e-fundresearch.com: Looking at your investment universe: what conclusion do you draw from the market developments in 2018?Mikko Ripatti: The technology sector has performed well year-to-date. But as we have seen during the 2Q-2018 results reporting season, result or guidance disappointments will lead to strong market reactions as for example the USD 120 billion market cap drop that Facebook had in one day. It’s natural that investors and the media are very focused on the FAANG companies, since they are the biggest and most followed ones (FAANGs represent 12% of S&P500 and 27% of Nasdaq 100 Index), but in our view there is so much more in the technology sector. Volatility of technology stocks has increased. However, when looking at the development that is taking place in areas like big data, cloud services, artificial intelligence, machine learning or autonomous cars, one realizes that a lot of very interesting things are happening independently of the technology stock moves.
e-fundresearch.com: From trade wars, the rise in oil prices to the further rise in interest rates in the USA, did the portfolios undergo significant portfolio adjustments as part of the changed capital market environment? Where did you intervene most significantly during the past six months?Mikko Ripatti: The mentioned macro level variables, with the exception of the trade war developments, haven’t impacted our investment decisions in any material way. The technology sector is by definition a global sector with companies that have global client bases and supply-chains. So we have carefully followed the trade war developments, but even those haven’t had much of an impact in our investment process.
e-fundresearch.com: Which positions have proven to be the most gratifying performance drivers in this period? Where have allocations turned out to be stressful?
Mikko Ripatti: The Swedish telecom equipment and mobile network manufacturer Ericsson has been one of the biggest contributors in our portfolio year-to-date. The latest results of the company have shown that the turnaround process is proceeding as we have been expecting. Our underweight in the North American operator AT&T has also worked very well. We are not excited about their Time Warner acquisition. We are of the opinion that telecom operators should focus on operating telecom networks and not try to become content providers. Oracle, which is one of our key holdings at the moment, has not yet developed as expected this year, but we continue to be very positive about the company. The on premise to cloud transition benefits Oracle. In our view the most important value creation points for Oracle are its ability to manage company critical ERP systems with low churn, a well executing management team and the higher profitability in the cloud. Valuation is not demanding with a forward 12m PE of 14x for an over 10% earnings growth. We also think the success in the cloud outweighs the declining license sales.
e-fundresearch.com: Which sub-areas of your investment universe do you find particularly promising in the current environment, and which segments are you currently consciously avoiding?
Mikko Ripatti: In our view semiconductor companies with large exposure to the smartphone market are in for a tough year since the global smartphone volumes are slowing down. We don’t share the view that semiconductor demand for crypto currencies will compensate for the declining demand of smartphones.
e-fundresearch.com: We are at an advanced stage of the business cycle: what role does protecting or limiting the downside play in your portfolio management approach? How do you ensure that your portfolio can continue to outperform relative to your peer group and benchmark, even during downturns?
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Mikko Ripatti: The market moves come as given for us. Independently of the stage of the cycle, valuation is always one of the most important criteria in our bottom-up stock picking investments process. We don’t like to pay upfront for high multiples and then hope that the companies “grow” to those multiples in the future. We prefer solid business models with stable and positive cash flows. The long term successful performance of the fund shows that it has been the right strategy.
e-fundresearch.com: What should fund selectors know about a quantitative fund comparison and analysis of their track records? What are the uniqueness of your approach?
Mikko Ripatti: The success of our technology strategy is based on a very experienced portfolio management team led by Anders Tandberg-Johansen that has been working together since 2001. Our bottom-up stock picking process covers technology stocks globally and in addition to knowing the companies inside-out, we also put a lot of focus on the valuation of the companies. In order to have the clients’ interest aligned with the asset managers, we think that the portfolio managers should be themselves invested in their own products.
e-fundresearch.com: Which developments and events should investors focus on in the further course of the year?
Mikko Ripatti: Increased volatility due to a much more uncertain political, geopolitical and economic situation seems to have come to stay. Focusing on the fundamentals of the industries and companies is ever more important. Valuations are not as attractive as they were some time ago, but plenty of opportunities are still available for bottom-up stock pickers.