With global technology stocks enjoying strong returns, the big question is whether another tech bubble is brewing? While some market analysts say ‘yes’, GERRIT SMIT, Head of Equity Management at Stonehage Fleming, has a different view.
“The returns being produced in the technology sector are based on real organic growth that is occurring right now; not on the prospect of future growth, which was the case during the dot.com bubble of 1997 to 2001.”
Smit says that many of the major technology businesses are creating significant free cash flow currently, which is funnelled to shareholders through successful reinvestment or through dividends. “This is an important cornerstone of prudent, successful investing. Without free cash flow, shareholders have more uncertainty of future returns.”
During the dot.com bubble the free cash flow yield on the S&P 500 technology sector was less than 2%. Currently that figure is 4.9%, a ratio of more than double. Furthermore, the 12 month forward P/E multiple in the dot.com bubble era was around 40, whereas now it is 19. “In both instances the valuations are half as expensive now as they were then.”
In addition to strong free cash flow, Smit sees strong, sustainable, organic growth potential in many technology stocks, notably large-cap counters. This is the second reason that Stonehage Fleming’s Global Best Ideas Equity Fund, which Smit manages, is nearly 30% invested in major cash generating technology companies.
In the current technology world, the focus is on big data and getting information as fast as possible to as many as possible all over the world through smart mobile devices. While Apple recently launched its new smartphone with a price tag of US$999, both India and China are producing models with comparable technology priced around US$100. This is making mobile technology and its many benefits accessible to more individuals than ever before, creating a sustainable growth path for well-managed companies that distribute their products through mobile technology.
In the technology sector the clear way to monitor whether a company remains to be relevant is to follow its organic revenue growth. If this doesn’t come through consistently, it implies that their technology is falling out of favour and the business may be in process of becoming extinct.
In terms of individual technology stocks, the fund has positions in, Visa, Tencent, Alphabet, Accenture and PayPal. “Tencent is one of the world’s most successful technology companies,” Smit says.
Using the metric of organic growth as a benchmark, Tencent reported in their last earnings announcement that their revenue line grew by over 50%. In addition, their compounded free cash flow growth over the past four years was over 33% per annum.
Smit says Tencent’s strength lies in having a number of different earnings drivers. Its social network business WeChat alone has over 900 million active users. Both a social media and messaging app, WeChat is also used for mobile e-commerce, payments, ordering food, taxis and more. Furthermore, Tencent has a stake in JD.com, China’s version of Amazon, and in Didi, the country’s version of Uber. “Importantly, we are also comfortable with Tencent’s overall corporate governance,” Smit says.
Turning to Visa, Smit says this technology giant supplies the platform on which all Visa transactions globally occur. Its growth potential is based on the fact that payments, whether consumer, corporate or institutional, occur more and more online. The mushrooming of e-commerce is adding further fuel to the company’s growth potential.
Alphabet is another outstanding business, Smit says. As the holding company of Google, Android and YouTube, it is also very active in AI, driverless cars and satellite communications; Alphabet’s free cash flow growth has exceeded 17% per annum over the last four years.
Recently, assets under management (AUM) in the Stonehage Fleming Global Best Ideas Equity Fund passed the US$650 million mark. The fund, which attracts investments from private, professional and institutional investors has returned 47.2%* over the last four years, compared to MSCI World All Countries Index of 39.0%.
Smit runs this concentrated, high conviction portfolio of 24 stocks that are chosen for their sustainable growth potential, strong management, strategic competitive edge and attractive valuation. The portfolio has very low turnover: over the past 12 months Gerrit has only sold two positions and initiated one.
In addition to the high weighting in technology stocks, other investments include some of the world’s best known companies such as Nestle, Estée Lauder and PepsiCo where there is confidence in the sustainability for indefinite growth rather than volatile cyclical growth.
Meet the ambassador to the future
Tilly Lockey, 14, lost her hands as a toddler, but sees it as a massive opportunity to embrace technology. She chatted with ARTHUR GOLDSTUCK about the human of tomorrow.
It is a description that defines 14-year-old Tilly Lockey: She lost her hands at the age of 15 months, and now uses bionic hands to show the world how to overcome disability.
That could easily read as an advertisement for a prosthetics company, but Tilly refuses to be defined by marketing messages. She has not only embraced what is supposed to be a disability, but wants to become nothing less than an ambassador to the future.
That is in effect what she is achieving by pushing the boundaries of what is possible with artificial hands. It means that, eventually, she will have more capabilities built into her body than most able-bodied humans can imagine. She collaborates closely with Open Bionics, a start-up that is using 3D printing to create low-cost prosthetics with high-tech capabilities.
“I have very high hopes for the future,” she said during a chat on the sidelines of the SingularityU Summit at Kyalami north of Johannesburg. From Newcastle-on-Tyne in the United Kingdom, she was at the Summit as a guest speaker, chaperoned by her father Adam and sister Tia.
“When I started working with Open Bionics, I wanted it to include lighting, music, Bluetooth, a projector in my palm, all over-optimistic things. But then I feel that is not too far away, and then a disability would turn into and enhancement of normal human hands. I’m really excited about it.
“I know there’s a couple of things they are working on right now, like trying to get the built-in battery thinner, because it’s hard to get overcoats and jackets over it, so they are trying to get the hands slimmer. They’re working on haptic feedback, to give a sense of touch of vibration, which tells me of I have a good grip on something. It could be coming soon. These hands I’m using now were made in the past five years. In another five years, I think we’ll have all of it.”
The hands in question are called Hero Arms, which its creators, Open Bionics, say is “the world’s first clinically approved 3D-printed bionic arm, with multi-grip functionality and empowering aesthetics”.
Click here to read more about the development of Open Bionics’s Hero Arms.
How Tilly Lockey became a Hero
Part 2 of ARTHUR GOLDSTUCK’s interview with Tilly Lockey explores her amazing career.
This is the second part of this series of articles. To start from the beginning, click here.
Tilly Lockey was diagnosed with Meningococcal Septicaemia Strain B when she was 15 months old.
Her mother spotted the tell-tale signs one day in 2007: a fast-spreading skin rash that looks like pinpricks, along with symptoms like lethargy and bruising. She was rushed to hospital, but the bacterial poisoning spread so aggressively, doctors gave Tilley no chance of survival. They had to make a quick decision to amputate her hands to save her life.
Twelve years later, her future truly came into focus: “I was surprised with really cool Alita: Battle Angel bionic Hero Arms and went on the blue carpet at the world premiere of the movie with Rosa Salazar and director James Cameron.”
That pivotal moment in her life would not have been possible without the intensive efforts of her mother, Sara, to raise funds to buy something better than the metal prosthetics issued by the National Health Service in the UK. She increased Tilley’s profile with a campaign to “Give Tilley a Hand”, and today works as a fundraiser and events organiser for the Meningitis Now support group. Her involvement in an event meant she was unable to join Tilley on her trip to South Africa last week, when she spoke at the SingularityU Summit. After coming off stage, Tilley told us that Sara was her biggest inspiration in her life, and the closest to a role model.
“I’m usually a speaker at her events. I tell everyone my story and what I’m doing now and give these kids inspiration, because they often feel they can’t do anything because of what Meningitis did to them.
“I am home schooled now, which is pretty cool, because I’m able to have a career and get educated at the same time. I feel I can do a lot of things that friends can’t do. I can take a whole class on an aeroplane. I have a great time traveling and meeting so many inspiring people who are making a difference in the world.”
The form of Mengingitis that attacked her leaves hidden scars and issues that only become apparent years later. She is almost absurdly cheerful about the challenges that have faced her.
“I personally figured out that my left leg had stopped growing. I’m still finding out things it has caused, but you survive. At least I’m here and I’m alive.”
It does help that she’s comfortable in the spotlight, happy to give interviews, and eager to show what she can do with her bionic hands.
“I want to go into public speaking a lot more, and it could be an option as career. I want it to continue because it’s a lot of fun, and I feel I’ve got a story to share. If I can inspire people to change the world, I will. “
Her travels this year will still take her to Barcelona, Jakarta and New York. In the Big Apple, she will accept a humanitarian award, and intends “to give a funky speech”.
In Jakarta, Indonesia, she will take part in a fashion catwalk and do a makeup tutorial live. She learned to do makeup with one of her bionic hands when she fractured her right elbow in a fall at school
“I got makeup for Christmas and wanted to play with it, and got the idea of doing it with an open hand. It took a lot of perseverance and patience, but after studying how to do it, I was able to recreate a full makeup routine using one hand. It wasn’t a great situation at the time, but now I’m happy it happened because it got me into doing what I do now.”
What she is doing with makeup is remarkable in its own right. She gives tutorials on YouTube, where she says she is “kinda new”, as she has “only around 16,000 followers”. That may well soon expand into cooking videos.
In other words, everything is an opportunity: “I could be sad, just sit on my bed and cry, or I can live my life and realise what I’ve got: these amazing bionic Hero Arms.
“All I want to do is help give people confidence in themselves, accept who they are, accept their scars and everything about them. That they don’t have to impress everybody and just be themselves.”
Read more in the third article of the series about how family remains at the centre of Tilly’s life.