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Rising Stars and Fallen Angels
Nationwide Bailard Technology & Science Fund
Interview with: Matt Johnson, David Smith

Author: Ticker Magazine
Last Update: Feb 12, 9:32 AM EST
Investing in technology and science requires domain expertise, discipline, and a repeatable method of handling continuous information flow. Looking for winners in any environment, the portfolio managers of Nationwide Bailard Technology & Science Fund utilize a barbell approach of investing in premium growth rising stars and out-of-favor fallen angels. The fund combines systematic quantitative with fundamental methodologies, and works to leverage its Silicon Valley location and open communication company culture.


“We believe that technology and science are structurally inefficient areas of the market, and we find within the overall economy that more companies are disrupting a number of sectors by utilizing technology to create sustainable competitive advantages.”
Q: What is the mission and the history of the fund?

A: We believe that the companies using advanced technology and science can have a structural and disruptive advantage in today’s economy. The future economy and population will increasingly rely on these companies and the stocks should reflect that trend. Our core mission is to invest in these companies across the technology and science domains.

The fund was launched by Bailard in 2001, while Bailard was founded in 1969. Bailard is differentiated by its ownership structure and tenure. 69% of the company is owned and controlled by current employees, and our average investment professional tenure is more than 14 years. About 41% of employees are women and 76% hold advanced degrees or industry designation.

Open communication, integrity and the drive to get better are at the forefront of our company culture. We have a “no-door” culture of being able to talk, communicate and disagree with each other. There are no doors on the offices in our headquarters in Foster City.

The backing of an institution like Bailard has been an important asset in managing these high-volatility sectors. The three portfolio managers are shareholders of Bailard and investors in the fund. Sonya Thadhani became the lead portfolio manager in 2003, while the current portfolio management team has been in place since 2012. The fund family was adopted by Nationwide in 2013. Currently, the fund has assets of approximately $120 million.

Q: What core principles guide your investment philosophy?

A: Our investment philosophy is centered on the notion that where you invest matters. Our research suggests that technology and science are structurally inefficient areas of the market. Disciplined, experienced and specialized managers can create sustained alpha in the space.

We believe that two areas within technology and science offer rich opportunities. The first area is the rising stars and the science leaders, which is our moniker for premium growth companies. The other area is the fallen angels or the out-of-favor non consensus names. As part of our philosophy, we focus on mining these two areas and as a result, our portfolio is barbelled towards both ends of the growth/value spectrum in technology and science.

A key aspect of our approach is combining quantitative and fundamental methodologies akin to a ‘centaur,’ we use elements of both approaches to create a sound, repeatable process of systematically analyzing companies and opportunities. It is one of our core beliefs that the world will increasingly adopt human-machine hybrid approaches like ours. We see examples of these hybrid approaches gaining rapid popularity in other industries like medicine, journalism, and customer service. We believe we are on the cutting edge in the investment community.

Q: What is your definition of science and technology?

A: We like to think of technology as technology-enabled services, or companies that are using science and technology to create sustainable competitive advantages. Within the overall economy, we find today more companies disrupting a number of sectors outside of traditional technology or healthcare. So, while we are predominantly in the technology and healthcare sectors, we can move outside of that definition to find companies that we believe will disproportionately benefit from innovation.

Q: How do you translate your philosophy into the investment process?

A: We believe that the key to a sound process is discipline and repeatability. We have systematized our process where possible to improve accuracy, attribution, and repeatability. The first step of our process is to refine the universe and distill it to a concentrated list of best opportunities. To do this, we use what we call the Bailard Intelligence Engine, which is our proprietary library of systematic fundamental factors to mine data and rank stocks. This is a highly customized approach that relies on a tremendous amount of data and years of experience. The end result is a continuously updated score for each stock in the defined list of potential opportunities. As a result of this systematized process, our stock selection has a bias toward what we believe are likely winners.

The next step is deep fundamental analysis, where we focus on growth, quality and valuation. Specifically, we look for non-stationary data that the models may not have captured. On the growth side, we examine the quality and the sustainability of the growth and the potential inflections in the growth rate. In terms of quality, we look for the history of execution, the quality of the management team, the quality of the data, the shareholder policies, and other metrics. Regarding valuation, we look at relative valuation against both history and peers. We also consider any issues with cyclicality that might potentially impact valuations.

The final step is looking at the underlying tectonic shifts in the technology and science arenas. Because these markets are so dynamic and shift so quickly, we focus on getting these shifts right and selecting the securities that are likely to benefit from and ride these waves. So, we have a two-step selection process (quantitative and fundamental) that results in a defined list of buy securities.

Q: How do you customize your models?

A: Experience has taught us that critical investment metrics can vary across different market segments. Similar to how other managers may think about sectors, our approach allows us to customize the models based on proprietary segments within technology and science. In other words, the factors affecting a fallen angel are not the same as the factors for a rising star, so using the same model for both would be a mistake. That has been a key differentiator and a source of alpha in recent years.

The models include momentum factors, both price and earnings momentum, quality metrics of profitability, operating quality, management quality, valuation factors, behavioral bias factors, and others. As portfolio managers, we have the ability to build out our models and back test the various factors in order to customize them for the categories of fallen angels, science leaders, rising stars or other segments. That’s an important aspect of our top-down approach.

Q: What are the key elements of your research process?

A: Bailard has dedicated tremendous time and resources to develop our quantitative team and its abilities which can be levered by all portfolio managers within the firm. For example, as the quant team and researchers build new factors or observe anomalies, they create a library that can be levered by the portfolio management teams. The strategy reaps benefits from the rest of the research team at Bailard and we consider that depth to be powerful.

In addition, we regularly meet with companies, experts, and analysts and our location in the tech hub of San Francisco is a tremendous advantage because we have our finger on the pulse of technological and scientific shifts. This allows us to learn and better understand the drivers of a company or industry’s growth and how the tectonic shifts are developing within technology and science.

In the end, we have a team-based decision-making process, and our long tenure working together is critical. The three portfolio managers work very closely in terms of the potential allocation across technology and science as well as across individual names. We are able to leverage our decades of experience in our decision making process.

Q: How does investing in science differ from investing in technology?

A: Science focused companies, predominately biotechnology companies in our view, are for the most part cash-burning entities where shareholder value is largely found in clinical data readouts versus financial data or quarterly earnings reports. Therefore, the majority of our fundamental research for science based companies is focused on analyzing expected clinical data readouts. We utilize our regular fundamental framework of Growth, Quality and Value when assessing a particular product’s peak sales opportunity.

To effectuate this, we attend disease specific medical conferences where clinical data are presented, regularly consult with treating physicians and key opinion leaders, conduct onsite visits of companies, routinely meet with management teams, and attend financial conferences focused on healthcare companies in order to continually assess the potential of new products as they make their way through a highly regulated approval process.

Q: What is the role of inflection points and how do you identify them?

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Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc