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There has been focus on technology companies lately. Investment Specialist Peter McPhee spoke with Eileen Riley, CFA, Co-Portfolio Manager of the Loomis Sayles Global Equity Fund, about the Fund’s technology exposure.
The Loomis Sayles Global Equity Fund is built from the bottom-up, investing in stocks with the alpha drivers of quality, intrinsic value growth and an attractive valuation. With this focus, the Fund continues to have key positions in Amazon, Alibaba, Facebook, and Alphabet (which now span the Communication Services and Consumer Discretionary sectors). The team has owned these stocks for many years, and Riley believes that these companies will continue to deliver value for shareholders over the long-term. In the current environment, e-commerce gains previously forecasted to take years have been achieved over the course of months. The team saw Amazon and Alibaba, in particular, benefit from an increase in e-commerce penetration from both existing users and new users during the pandemic. The team expects the pandemic to also advance the cloud adoption curve, with companies moving increasing amounts of data to the cloud to facilitate a remote work environment. For Alphabet, the team believes the company is well-positioned to benefit from growth in digital advertising while Facebook remains the dominant global social network and is still in the early stages of monetising its various platforms.
Beyond these companies, Riley noted that the Loomis Sayles Global Equity Fund has a diverse set of names in the technology sector. The strategy’s largest technology position is MasterCard, the global payments firm. The company, which effectively has a duopoly (alongside Visa) in global payments processing, has multiple structural growth drivers including the shift from cash to cards, and the expansion into business payments.
Other technology holdings include software companies with a significant value add for clients, notably Dassault Systemes. Dassault’s products help its clients create ‘digital twins’ of complex, real-life products and systems, placing Dassault at the center of the digital transformation in global manufacturing. The Fund also has meaningful exposure to consulting companies with technological expertise. Accenture, the global IT services consulting firm is one example. The company partners with its client base to facilitate their digital transition. The company has worked with the Australian Rugby League (ARL) to develop its digital streaming capabilities, customer relationship management software, and other aspects of the ARL’s digital transition.
The Fund’s technology exposure extends to the semiconductor industry, where the Fund holds ASML, the leader in photolithography, the process in which a light source is used to etch a pattern on a silicon wafer. The team likes the technology advantage that ASML holds, Riley said, particularly in next-generation extreme ultra-violet (EUV) technology. About 40 percent of the company’s employees work in research and development, providing technology and investment advantages which are very difficult to replicate, which Riley argued provides ASML with a durable competitive advantage. Riley also discussed the Global Equity Fund’s ownership of global Internet domain name registry services provider Verisign. Verisign provides registration services and internet infrastructure for over 160 million .com and .net domain names, which support the majority of global e-commerce. The team believes that Verisign’s business is very difficult to replicate and likely to have an extremely long period of competitive advantage, with an attractive valuation. The pricing architecture is built into Verisign’s contracts, helping provide certainty about the timing and ability of the company to extract price increases, providing extremely attractive visibility of cashflows.
The team is managing risk the same way that it manages risk in any environment, Riley noted; idiosyncratic (or stock-specific) risk is the most significant risk in the portfolio. This aligns with the core competency of fundamental research. As an active manager focused on stock selection, Loomis Sayles believes volatility often creates valuation opportunities. The key question to ask, Riley said, is ‘what is the downside associated with a company?’, which Loomis Sayles addresses in its fundamental research and scenario analysis, which are primary tools in the team’s risk management process. This focus on valuation is a key driver in identifying both attractive and excessively priced businesses.
As a style agnostic investment strategy, the long-term performance profile of the Global Equity Fund reflects contributions from multiple stocks across a diverse variety of sectors, including technology.
While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock. Past performance is not a reliable indicator of future performance
Examples above are provided to illustrate the investment process for the strategy used by Loomis Sayles and should not be considered recommendations for action by investors. They may not be representative of the Fund’s current or future investments and they have not been selected based on performance. Loomis Sayles makes no representation that they have had a positive or negative return during the holding period.
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