened volatility. Taking advantage of these opportunities is important in any investment strategy, but is particularly important for this one.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
We are incredibly excited by the innovation and opportunities present in the technology space today. While the pandemic accelerated the adoption rates for many tech-enabled innovations, we believe many of these key secular-growth trends are still in very early stages with long runways for growth ahead. Some of the areas we are most excited about include:
- Cloud-Enabled Software: While software spending remained healthy in 2020, we believe it will continue to accelerate as corporations continue to digitize their workplace to drive more productivity and efficiency gains.
- Digital Payments: Despite being cyclically depressed in 2020, digital payment players are acquiring new subscribers at 2.5x their pre-pandemic rate, leading us to expect a big acceleration post-crisis.
- Online Entertainment: We believe the acceleration in the adoption of online entertainment due to lockdowns and social distancing will continue after things normalize. We currently see many opportunities in ‘content delivery network' companies, which provide the enabling technology for streaming games and movies.
- Smart Components: While automotive semiconductors were the most cyclically depressed end market in 2020, we believe their rebound in 2021 could be pronounced. Additionally, we believe 5G will continue to be a strong tailwind for the industry as spending broadens out globally.
Source: GSAM. As of 31-March-2021.
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