Our Technology Growth Curve...
We wrote a couple of weeks ago that over the next few issues we would discuss our themes and the companies that we have in place to represent those themes in the portfolio. Recently, we were asked by our counselling group to contribute to a thought piece on the “Magnificent 7”, which has been topical in the media. So we thought that we would add to our contribution in a bit more technical detail from the portfolio management perspective below.
When we started Pathfinder, our technology exposure was very limited. We are value investors and found it hard to “buy the tech stocks”. We were able to add Microsoft (MSFT US) in 2013 at $28.17 after a rare stumble from the company. We viewed their issues as short term, but the market viewed them as material, so there was a disconnect between value and price. The business is truly exceptional (we doubled our position at $36 that same year and added again at $42 in 2015). We followed the company as it evolved through the adoption of a recurring revenue model, expanding its stack to include cloud (among other tools), and finally artificial intelligence. Concurrently, we grew convinced that we were at the start of a technology evolution and established our theme. We have expanded our positioning in the technology sector from 0% to our largest weights, in both our domestic and international mandates (please see Figure 1). The theme is further expressed with “downstream” exposure:
- The cloud thesis evolved at MSFT and we added a number of chip manufactures (Taiwan Semi Conductor Manufacturing, Skyworks and Intel), a clearly much more computing would be needed.
- As we saw the demand for chips increasing dramatically, we added the “picks & shovels”. Those companies that service the chip building industry (ASML, CCMP, Tokyo Electron, Jeol, Valqua).
- Finally, we added the designers (NVDA, Intel) and other end use cases (Alphabet, Apple, and Oracle) and also industrial technology (Emerson, Daifuku and Kion) as we saw the overall business use case expand.
“This means that” we believe this theme has years to go. While we may switch companies over time as the environment evolves (the best example of this is how quickly the situation at NVDA changed), we think the overall technology need will continue to be material. We will continue to remain laser focused on the strategic direction of the theme and the companies in the portfolio that we use to express our view.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.