It is reported that in the past 10 years, under the stimulus of the flood of monetary policy in the United States, the stock prices of major technology companies have soared. Therefore, this kind of investment method does sometimes bring amazing returns.
However, in the past year, the same investment philosophy was impacted by factors such as rising interest rates and inflation. With the relaxation of epidemic control, so-called "epidemic beneficiary stocks" such as Zoom and Peloton have fallen off the altar. In addition, technology stocks have also been sold off on a large scale. Many once popular stocks have caused heavy losses to investors. Against this background, "defensive stocks", which have been neglected by Wall Street for many years, have become the new favorite of investors.
In addition, the downturn in the stock market since the beginning of this year has led to the "longest lasting" IPO shortage of US technology stocks in this century. At present, although there are signs of recovery in some other industries, experts are still cautious about the recovery pace of technology IPO (initial public offering).
According to the research of Morgan Stanley's "stock capital market" team, as of this Wednesday, there will be no technology IPO with a scale of more than 50 million US dollars in the US stock market for 238 consecutive days, surpassing the financial crisis in 2008 and the record set after the bursting of the Internet bubble at the beginning of this century.
Picture: "Sister Wood" Kathy Wood The American investment community is filled with grief. The net value of the global technology equity fund under the investment company T Rowe Price has shrunk by 45% since this year; The flagship hedge fund of Tiger Global, which is controlled by Chase Coleman, was cut in half by the end of July; The net value of Ark Innovation, the flagship ETF fund of Cathie Wood, the "sister of wood", has also fallen by 55% this year. Since December, the asset scale managed by her Ark Investment Management has shrunk by nearly half.
The UK market also fared poorly. By the end of August, Baillie Gifford's Scottish Mortgage Investment Trust had declined by 40% in the year, and Polar Capital Technology Trust had also declined by 22% in the year by the end of July. In the Japanese market, the sharp decline in the valuation of technology stocks and the weakening of the yen led to a record net loss of 3.1 trillion yen ($23 billion) in the second quarter of Sun Zhengyi's Softbank.
Although such a rapid reversal has taken place, few big name growth investors give up their existing investment methods - some of them believe that such a decline has created the opportunity to buy cautiously.
Growth investors are inherently optimistic. They firmly believe that we are in a once-in-a-lifetime technological wave, and that during this period there will be a number of outstanding companies that can lead the future trend and achieve explosive growth. If they want to become successful investors, their task is to find out these enterprises.
"Some high-quality growth enterprises seem to be sold at a low price." said Kirsty Gibson, the US equity investment manager of Baillie Gifford. "Now the opportunity is rare, and you can take the opportunity to make long-term bets on growth investment. Although it is not comfortable now, it is really exciting."
"Sister Wood"'s confidence seems not to have been hit by this year's losses. "Innovation can solve all problems. The world today faces more problems than two years ago." She tweeted on September 8, saying, "Innovation is the key to real growth!"
Although growth investors are still optimistic about technological change, many of them have made major adjustments to their investment strategies, paid more attention to short-term profits and cash flow, and actively explored new ways to help technology companies that are still in the early stages of development survive the downturn.
David Older, director of equity investment at Carmignac, an asset management company with a scale of 33.2 billion euros, said: "It's not going back to the past. No matter how high you think the interest rate will rise, the rise in capital costs will have a continuous negative impact on growth enterprises."
Where does the money come from?
Many well-known growth investors said that although the macroeconomic environment made them more cautious in the short term, they still believed that the scientific and technological revolution had just begun.
Some funds have adopted the so-called "cross-border" strategy to diversify their investment into private companies and listed companies. Some growth investors emphasize that their investment in a company usually lasts for several years, so they can avoid short-term market fluctuations. Technology stocks are particularly vulnerable to the impact of rising interest rates, and their potential future earnings will be weakened.
But instead of trying to predict the direction of interest rates, they focused on understanding whether the competitive pattern of the companies they invested in had changed. The results show that although the macro environment of these enterprises has changed, the long-term potential of many enterprises has not been destroyed.
Figure: Snowflake Computing T Rowe Price's investment method: first imagine the scale of a technology company in three to five years, and then find out the companies that can grow by 30% to 40% every year. Five of the top 10 holding stocks of the company's global technology fund come from the software industry, namely, Atlassian, MongoDB, HubSpot, ServiceNow and Snowflake Computing.
Julian Cook is the fund manager of this US $1.39 trillion asset management institution. In his opinion, although the rise in interest rates will put pressure on the valuation of technology companies, the more important issue is the performance of these enterprises in terms of fundamental indicators such as profits, revenue and free cash flow in the environment of high interest rates in the next five years.
Some investors are dismissive of unreachable profit commitments. "We have shortened the investment horizon," said Ben Rogoff, co head of the global technology team of Polar Capital. Half of the investment trusts he is responsible for are invested in software and semiconductor enterprises, including Nvidia, TSMC and ASML.
He said, "Your (company's) technology may have great market potential and may change the world, but it is hard to be sure now."
Investors are also increasingly picky about the profit path of enterprises. Odell of Carmignac agreed with this view. He said that everyone's return expectation has been shortened from 10 years to 2 years. "Obviously, the market can no longer pay for the illusory growth story unless they can really prove their profitability and quickly create cash flow," he added.
Potential growth enterprises must first resist various pressures such as supply chain interruption, inflation, and increasingly tight financing environment to fully exert their long-term potential. While executives are re examining the industry development model, investors are also trying to clarify how their companies will respond to the economic downturn. The most favored are cash generating enterprises that have both market share and pricing power, and are not easily affected by the reduction of consumer spending - they cannot be just "epidemic beneficiary stocks".
"We need to pay more attention to the resilience and adaptability of these enterprises than ever before," said Gibson of Baillie Gifford. The total assets under the management of the fund manager fell to 231 billion pounds on June 30, more than a third lower than the same period last year.
"Some enterprises will become stronger." She added, "We welcome enterprises that can 'reduce fat', but we will be cautious about those that can 'reduce muscle', because we do not want them to lose long-term development opportunities."
The selling tide of technology stocks was triggered by macro factors, which showed no difference. In other words, the market will not discriminate the cash flow situation. As long as it is a growth stock, it will be sold out. This creates a buying opportunity for investors. They can selectively increase their holdings in existing positions of stocks whose share prices have fallen more than their earnings have fallen, or they can add new positions.
Rogoff of Polar Capital said that the valuation between the next generation SaaS (software as a service) company and the old Internet companies is increasingly similar, and the growth potential is greater, which creates a rare opportunity for investors to buy the former.
Many investors said that they were optimistic about defensive stocks in the technology sector, such as semiconductor companies such as Asmar and Synopsys, and cloud computing and enterprise software companies (such as MongoDB, a database program developer). In the face of inflation, enterprise software can help companies reduce costs and improve productivity, and such software usually adopts a non cyclical subscription model.
They believe that the long-term structural trend is still on. "The process of economic digitalization and workflow migration to the cloud is still advancing," said T Rowe's Julian. He added that some consumer oriented companies made a lot of money during the epidemic, and now it is time to return to reality.
Investors who are optimistic about the prospects of growth stocks also said that the technological revolution has just touched the tip of the iceberg in global economic fields such as energy, gene sequencing and synthetic biology.
Baillie Gifford's US investment team increased its holdings in software companies such as HashiCorp and Snowflake, as well as education company Duolingo and delivery platform DoorDash.
Challenge in next year
Although some people think that the selling trend of growth stocks has created an excellent buying point, not everyone will buy without thinking.
"I feel that the open market will certainly be valuable in the next five years. The challenge is next year." Philippe Laffont, founder of New York Coat Management, said that he is a member of the "tiger family" and once received professional training in Tiger Management of Julian Robertson.
Among growth investors, LaFonte belongs to the more pessimistic group. In the crash earlier this year, the hedge funds under Coatue chose to close their positions. Data shows that the hedge fund's cash position in May exceeded 80%. This decision and the strong performance of short positions helped the company's flagship hedge fund to control the decline in net worth at 17.6% by the end of August.
LaFonte said: "The situation is getting worse, not better." Some investors believe that although some stocks do show good value, compared with the end of the Internet bubble in 2003 and the end of the financial crisis in 2009, the market today is not cheap. In their view, the delusion to copy the bottom will only be futile.
Rogoff of Polar Capital said: "I think there are some good opportunities. However, although the dynamic market sales ratio of software stocks has dropped from 25 times to 10 times, it is difficult to judge whether it will stop falling at 10 times."
Another factor holding back potential bulls is that many investors have not written down their shares in private companies, although the public market has repriced. Baillie Gifford's Scottish Mortgage Investment Trust gives the outside world a glimpse of the power of this write down: the institution revealed that in the first half of this year, they reassessed their 351 private companies, with an average write down of 27.6%.
After the market correction, private enterprises have become less attractive than the stocks in the open market, and the more picky venture capitalists have more cash in their hands. According to insiders, not only has Chess Coleman's Tiger Global not made any new private investment in the past year or more, but it has significantly reduced the overall stock position through hedge funds and increased the proportion of short positions. Even Sun Zhengyi of Softbank entered the "defense mode" and kept a lot of cash.
Figure: Sun Zhengyi, founder of Softbank Group "Because the selling tide is too fierce, many good opportunities now come from the public market." said Gibson of Baillie Gifford, "Our standard for investing in private companies is higher than before, because the competition for capital is more fierce, and your competitors are the public market stocks with lower valuation in the portfolio."
When technology companies were first frothy in valuation and then sold off sharply, it was inevitable for market observers to recall the ups and downs of the Internet bubble in the late 1990s. However, investors believe that although these two periods do contain a period of irrational prosperity, they still have many differences.
"As far as the technology industry itself is concerned, it is much more mature now than at the end of the 1990s, the profit data is much more solid than at that time, and the starting point of valuation is fundamentally different," said Rogoff of Polar Capital.
Explore new models
In July, when Klarna, a pioneer of the "buy first, pay later" model, announced a $800 million financing plan, its valuation shrank from the original $46 billion to $6.7 billion. In the venture capital circle, it stirred up a thousand waves. As one of the most valued technology start-ups in Europe, Klarna's valuation plummeted as one of the most significant signs of the future difficulties of the private market in many people's eyes.
Some investors began to try other investment models. Coatue is raising US $2 billion for the Tactical Solutions Fund, which adopts a structured equity strategy. The fund specifically provides loans to private enterprises that are in financial difficulties but do not want to dilute their equity due to undervalued financing. The structured equity they invest in has the dual attributes of debt and equity, usually including convertible bonds, preferred shares or debt weighted certificates.
"We need to use this crisis to explore new models." LaFonte said, "Structured transactions have become a way of attack for us, which can provide a solution to founders in the economic downturn. We hope they can continue to expand their business, make attractive acquisitions, and expand their teams. Many new financing methods can be used to support the founders and prevent them from being forced to sell their shares. "
Atreides Management, founded by Gavin Baker, the former fund manager of Fidelity Investment, is also preparing an opportunistic venture capital fund. According to the public information released in July, the fund will take advantage of the current downturn in the risk market to participate in structured equity transactions, and will also help the privatization of listed companies.
Figure: Warren Buffett, the "god of stocks" "When others fear, I am greedy, and when others are greedy, I am afraid." This sentence is easier said than done. "Beck quoted the famous saying of Warren Buffett, the" god of stocks ", and said:" We believe that the next 9 to 12 months will be one of the most suitable periods in history to maintain greed, and we must increase capital allocation in the risk area. "
