In recent years it has been impossible for global equity funds to beat the index without a substantial allocation to the FAMANG stocks. But the Global Disruptive Opportunities fund of CPR AM, a boutique of Amundi, has done it. We asked fund manager Wesley Lebeau how.
The Global Disruptive Opportunities fund, which was established in December 2016, has achieved an annualised return of 17.3% over the past three years (at the end of September), more than twice the return of the MSCI World Index over that period. The fund achieved this outperformance without investing in the large tech companies, but has partly benefited from the same trends, according to Lebeau.
Disruption
After all, the main reason why the big tech companies have done so well is the fact that they have benefited from disruption. ‘When we were setting up this fund a few years ago, we did not want to start a specific technology fund. There were so many of such funds already,’ says Lebeau. ‘In the end we realised that the common denominator of all these funds was disruption. And that’s what this fund focuses on. However, we look much broader than at tech alone. We have a preference for flexibility and do not want to be too dependent on tech companies. Our aim is to achieve a good return at every stage of the market cycle.’
The Global Disruptive Opportunities fund invests in no less than 28 themes with disruptive potential, ranging from e-commerce and big data to drones and precision agriculture. Yet technology companies are the backbone of the fund. Almost half of the fund’s allocation is in the information technology sector.
Mid-cap bias
But not in the likes of Google, Amazon and Facebook. ‘We have a certain mid-cap bias. 30% of the portfolio is in companies with a market capitalisation of less than $10 billion,’ says Lebeau, who also has a preference for B2B companies. ‘Two-thirds of our portfolio is in B2B, and we are much less invested in the large consumer-oriented companies. Overall, B2B companies benefit most from the large, steadily growing global IT spending that already amounts to $3.5 trillion annually.’ Another disadvantage of taking exposure to consumer-related companies, Lebeau adds, is the related uncertainty about privacy issues, such as whether certain customer data can be used commercially.
Cloud
Within tech, Lebeau finds the theme ‘Cloud’ particularly promising. ‘Everything that has to do with the cloud is really a long-term theme. Companies need to be more flexible and online connections with customers are becoming increasingly important,’ he says. The disruption lies in the transition companies are now making from business servers to the cloud, a development that has received an extra boost from the Covid-19 pandemic.
After all, with more employees working from home, the need for ‘cloud-based’ work has increased. Lebeau believes the 20% drop in the price of German IT company SAP last month should also be seen in this context. ‘Companies are now speeding up the transition to the cloud, and that hits the revenues of a company such as SAP, which is still largely dependent on the sale of software packages to companies. SAP has now announced they will speed up the transition to cloud-based software, but this will require additional investment.’
Uber for doctors
Lebeau mentions three other disruptive trends he likes. The first is the rise of telemedicine: remote doctor consultations. ‘This also has to do with digitisation, of course, but there’s more to it. There are more and more doctors who no longer even open a practice but only work remotely via platforms such as American Well Corp and China’s Ping An Doctor. But you also have such companies in Europe. These are the Ubers of Health Care and we expect this to be a trend that will continue. It is an effective way of addressing shortages of doctors in rural areas, for example.’
Another disruptive trend par excellence is, of course, the energy transition, in which Lebeau’s fund also invests. ‘One of the best-performing companies in our portfolio, for example, is Solaredge, a company that produces highly efficient solar panels specifically for households.’
A final trend where the Frenchman sees many opportunities is the switch to electric cars, which is expected to turn the automotive industry upside down in the next decade. Lebeau is not responding to this trend by investing in Tesla but is mainly focusing on suppliers instead. ‘Think of companies like Nidec of Japan, the most important supplier of battery systems for electric cars to China, and ST Microelectronics, an important supplier to Tesla.’
High valuations
Despite the absence of ‘hyped’ companies such as Tesla in the fund’s portfolio, the average current P/E-ratio of the companies in the portfolio, more than two-thirds of which are invested in the US, is well above the MSCI World average at 39.7. Lebeau stresses that this is mainly due to the higher growth expectations of the companies in which he invests, but admits that a strong economic recovery and an eventual rise in interest rates would make it more difficult to continue the portfolio’s outperformance. ‘In a market environment dominated by large technology companies, this is easier for us.’
The Global Disruptive Opportunities fund already has $3.5 billion under management. Because of the fund’s mid-cap bias, there is a limit to the fund’s capacity. According to Benelux sales director Jovan Ponsioen of Amundi, however, this limit has not yet come within reach. Ponsioen estimates the maximum capacity at approximately $6 billion. ‘In addition, the universe is developing rapidly so this limit is expected to rise,’ he says.