As I sat down to write this week’s MitonOptimal weekly comment on the difficulties in and complications of ‘the endeavour to time the market’, I was sidetracked by the news that the NASDAQ Composite Index had reached another all-time high, getting above 6,600 intraday on the 10 October. The spectacular rise in the index, (131.05%) since the end of 2012, outperforming the S&P 500 (97.72%) and MSCI AC World (64.18%) meaningfully over the period, has prompted numerous commentators to call, that we are in a period of irrational exuberance that bears similarities to the dot-com bubble at the end of the nineties, and a major correction (if not a crash) is forthcoming.
Looking specifically on a P/E Ratio basis, at the height of the dot-com bubble the market, as measured by the NASDAQ Composite, was trading on 200x earnings, as of writing (reference: Bloomberg) the Index is trading on 43x, though, there are certainly a number of stocks trading well in advance of this, e.g. Amazon and Netflix at an eye-watering 250x and 237x respectively. The extraordinarily high ratios of constituents across the Index, seen during the dot-com bubble, is not evident in the current bull market, i.e. Microsoft at 31x vs. 59x, Intel 12x vs. 126x and Oracle at 21x vs. 87x to highlight a few. In fact, a number of the Index’s larger constituents offer value against the wider market, with Apple currently trading on 18x, Qualcomm on 13x and Cisco on 16x against the S&P 500 on 22x earnings. (All earnings data supplied by Bloomberg as at the 12/10/2017)
On a P/E Ratio and various other metrics, we would argue that this time it really is different, and as such have held Technology as a long-term theme within our offshore private client models and offshore core fund of fund range to take advantage of what we perceive to be long-term relative growth characteristics within the sector. Furthermore, with the ever-changing dynamics within the IT sector and the need to be able to determine and take advantage of emerging themes within the broader IT universe, we would advocate an active approach to fund management. To which, we have selected two specialist technology vehicles to express our positive view on the sector, in the form of the Polar Capital Global Technology Fund and the GAM Star Technology Fund. Affording us exposure to exciting themes that look set to change the way we are doing business today, in eCommerce, Digital Marketing, Automation, Robotics, Cyber Security, Cloud computing, and how we are going to be living in the future, Artificial Intelligence, Machine learning, the Internet of Things, Augmented/Virtual Reality, eSports, and Autonomous Vehicles.
Though Global and various Regional funds can still provide exposure to several exciting and rapidly growing companies within the technology space, few ‘all-around’ managers have the expertise to be able to recognise developing themes or emerging disruptive technologies, nor indeed the capacity to have a significant allocation to the sector within the fund due to risk control measures, consequently, we have included technology as a two-thirds equity weighting within discretionary portfolios.This Time it Really is Different