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When technology shares tumbled from sky-high valuations in 2000, Stanley Druckenmiller, then second-in-command to George Soros at his famed Quantum Fund, suffered the fate of having held on too long.
Nearly two decades on Mr Druckenmiller, who now runs his own family office but remains a closely-followed investor, holds vast amounts of his wealth in technology shares that have risen massively in value over the past year.
US regulatory filings released this month showed that in the third quarter Mr Druckenmiller’s Duquesne Family Office held 41 per cent of its long US equity holdings in just five technology shares — Microsoft, Facebook, Amazon, Alibaba and Alphabet, formerly known as Google.
Yet Mr Druckenmiller’s portfolio construction has in fact been a relatively contrarian bet in spite of the huge gains for technology shares. His enthusiasm contrasts with that of rank-and-file professional fund managers who have by and large remained deeply sceptical of the ferocious rally in US and Asian technology giants.
Andrew Milligan, head of global strategy at Aberdeen Standard Investments, argues that some of the apparent reluctance to own the best-performing tech stocks reflects psychological factors as much as any sense of fundamental valuation.
“There is a behavioural finance aspect to this. It is perfectly understandable that if something has already risen a lot in value people are reluctant to buy them,” he says, while also pointing out that earnings growth at these companies have consistently surprised the market.
But Mr Druckenmiller is not the only contrarian. The portfolios of other highly respected veteran investors also have significant holdings in high-flying technology shares.
Julian Robertson, the octogenarian patriarch of the Tiger group of hedge funds who famously suffered before the dotcom crash for eschewing tech shares, holds just under a quarter of his portfolio’s long US equity exposure in Facebook, Alphabet, Microsoft and Alibaba. Even Warren Buffett’s Berkshire Hathaway, which also sat out the dotcom bubble, has seen its investment in Apple pay off handsomely since building it up over the past year.
These big bets by some of the world’s well-respected investors using large amounts of their own wealth have been vastly rewarded in a year when Facebook shares have risen by almost 60 per cent, and Alibaba has more than doubled in value.
But reticence elsewhere remains. The most recent Bank of America Merrill Lynch fund manager survey, which polls investors who manage $533bn in money for clients, saw 34 per cent of those questioned claim that “long Nasdaq” was the world’s most “crowded trade”. In June analysts at Goldman Sachs compared the so-called Fang stocks (Facebook, Amazon, Netflix and Google) to the dotcom bubble, with jitters over their valuation briefly pushing down their prices before resuming their upward march.
Such has been the outperformance of a concentrated number of technology shares this year, that regular stock pickers managing money for their clients have succeeded or failed largely based on whether they had owned them or not.
In spite of their surging market capitalisations certain technology stocks have not until recently been particularly well-owned by institutional investors. Amazon, for example, was only the 18th most widely held US stock by all equity strategies in the second quarter of 2016, according to eVestment research. By the end of the first half of this year it had shot up to ninth place, but still ranked behind companies including United Health Group and Cisco. Facebook meanwhile moved up from 10th most owned to sixth place over the same period.
While the largest technology companies, Apple and Microsoft, are the most owned shares, current position concentration among investors as a whole does not match perfectly with the excess levels of profitability being achieved by this breakout group of shares in the US.
One way of measuring this is by looking at these companies’ return on invested capital, which measures their profitability based on every dollar of debt or equity capital invested in their businesses. Certain analysts argue this represents a far cleaner portrayal of corporate profitability than standard accounting-based earnings numbers. On this basis some of the largest tech shares remain significantly ahead of “old economy” peers. Apple had generated over 100 per cent ROIC in 2017 according to analysis by New Constructs, the highest level in the S&P 500, while Facebook and Alphabet both generated a very strong 30 per cent ROIC.
At Berkshire Hathaway’s annual meeting this year Mr Buffett rued not having invested in Alphabet and Amazon in the past. He later said when asked about whether he would buy them today how “it’s a little hard when you look at something at ‘X’ and it sells at 10X to buy it”.
Graham Secker, chief European equity strategist at Morgan Stanley, argues that technology sector valuations are still not as expensive as the levels seen in the dotcom bubble.
“We are nowhere near the levels of overvaluation we saw in 2000,” he says. “Some of the stocks are not egregiously expensive. The bigger point is that the bifurcation or polarisation across the market between unloved sectors such as retail and tech is as big as I can remember in a long time.”
Mr Milligan at Aberdeen Standard Investments notes that there are anecdotal signs that a growing number of conventional fund managers are now throwing in the towel and following the veterans into holding larger amounts of these seemingly unstoppable technology shares. The question for those who are choosing to do this in 2018 will be whether they now risk arriving at the party too late.
For investors such as Mr Druckenmiller the question for next year will be whether this time his big bet on technology shares will have a happier ending than two decades ago.