Hello and welcome to the latest Insider interview. Our guest today is Ben Rogoff, who is the manager of the Polar Capital Technology Trust. Ben, it's great to have you in the studio.
The Magnificent 7 is the big theme in tech investing, but where do you stand on these giant American technology shares?
Well, I mean, about a third of the portfolio is still invested in the Mag. And you know, again, you only have to get a few things right in life and investing, as someone much smarter than me once said. And I think, you know, we made a very key decision, you know, probably nearly 20 years ago to move away from a multi-cap investment approach to really looking more at the index. Now again, that's very uncalled to talk to index, but actually the index has been a phenomenal thing to be tethered to for most of the last, well, ever since really the great financial crisis. And one of the reasons for that within tech has been that really the larger got larger. We've seen this, you know, the Mag 7 are really a manifestation of the fact that some very large companies have ended up dominating the profit pools associated with technology, be it, you know, Microsoft in software or, you know, obviously Google in search and so on. And so we've been delighted with the Mag 7 exposure that we've had, and it's probably been higher than most.
So, how do we feel about it today?
I think the answer is it's more nuanced. And by the way, that's a sort of, you got to be slightly careful what you wish for.
These companies have been the engine room of PCT's performance, haven't they, over a sustained period of time?
But they've also been very difficult to outperform. So, again, we'd love to see the market broaden, just like others. You in the end, though, have to operate with the market that you've got and not the one that you want. So, but why, what are we doing at the margin? The answer is we're reducing Mag 7. We're doing that because, not because really anything has gone wrong with those businesses, and in fact we've, you know, we've got lots of Nvidia at 12% of the portfolio, and we're still, you know, overweight Amazon relative to an index that, albeit, is at zero. But we feel that they've been incredible conduits for AI for the last two years. But we're beginning to feel that some of them are looking less good conduits for AI over the next few years. And so we've reduced our Alphabet, Google exposure, where they've got obviously an incredible model, they've got a cloud business that's on fire, they've got Waymo. There's lots of great things about this company. We've owned it continuously since it came public, so we're huge fans. But they also have lots to lose from a world where 800 million people are now using OpenAI ChatGPT. So that one we've been reducing. Apple also, I've owned it continuously since 2003. It's probably the best investment decision I ever made. Everything I've done subsequently with that stock has been wrong because I bought 1% of the trust in 2003 and I should have just left it there. But joking aside, one of the most phenomenal businesses on earth. But smartphone penetration has been, you know, full for a sustained period of time. Company, you know, is not struggling, but certainly replacement cycles have extended. The hope is that AI will revitalize iPhone sales, and, you know, they tried to launch Apple Intelligence as a way to do that. Our sense is that, well, Apple Intelligence hasn't been great. But more importantly, we feel that AI is something you're going to do in the largest model, the most complex, sophisticated, and sort of not maybe a winner-takes-all, but a winner-takes-most, which is why, of course, the OpenAIs and others are spending so aggressively to have the very best model. Apple doesn't have a model, and so in a sense is a bit of a spectator to what happens next, and that's given us a good opportunity to reduce our exposure there. So at the margin, we expect to keep reducing the Mag 7 names. I think we can find better conduits for AI elsewhere.
Just how expensive are technology stocks? It's often a very pricey sector, but where are we now versus history?
Well, look, markets are at the higher end of where they've tended to trade. That's not just true for tech or even for the US. But, you know, it's true to say that things are not cheap. But I think the forward PE of the US tech sector is in the high 20s, which is, you know, a level that I think some people will find uncomfortable. The relative PE, so when you think about what PE you pay relative to the PE for the broader market, is around 1.4 times the market multiple, and I think, again, going back to a post-great-financial-crisis range, that is towards the high end of life. Having said that, we're three years into a new AI cycle, and there are some incredible opportunities for technology to redistribute profit pools, both within the tech sector but also beyond it. And, you know, the earnings profile of our portfolio is very much at the higher end of life. You know, we're hopeful that our portfolio can grow earnings, you know, 20% plus. We're still trying to build a portfolio that's diversified because there will be, you know, challenges along the way to some of those companies, but, you know, the profile of tech is strong. It's meaningfully better than obviously the broader market, and let's not forget that, at least in our view, we're going to see more AI disruption. We're going to see companies that fall foul of AI as some of their core propositions are challenged by ever-better models. If that's true, the premium that you pay for a tech company that's delivering that disruption, I think, all things being equal, should be, you know, relatively high. One last thing, if I may, you know, I think the conversation about valuations is obviously relevant, but I think that often people bring it up as a way to sort of, I suppose, denigrate the technology story. And I think, you know, of course, everybody wears, you know, we're all some total of our cumulative experience. And for people that were around in the '90s like myself, you know, the dot-com period was, well, a tricky one. You know, obviously very exciting on the way up and then, you know, learn an awful lot on the way down. And I think that people want to liken the current period to that, you know, that '90s experience. But if one does, then you sort of come away sort of empty-handed because here we are today trading on 29 times or 1.4 times. So yes, at the high end of life, but in the late '90s when people were super excited about and it was, you know, at the heady end of that, you know, the tech sector traded in the 50s and 60s on a forward PE and we traded on more than two times the market multiples. So look, things may be a bit extended, but I think with good reason, and we look nothing like we did at the end of the late '90s.
