Tech killed value investing: report
It’s over. Or at least, it’s over for now.
A new report has called the “death of value investing” as tech companies, with their persistently high growth rates and irritatingly consistent upwards trajectories, continue to rout traditional stocks.
It’s a view already being bitterly animadverted upon by Australian small cap fund managers.
The report, from London-based M&A firm Aquaa Partners, found total shareholder returns for the Nasdaq 100 Tech index delivered about two and a half times more returns since 1999 than the Nasdaq 100 Non-Tech index and 13 times greater than the FTSE 100 Non-Tech Index.
Since 2009, that variance has become more pronounced.
The report authors believe the next two decades at least will see the rest of the market versus tech stagnate.
The report did not distinguish between different non-tech sectors, such as retail versus biotech, the latter of which has been on a decade-long roll in Australia.
And what of the assessment that tech stocks are riskier than your traditional blue chips?
Aquaa Partners, a company that specialises in tech M&A, says its report suggests that risk profile has come down because everything, now, is tech.
“Using the maximum point of loss each year since 1995 for individual tech and non tech stocks … the figures suggest that since the late 1990s, which encompassed the dot-com boom and the emergence of the Internet, to today, the tech sector has transitioned from being volatile and risky to becoming a safe haven of value over the long term,” the report said.
“The world [is] becoming more technology dependent.
“Critics may argue that this data mainly represents ‘Big Tech’… [which] is at risk of a significant fall in value, due either to being overpriced or a likely future victim of regulation and tax.
“Our view is that when Big Tech falls, smaller tech develops to take its place.”
Friendster is replaced by Myspace which is replaced by Facebook. Forced breakups, for example if Facebook was pushed to spin off Whatsapp, are likely to still result in growth for both new companies, as happened to Paypal after it was sold to Ebay then spun out again.
Paul Cuatrecasas, founder and CEO of Aquaa Partners, said the report outlined why their approach to investing, as opposed to a value or tech-exclusionary approach used by entities such as pension funds, insurance companies and other institutional investors, was right.
He advocates an index-like approach to investing in tech.
“Based on our findings, we recommend long-term fund managers invest the same amount every month, because no one can time the market consistently,” he said.
“Invest in a basket of tech companies, the best ones you or your advisers can find, or the best tech indices, and then don’t touch them.
“When a market crash has clearly arrived because the markets are consistently showing lower lows and lower highs over a period of several months and a state of maximum pessimism is being reached, then you plan a special one-off ‘bottom’ purchase.
“Allocate your one-off purchase to the highest quality tech companies and also consider buying out-of-the-money long-term options. As Warren Buffett said, ‘price is what you pay, value is what you get’.
“Apply geographical diversification to your tech stocks. The next 20 years in tech are going to be as much if not more about Asia and China than about North America, so be sure to have a mix of tech stocks from North America, Europe and Asia.”