Columbia Threadneedle Investments
- Rahul Narang runs one of the best-performing tech funds over the last five years, the Columbia Global Technology Growth Fund.
- His strategy has been to focus on the two ends of the tech market — the most and least expensive stocks; over time, both have performed better than those in the middle, he told Business Insider.
- Narang’s fund is built around three big components: companies with so-called moats; underappreciated, value stocks; and those that are capitalizing on the big themes in tech.
- In the value area, he likes several semiconductor stocks, in part because they’re likely going to benefit from some of the emerging trends.
- Visit Business Insider’s homepage for more stories.
In tech investing, many fund managers stay well clear of value stocks.
Rahul Narang likes to buy them up.
Like many tech investors, Narang, who runs the Columbia Global Technology Growth Fund, spends a good deal of time — and dedicates a big portion of his fund’s portfolio — to the in-demand stocks, whether the technology giants or the up-and-comers. But unlike many of his peers, Narang also reserves a sizable portion of his fund for some of the cheapest stocks in the technology world.
His reasons are simple. Over the last 40 years, according to Narang’s research, the most and least expensive tech stocks have outperformed the vast majority of companies priced in the middle. What’s more, the value stocks tend to balance things out during the periods when the market sours on the fastest growers and priciest companies.
Owning those companies “keeps us in the game during those periods of sell-off,” Narang told Business Insider in an interview last week.
That strategy is paying off.
The Global Technology Growth fund ranked in the top 20 tech funds for its performance over the last five years, including through the coronavirus dip, according to Morningstar Direct. The fund has also won the Lipper award for its category for the last two years for having the best risk-adjusted returns over the last five years.
Narang looks for companies with moats
Narang’s fund has three key components, although one of those pieces kind of blurs into the other two.
The fund invests more than half of its fund’s assets — and sometimes as much as 60% or 65% — in companies that have significant so-called moats. These are firms that dominate their sectors, have few competitors, and have the ability to raise prices as needed or desired.
For Narang and this fund, this group includes many of the usual suspects among the big tech companies. The Global Technology Fund’s biggest holdings, by far, are its stakes in Microsoft and Apple. It also has sizeable positions in Alphabet, Amazon, Netflix, Facebook, Adobe, Nvidia, and Visa.
When the fund finds moat companies — or those with the potential to develop into them — it holds on to them, Narang said.
The fund’s “best ideas” are “our biggest positions, and we’ve stayed with them over time,” he said.
The second big component of the fund’s holdings are the value stocks. These are companies that for various reasons trade at low multiples of their earnings or sales. Value stocks tend to get a bad name in tech investing because often the companies with low valuations are those whose best days are past them, firms whose businesses have been disrupted, or whose products have been replaced by a new generation of technology.
He likes value stocks, but not just because they’re cheap
Narang is certainly aware and wary of that dynamic. He and his team try to avoid those whose businesses are in decline.
“You don’t want to buy stocks just because they’re cheap,” he said. “That is a fool’s errand. You will lose money consistently.”
But he still think investors can find gold in the value pile. He and his team look for companies whose potential is being underestimated by the market. Often in such cases the market is missing or undervaluing a fundamental change taking place either at a particular company or a broader industry.
For years, it was basically a value stock, because investors saw it a hardware maker whose primary industry — smartphones — was starting to decline, Narang said. But the company had some huge and underappreciated strengths — a standout balance sheet with huge amounts of cash, a strong management team, and a moat in the form of large numbers of customers that were essentially locked into its ecosystem of phones, computers, and software.
And, he said, many investors didn’t recognize that it was starting to capitalize on that moat to sell a raft of subscription-based services to those same customers to generate something the market highly values — recurring revenue.
When the market finally recognized what Apple was doing, its stock started to grow again, rapidly.
Narang and his team saw similar potential in the makers of computer memory, including Micron and Samsung. Those companies tend to trade at low multiples, in part because instead of offering consistent earnings growth, they go through boom-and-bust cycles.
But a few years ago, Narang and his team recognized the industry was changing, Narang said.
The memory business had consolidated down to three main players and excess capacity — which led to lower prices and profit margins — was been taken out of the system.
They bet that this would allow the remaining players to become much more profitable in the near future and their stocks would grow as a result. Although the memory companies had a rocky year last year, over the longer term that’s been a good bet.
With Apple and the memory market, “Our opinion was that the market wasn’t giving enough credit for [the] scenarios that were playing out over time,” he said.
Narang looks for companies that are capitalizing on themes
The final piece of Narang’s strategy is to focus on the big themes in the technology industry and to find the companies that are best at taking advantage of them.
Some of the themes he and his team are focused on are well-established ones, such as the growth of cloud computing, e-commerce, and mobile gaming. Others are emergent, such as artificial intelligence, robotics, autonomous vehicles, and 5G wireless networking.
The theme area, though, gets a little squishy, because it blends into the other two parts of the Global Technology Growth Fund’s portfolio. Narang and his team look for moat and value stocks that are capitalizing on the important themes. On the moat side, Apple and Amazon are taking advantage of numerous themes.
On the value side of the portfolio, the memory chip makers are poised to capitalize on trends such autonomous vehicles and 5G phones, which will up the demand for memory, Narang said.
The upcoming boom in such devices is going to drive demand for chips, and another of the fund’s value plays, Taiwan Semiconductor Manufacturing, should benefit, he said. So too should Broadcom, which makes chips that are used in cloud computing data centers and in wireless devices.
“Semiconductors are one way to get thematic exposure at a cheaper valuation,” Narang said.
Got a tip about the tech industry or tech investing? Contact Troy Wolverton via email at [email protected], message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.