Tech Leaders on a Profitable Path
Wells Fargo Specialized Technology Fund
Author: Ticker Magazine
Last Update: Jan 23, 10:38 AM EST
|Managing a tech fund out of San Francisco has indisputable advantages owing to the eco system of information on new advances in technology. At the helm of the Wells Fargo Specialized Technology Fund, Walter Price invests in leaders with a portfolio focused on growth, value and GARP stocks in which the path to profitability is clear and the profit potential is substantial.
ďWe aim to capture the growth of the segment through the leader, because the leader tends to gain share over time both in consumer and enterprise technology. Even if the leader is priced with a premium to the second or the third company, we would pay more to capture that subsector growth.Ē
Q: What is the history and the objective of the fund?
We have been managing the fund for Wells Fargo since 2000, the peak of a cycle in technology stocks. In this environment, the manager had to understand the companies well and to build a portfolio that would capture the long-term potential of the sector without having to worry about timing the exact entry and exit points.
Our goal is to generate capital appreciation. Although we measure ourselves against different tech benchmarks, we donít have portfolio constraints relative to the benchmark. We aim to build a fund that captures the leading companies in technology by buying them at reasonable valuation and enjoying the appreciation as they grow.
Q: Is your approach global or do you focus on the U.S. market?
We have a global approach, but a large percentage of our assets are currently in the U.S. Over 70% of the global indices are concentrated in U.S. stocks. One of our advantages is that we are based in San Francisco, not in Japan, Hong Kong or London. We are a little less inclined to invest in foreign companies, unless they are the leaders in their technology subsector. We have been investing in China, Europe and Japan. However, we currently find higher growth and reasonable value in U.S. companies.
Q: What is your definition of technology?
Our broad definition classifies a company as technology if it is driven by or associated with technology. That broad definition has served us well, because technology is broadening its reach and is redefining industries. When we see that an industry becomes driven by technology, we are happy to buy the stocks. Amazon and Tesla are examples of technology-driven companies that fit into our portfolio.
Q: What are the core beliefs that guide your investment approach?
The portfolio consists of three parts Ė growth, value, and GARP. Growth represents the largest part of the portfolio, more than half of it. Within growth, we look for segments of technology that have a new or a lower-cost approach. We thoroughly research the companies in that subsector and we gravitate toward the leader. Basically, we aim to capture the growth of the segment through the leader, because the leader tends to gain share over time both in consumer and enterprise technology. Even if the leader is priced with a premium to the second or the third company, we would pay more to capture that subsector growth.
As stock pickers, it is important for us to understand the drivers behind the industry and the companies. We meet with managements to discuss their strategy and we benchmark them against their targets to see if they execute. Thatís how we find companies that make or will make money. We want the managements to understand that earnings and cash flow drive the valuation of their company. We make sure that the companies target free cash flow growth.
Fundamentally, we look for attractive subsectors that can generate good cash flow and, therefore, good returns to investors in the fund. Then we look for the companies that lead these subsectors. We aim to understand how the financial model evolves and why growth and revenue would translate into growth and free cash flow over time.
Q: Would you describe your idea generation process?
We are located in an area that is focused on new technology; San Francisco has many venture capitalists, public investors and tech companies. There is a flow of information that we constantly tap into. One source of ideas is the community, the informal meetings of team members, the understanding of where the focus of the sales community is, and who has the new product that resonates with customers.
Another source of ideas and information is conferences. There are many tech conferences in San Francisco, probably one each month, which include both public and private companies. We go to the conferences, listen to the management presentations, visit their companies and decide if an idea is worth pursuing. We also go to industry events like the Robotics Conference in Munich or the Amazon Conference associated with cloud computing.
Q: What is the process of turning these ideas into investment opportunities?
The key factor is understanding whatís driving the market. By examining long cycles of subsector growth, we try to understand if a trend is going to last for six months or if it represents a longer-term opportunity. We use long waves of appreciation and invest in growth that is driven by new and lower-cost approach.
Once we find such growth, we visit most of the companies in the subsector to understand their position and to identify the leader. We dig into the companies and meet with the management to understand the products. Typically, we have 60 to 70 companies in the portfolio, but we visit at least twice as many companies to develop that portfolio.
We run this portfolio as a team. Usually, two or three team members are involved in the research and build an opinion on the specific subsector. Then we discuss the company and how it fits the portfolio on a relative valuation basis. If there is a disagreement about the potential of the company, then it most probably wouldnít go into the portfolio.
It we still decide to invest, we would start with a small position until we resolve the issues that worry part of the team. Then we may increase our position or sell the stock. If two or three team members agree that it represents a great opportunity, then we would make it a large position. We also look at risk. The construction of the portfolio is a function not just of the ideas, but also of risk profile and the benchmarks that we try to beat over time.
Q: When you find an opportunity, would you invest in the entire theme?
It depends on the theme, its maturity and its impact. It is essential to establish if the theme could change the profile and the growth rate of the company, if it can change the perception and valuation.
For example, cloud computing represents more than 40% of our portfolio for two reasons. First, we had a large position in consumer Internet. Our belief was that these stocks were getting close to being fully valued relative to their potential. So, we decreased our exposure last year. We also had a large position in semi-conductors, but because we believed that we were entering a cycle in semi-conductors, we took that position down. Meanwhile, the adoption of cloud computing was accelerating and more companies were becoming public, so we increased our exposure to that sector. Thatís part of the portfolio construction process.
The other reason is related to the cycles of enterprise technology adoption. Our view is that enterprise technology changes every 20 or 30 years and there must be a compelling rationale behind the change. We believe that cloud computing is a major enterprise change and we are early in that transition. Therefore, we donít know yet who will be the eventual leader, or whether the market will be bifurcated, so we have a broad collection of companies in that area.
Cloud computing will probably continue to be a large part of the portfolio because of our view that enterprises are changing their entire infrastructure. We believe that the next trillion dollars that investors are going to realize in technology will come from the cloud computing sector. The companies that provide that infrastructure are going to be much more valuable in the future than the companies in the past were. That was the bet we made in 2017; it has worked out well this year and we think itís going to develop next year as well.
Q: Would you illustrate your research process with some examples?