Aug 31, 2020 Equities

How sustainable is current tech-stock dominance? Andre Köttner shares his thoughts

So far, the coronavirus crisis seems to have had little effect on large technology companies. But DWS fund manager Andre Köttner warns against excessive euphoria and explains why he believes good risk diversification is a better strategy in the long run.

  • Five IT groups currently dominate the Nasdaq 100, and their market capitalisation is now greater than that of the 95 remaining competitors in the index.
  • While some other companies suffered in severe dips in sales due to the pandemic, Apple, Microsoft and Amazon reported new records.
  • But today's losers could be tomorrow's winners. Competition – especially from the Far East – threatens the Big Five.
6 minutes to read

"This year’s losers could be next year's winners."

Andre Koettner, Co-Head of Equities

Andre, the coronavirus crisis has upset stock markets. But one sector seems to have survived the turmoil completely unscathed: US technology companies. Why is that?

That's true. No sector has yet come through the crisis as well as the large IT groups. Just look at the quarterly sales of the Big Five from the USA: Apple, Amazon, Microsoft and Facebook have reported double-digit growth figures. The only exception is Alphabet, which has "only" remained stable. This is simply due to its business model, which depends heavily on advertising revenues. That’s less the case for the other companies. They were better able to take advantage of the trend to stay at home and increased digital communication.

Of course, the question is: will this remain the case?

Correct. And I’m certainly not taking that for granted. Take a traditionally stable company like Coca-Cola. Even its sales have fallen by 20 percent compared to the previous year because of coronavirus. Now let's think one year ahead and assume that we will somehow have returned to normality. In that case, Coca-Cola should recover just as quickly and return to its old level. That would mean that this year’s losers would be the ones achieving the highest growth next year. That could be exciting too.

Andre Koettner

Co-Head of Equities

Is it not also possible that the technology groups’ growth simply received a further boost from the coronavirus crisis – that they are simply extending their lead?

That’s possible. But I would caution against excessive euphoria: even the best business models hit a wall at some point. Then they can no longer continue or at least not as quickly. This is not to mention companies whose valuations are still based primarily on strong sales growth. At some point, those companies will have to prove that they can also generate profits. Then we will see how attractive they really are.

The big five - Apple, Microsoft, Amazon, Facebook and Alphabet - now account for more than half of the total market capitalisation of the Nasdaq 100. Is that healthy?

These companies do indeed occupy a special position. You can tell that from the fact that they almost have a monopoly position in their respective markets. That, in turn, creates many opportunities for them to develop further and exploit new business areas. That alone is very positive. By the way, I don’t believe that breaking them would change that much. So, they are already very well positioned. But everyone knows that. That's why I find it hard to imagine that it will always carry on like that.

"I cannot imagine that the Americans will break up their best companies."

Andre Koettner, Co-Head of Equities

Are there political dangers too? The bosses of four of the five big companies mentioned above – Microsoft is the exception – have recently had to testify before the US Congress.

I personally do not believe that the Americans will smash their best companies. They are far too important to the US’s economic dominance. And the Trump administration is also introducing industrial policy that massively favours corporates. You only have to think of the pressure that the government is currently building up against TikTok, WeChat and Huawei. It’s not clear to me what this has to do with fair competition. Of course, China is not one bit better. To the contrary. But it is clear that the Americans are aware of competition from China and are taking it seriously. I cannot imagine that they would weaken their own companies in such a situation.

It almost sounds as if the Americans are afraid of competition from the Far East. Is that really the case?

I myself spent two and a half months in Silicon Valley. I visited a lot of companies there, from the smallest start-ups to some of the largest companies in the world. When I asked people who they took seriously as a competitor, no European names came up, but Chinese names very often did. And rightly so: what the Chinese have achieved with Huawei, for example, over the past 30 years is in no way inferior to what Apple or Amazon have achieved. Huawei has 188,000 employees, generates over 100 billion euros in sales and is number one in many of its markets worldwide. Apple itself says that it has never had a competitor like Huawei. The battle between the USA and China has only just begun.

As a fund manager, how do you use an insight like that? Are you now looking more at China or is Silicon Valley still in the frame?

There are still significantly more investment opportunities in the USA than in China. Capital markets don’t play such an important role in China. There are a few companies, like Alibaba and Tencent, that are allowed to build up monopolies. But when it comes to software, algorithms and so on, the most interesting things are not necessarily done by companies that are listed on the stock exchange. The Chinese prefer to keep that to themselves. But a few big companies are listed in China, and we are invested in them. There are also successful companies in other Asian countries that are in a position to produce semiconductors.  That remains key to technological development.

We’ve already discussed some companies’ size and their dominance in the Nasdaq 100 and other indices. As a fund manager, how do you ensure that these companies do not dominate your funds too?

I cannot completely exclude those companies. They are too important for that. If the heavyweights are also performing best, then they have a greater weight in the portfolio than other stocks. Naturally, however, I take care that their share of the portfolio does not get out of hand.

Are there alternatives? How do second-tier IT companies look?

Well, their valuations are not much more attractive. I therefore prefer to approach things in a different way and look for companies that are really cheap. And there are some.

You’ve visited Silicon Valley yourself and seen everything. What did that achieve? If you want to be a successful tech investor, do you have to see for yourself what makes them tick over there?

Yes, that is very important. And I was actually planning a longer stay in Silicon Valley this summer, but it didn't work out. A lot is changing, and development is still very, very fast. That's why it's important to stay on the ball. For example, I originally thought that Covid-19 would freeze risk capital, meaning that it would be harder for start-ups to get investor money. But that was only the case for a few weeks. After that, capital came back, and there were new financing rounds. Today, business models that are unlikely to make a profit for years are finding finance again. In other words: there is still a lot going on in Silicon Valley. The music is still loudest there.

"In China, the most interesting things are not necessarily done by listed companies."

Andre Koettner, Co-Head of Equities

"Equities from the healthcare and consumer staples sectors look attractive as a stabiliser right now."

Andre Koettner, Co-Head of Equities

You manage the DWS Akkumula fund. IT stocks are currently the largest sector in the fund, accounting for 22 percent of fixed assets, but of course there are other sectors too. What are you looking at particularly closely right now?

In the current environment, the healthcare sector is obviously exciting. Anyone who makes drugs is currently doing steady business. The situation is somewhat different for medical technology. But even though operations to implant artificial hip and knee joints are currently being postponed, they are not being cancelled and will be made up for quickly. That's why health care as a sector has a stabilising effect and looks interesting to us as a counterbalance. The same applies to basic consumer goods such as food. In the financial sector, we tend to concentrate on stock markets or rating agencies, i.e. companies that can benefit from unsettled markets.

Let's finish by talking briefly about Coronavirus and its future development. Despite optimism on the stock markets, it is still completely unclear how things will unfold. How do you deal with that kind of risk?

We try to combine the best of two worlds. We have very dynamic companies in our portfolio that are growing aggressively and benefit from strong economic growth. This includes a great many from the technology sector. But we also have companies that are very stable and defensive, for example in the healthcare sector and consumer goods. If the economic situation becomes difficult, those companies should ensure a certain risk balance in the portfolio. Both sides are well represented in the fund, so it should be well positioned.

Performance in the past 12-month periods DWS Akkumula LC

Period

Net

Gross

10/08/2019 – 10/08/2020

9.24%

9.24%

10/08.2018 - 10/08/2019

4.64%

4.64%

10/08/2017 – 10/08/2018

11.93%

11.93%

10/08/2016 – 10/08/2017

7.77%

7.77%

10/08/2015 – 10/08/2016

-5.77%

-1.06%

Past performance, [actual or simulated], is not a reliable indication of future performance.[1]

As of: End of August 2020; Source: DWS International GmbH

Risk information Risk information DWS Akkumula LC

  • Market-, industry- and company-related price losses
  • Exchange rate fluctuations
  • Due to its composition / the techniques used by the fund management, the investment fund has a significantly increased volatility, i.e. the unit prices may be subject to considerable downward or upward fluctuations even within short periods of time
  • The unit value may fall below the purchase price at which the customer acquired the unit

Key Data DWS Akkumula LC

  • ISIN | WKN: EN0008474024 | 847402
  • Currency: Euro
  • Appropriation of income: Retention
  • Issue surcharge: 5.00%
  • Flat rate: 1.496% (as of 31/12/2019)
  • Fund assets: EUR 5.17 billion (as or: 10/08/2020)

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1. The gross value development (BVI method) takes into account all costs incurred at fund level (e.g. management fee), the net value development additionally includes the front-end load; other costs may be incurred at investor level (e.g. custody account costs), which are not included in the presentation.

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