Tech investing: Going from a stay-at-home to a reopening world
2020 was defined by the COVID-19 pandemic and the massive social and economic disruption it created, including a recession that rivalled the Great Depression of the 1930's. As tech investors it was the year where we saw the businesses that we invested in reaching a new level of mainstream acceptance as everyone in the world was, to put it mildly, encouraged to familiarise themselves with modern communication, commerce and entertainment technologies. Not surprisingly, in a year where the global stock market returned 7.0% in EUR, information technology led the way with a 32.5% return, followed by communication services at 13.4%. DNB Technology, which is benchmarked to a market weighted combination of these two indexes, returned 19.0 % gross fees, 6.7 % behind the benchmark return of 25.7%.
Source: DNB Asset Management
As we entered 2020, we were underweight software and services, being concerned about excessive valuation, lack of profitability and high stock-based compensation. This formed the funding for an overweight in telecom services, which was, and continues to be, attractively valued with potential positive triggers ahead. We talked about this positioning in a blog post in August last year (Are there tendencies to a Technology bubble?). We were hurt by this positioning in 2020. Both telecom and software and services formed an important backbone of keeping the wheels turning in society, but investors flocked to the latter, not paying attention to what they paid for the exposure. The second factor was monetary stimulus which lowered interest rates and increased the relative attractiveness of long duration equities, that is, stocks with the majority of earnings far into the future.
Source: DNB Asset Management
Following the news of several successful vaccines in November and the prospects of reopening long-term interest rates have returned to where they were at the start of 2020. That has fuelled an opposite effect from what we saw in 2020, with investors now leaning away from long duration assets. We have seen this effect in the portfolio too, with the underperformance from 2020 now being reversed. End of first quarter 2021, DNB Technology has returned 15.2 % gross fees, 8.0 % above the benchmark return of 7.2%.