Denny Fish, portfolio manager in the Global Technology & Innovation Team, discusses how the team is navigating the coronavirus pandemic and why this period may have long-lasting positive implications for the sector.
The strategy strikes a balance between ‘resilient’ companies that should hold up rather well under different economic scenarios; and ‘optionality’, which has a higher range of outcomes and growth optionality, but may come under more stress in terms of valuations or when the macroeconomic environment puts general pressure on all businesses.
In the team’s view the coronavirus is accentuating the longer-term mega themes such as the cloud, artificial intelligence, machine learning, Internet of Things and 5G connectivity, and is reshaping both enterprise and consumer behaviour in terms of technology usage and adoption.
Hello, my name is Denny Fish. I am one of the portfolio managers for the Global Technology Strategy here at Janus Henderson Investors. I am recording this video from my home in Northern California, where we have been sheltered in place now for a few days. We have been taking precautions for the last two to three weeks given the nature of the situation, and so had a lot of time to reflect and think about how the chain of events over the last couple of months may impact the technology sector on a go-forward basis and I am here to share those with you in terms of how we are thinking about that.
One of the things that is important about this is that there aren’t that many instances where we have had events that have been unprecedented in nature where we have to think through so many different lateral implications. And that has been one of the most challenging and interesting parts of what we have just experienced. And what I would say on balance is that in the absence of information, the market is discriminating between companies that have secular growth, (which we have tended to gravitate towards) low-leverage balance sheets, cash richness, ability to generate free cashflow and a light at the tunnel on the other side. And the market is punishing leveraged balance sheets, where there is uncertainty on debt coverage or uncertainty on what the economic outcome might do to EBITDA* or other financial metrics that play into those calculations. And so it really has been a pretty significant divergence in how each of those types of businesses have been treated in this broad-based sell-off.
I think importantly, coming into any situation like we are experiencing right now, it is important to be comfortable with the strategy and the portfolio. And a concept that we historically have deployed in managing the strategy is that we strike a balance between what we call ‘resilient’ companies that should hold up rather well under a number of economic scenarios, and then we have another portion of the portfolio that we define as ‘optionality’, which has a higher range of outcomes and growth optionality, but clearly could come under more stress when valuations come in or the macroeconomic environment puts general pressure on all businesses. So we actually feel pretty comfortable. One of the important things about that is we have confidence in how we are currently positioned, but what this does give us is the opportunity to do what I call ‘upgrade around the edges’, and so there are always some positions that maybe we have been questioning the (investment) thesis a little bit or considering selling. And when you get a broad-based sell-off where everything comes down, you get some of our higher quality assets or our real growth optionality (at more attractive valuations).
Another element of our thinking is that we are clearly cautious on the short term, given the amount of potential economic damage andwhat that could mean for companies, earnings and free cashflow streams. At the same time, we are also trying to balance that with our longer-term view of mega-themes that we continue to talk about for the strategy, those being the cloud, artificial intelligence, machine learning, Internet of Things and connectivity with 5G; and those don’t go away by any means. In many ways, they become more pronounced. But I think importantly, as we get through this, there are fundamental things that will reshape both enterprise and consumer behaviour and those are really long lasting. Everything from the virtual workplace and how corporations enable that ̶, virtual call centres for serving customers, collaboration, the way that we digitise and enterprise, so that we are not constrained by physical forces, there are just many, many different themes. And as people are forced to actually adopt these type of technologies, they realise how productivity-enhancing it really is and those are long lasting and durable. And I would say on the consumer side you see the same thing in terms of whether it is completely adopting ecommerce, leveraging Apple Pay because you don’t want to touch a point of sale terminal, or food delivery and groceries. These are things that as consumers get comfortable with them and are actually forced to adopt them, they realise just how much better off they are leveraging these types of services. And so I think those will be the most long-lasting effects that we will have as we look back on this period two or three years from now. It is really what it has meant for reshaping the way companies think about the evolution of their IP infrastructures** and the way consumers actually change their behaviour to adopt many of these newer and more efficient technologies.
*Earnings before interest, tax, depreciation and amortisation.
** IP (internet protocol) allows computers to communicate with each other; IP infrastructure is the network between a communications medium and the applications that are built upon this medium.
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