Meeting the tech challenge by “investing where adoption exceeds hype”

Tech funds have clearly had huge tailwinds behind them, but there's still a lot of differentiation in this space. Janus Henderson's Graeme Clark explains their particular approach.

Over the past 10 years, the Horizon Global Technology Leaders Fund managed by Janus Henderson has returned 15.4% per year in dollars. That is well ahead of the 9.9% return from the MSCI World Index, and largely in line with the 15.5% gain in the fund’s benchmark, which is a composite of the MSCI ACWI Information Technology and Communications Services Indices.

Considering that Meta, Apple, Microsft, Alphabet and Nvidia together make up nearly half of this benchmark, it is a high hurdle to match.

Co-portfolio manager Graeme Clark (pictured below) says that the fund’s success has been based on an important premise:

“We take a risk-balanced approach to investing in technology, looking to avoid the drawdowns that people who chase the hype experience.”

He adds that a key challenge to investing in this space is that in the early stages of many new discoveries, the hype around the technology exceeds adoption. This was the classic cause of the dotcom bubble.

Clark and co-portfolio managers Alison Porter and Richard Clode – who have managed the fund together for 10 years – are deliberate about trying to avoid this risk by finding “underappreciated growth”.

“Technology is always disrupting and taking share, but what are the valuations saying?” Clark says. “We want to find those stocks where valuations are potentially understated.

“We would rather pick up a new trend when it’s halfway up the hockey stick than being too early when it’s over-hyped and trading on 60 times revenue,” he adds. “Want to find a balance between valuation and where that stock is going to be in five years.”

The fund is therefore managed with a strong valuation discipline, but he is clear that this is not about value investing.

“If you are a value investor in technology, you are investing in legacy companies with low P/Es,” Clark says. “What we are looking for is a risk-adjusted return: valuations that look reasonable, given the earnings growth we can see. We want to invest in those players whose growth is going to be materially higher than the market expects.”

He says that identifying where that growth might lie comes from extensive research and collecting as many data points as possible. The team also spends a great deal of time on the road, visiting different companies, different regions and speaking to competitors and customers.

They also draw on the experience of having invested through technology waves in the past. This is particularly relevant in the age of AI.

“We don’t talk about AI as a theme, but as the next major wave of compute,” Clark says. “In the 50s mainframes were introduced, and that was a fundamental change. We’ve since been through the PC era, mobile cloud era, and are now moving into the AI era.

“Ten years ago, we thought it would be about the internet of things, with hundreds of billions of devices talking to each other. But AI fundamentally changed with Chat GPT and the introduction of large language models able to get reason from huge amounts of data.

“We are still very much in the early innings of this fourth wave, but see it as a huge driver for tech.”

Clark’s belief is that which companies benefit from this AI wave will follow a similar pattern to what occurred in the previous waves. And this guides how Janus Henderson builds the portfolio.

Source: Janus Henderson Investors

“Mobile cloud’s most successful super app is probably Uber, but it didn’t exist in the early stages of that era. It takes time for the market and ecosystem to work out what can be done,” Clark says.

In his view, the AI wave will be similar. The early investment opportunities have been, and largely continue to be, in semiconductors and physical infrastructure.

“It’s pretty well known that semiconductors and infrastructure is all about Nvidia,” Clark says. “Even so, many general portfolio managers will talk about Nvidia being expensive. But this is where we use our experience in identifying underappreciated earnings power.

“We did sell some Nvidia, but we went back to overweight at 40x earnings. That sounds expensive, but it turns out it’s actually 4x earnings, because earnings were so much higher than the market expected.”

He added that some platforms for AI are starting to be well recognised. These are the cloud providers Microsoft and Amazon.

“There may well be specialist platforms that come through and displace these big players, but right now they are best positioned.”

What is largely unknown is who the winners will be in AI software applications and use cases. Here, Clark and his co-portfolio managers are content not to act too early.

“I’ve been talking about the potential in AI for over a decade, but had we overly pivoted to AI 10 years ago, we would have destroyed huge amounts of value,” Clark says. “Understanding the maturity of a technology and where it is in the hype cycle is key. Investing at the point where adoption exceeds hype is the best way to create value.”