Ben Rogoff interview: the best tech company I’ve ever owned

The lead manager of Polar Capital Technology (LSE:PCT) talks to interactive investor’s head of markets Richard Hunter about investment themes, historical parallels between the coronavirus crisis and tech innovation around the time of the Second World War. He also discusses portfolio holdings, stocks for the ’new normal’ and the acceleration of disruptive tech.

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Richard Hunter, head of markets at interactive investor: Could you talk us through some of the objectives and investment themes of the Polar Capital Technology Trust?

Ben Rogoff, lead manager of Polar Capital Technology Trust: Sure, I’m very happy to do so. I joined Polar back in 2003, but the trust had been going before then and had been migrated from another shop before then. But yes, the trust is there to invest in a sort of global portfolio of technology companies that hopefully can capture, or allow people to get exposure to, some of the most important themes and companies around the world, benefitting and delivering disruptions associated with the technology.

We’ve done that consistently in a diversified way. Currently, we have just over 100 individual investments within the trust with a skew towards the US, but happy to look globally for the very best opportunities.

Richard Hunter:  So, you mentioned some of the geographical allocation there within tech, which is increasingly I think, an all-embracing term. What sort of allocations have you got within the tech sector itself?

Ben Rogoff:  Geographically, the tech sector has been a US centric industry for multi decades for lots of very good reasons that we haven’t got  time to go into, but you know, Silicon Valley was originally set up to help support the aerospace industry in Los Angeles, believe it or not.

And software and the venture capital industry is still very heavily skewed towards the US, and that supported lots of the internet companies, the internet itself was not necessarily all of it, but important elements of it were pioneered in the US.

The portfolio is currently around 70% North America, that’s a very sort of consistent number over the, well nearly two decades that I’ve been at Polar. Actually, when I arrived, we were more like 50/50, and I’ve moved it that way because it’s something we should definitely call out. The way that I run this trust is with an eye to the benchmark, at any given time you should expect active share to be around 40 to 50%, which is lower than other trusts, that’s how I run money and we could talk about that if you care.

But as a result, my geographic weighting doesn’t deviate that much, so you know, the US is where we look for our internet, for our software and some other exposures, but we’re very happy looking in Japan for robotics, and we look in Asia for semiconductors.

And so, we typically go to the geographies where we can get the best exposure so hopefully the best themes.

Richard Hunter:  And how much have you seen a change, investment appetite aside, in the tech sector over what has obviously been a fairly defining three to six months in 2020?

Ben Rogoff:  Well I think it’s fair to say that this period, this awful period for, you know, civilisation and the world and the economy, has been an interesting test bed for a lot of technologies that may have taken years to be able to prove their value. And, of course, they’ve been able to do it in very short order during this testing period.

And in that sense there’s lots of historical parallels for this period. If you went back to World War II in our annual report, we talk about some of the accelerated innovation that happened during World War II at Bletchley with rockets, with moon landings, with, I don’t know, mass production of penicillin. Lots of very exciting things happened in the technology world as a result of the World War, you know, the crisis that was World War II.

And there’s no question, perhaps things are less profound today, but things like video conferencing and Zoom, or online education or Telemedicine, things that, online grocery delivery, stuff that might have taken a decade perhaps, to become mainstream have become accepted alternatives to real world activities.

And so, no question that the sector has been a beneficiary from this hiatus. It’s been well earned, and what we’re seeing is this acceleration of trends, these trends are already there, you know, this is not just something that just happened, the sector has been capturing nearly all of the earnings progress in global equity markets for the last decade.

Which is a very big statement to make and hard for me to support in a podcast. But just think about the disruption that tech has had in various domains like retail, in financial services perhaps, and in lots of other areas, the internet as a general purpose technology, has sort of created this incredible disruption that the current crisis has accelerated rather than created, if that makes sense.

Richard Hunter:  Yes and potentially even bought a new audience in, in terms of some of the, shall we say, mature parts of the population, who a few months ago were certainly not as tech savvy as they’re becoming, because they’ve needed to for some of the reasons that you’ve just mentioned in terms of conferencing, online shopping, and so on.

So, with all that in mind Ben, if we look at the sort of top holdings within your portfolio, what sort of names are held within there?

Ben Rogoff:  Typically, our top 15 are, often, not always, but often well-known companies that form decent parts of our benchmark that we like. We don’t hold anything in the trust that we don’t like, we don’t hold it because it’s in a benchmark, these are stocks that we like. And they happen to be very well represented in the benchmark because they’ve done very well and they’re great businesses.

So a few of those just to call out, well I mean the number one business in the portfolio is Microsoft (NASDAQ:MSFT), which is a company if you told me five years ago or seven years ago that this would be my largest position, I would have probably laughed at you, but the company’s done a phenomenal job of basically pivoting to a sort of software as a service, or a more recurring revenue model. It has built out, you know, the second largest public cloud company, or offering, Azure, which is second only to Amazon’s own AWS.

And it is in a very good position to benefit from the transition to public cloud computing. And in the crisis, I mean it has been a very positive thing in terms of its offerings in communications, like Microsoft Teams, for example, but also Office 365, and just facilitating remote work, which I have to say, I’m not a big fan of sort of hackneyed phrases like things like new normal, but I do think this is a new normal, and I don’t think we’re going back to an old world.

And I think Microsoft is very well positioned in the so called new normal. So that’s one name I would call out, and I would also call out Apple (NASDAQ:AAPL), which is a stock that really doesn’t fit any template of tech companies that we’ve ever seen before.

I mean is, I think, really without question the best tech company we’ve ever invested in, not necessarily, I mean it’s been a phenomenal return, and I bought it in 2003 when I actually joined Polar, genuinely on my second day I think in the job.

You know, companies like this, normally when they become slightly slower growth, and Apple just to be clear, didn’t grow earnings last year, so this doesn’t fit the normal template of a kind of company we’re looking for. Because this isn’t a normal company, this is an extraordinary company, with an extraordinary customer base of sort of mass affluent people that understand that their premium associated with Apple products is not real.

In that the residual values of iPhones are much higher than, for example, with other brands of Smartphone. And as a result, it’s a premium product for a mass affluent audience, and that mass affluent audience likes buying other products from Apple.

So this company looks much more like a mass affluent consumer brand business, and I think a large part of its revaluation and performance over the last few years, has been the recognition that there’s longevity in a business that people thought was a handset company, which it obviously looks like it’s a handset company from a revenue perspective. But really where the value in the business is all about the audience, the customer base and the recurring revenues through the Apple Appstore and Apple Pay and so on.

So that’s two names I would highlight, but there are plenty of others if you want me to go on?

Richard Hunter:  Sure, perhaps you could just make it up to a hat-trick, Ben?

Ben Rogoff:  There’s a lovely, lovely list of great businesses here, Facebook (NASDAQ:FB), Tencent (SEHK:700), Alibaba (NYSE:BABA). I mean Amazon I think everybody knows well, so I shan’t ponder it, but it’s our largest active bet, and when I say active, I mean our exposure relative to the benchmark. And Amazon is still perceived as a retailer, so it doesn’t feature in our benchmark.

So, our roughly 3% weighting is our largest bet against our benchmark. I was actually going to call out PayPal (NASDAQ:PYPL), a company that is one of our larger bets as well, it’s also not in our benchmark, it’s perceived to be a financial, and it is a payment asset after all.

But this is a company that was effectively spun out of eBay (NASDAQ:EBAY) many years ago, and has, I believe, seen its business definitively accelerate as a result of the lockdown, and the transition from, you know, a couple of things.

So, the first thing is the transition away from cash to card or online, has been accelerated. So, PayPal have had benefits from the acceleration in ecommerce, it’s also benefitting, interestingly, from growth on non-Amazon platforms. And as I’m sure you’re aware, Amazon is the lion’s share, or certainly the very largest share, of online commerce and dominates really in a lot of geographies.

But PayPal, it typically does well when non-Amazon platforms do well, because Amazon has its own payments mechanism. So, PayPal for us, we added to very significantly during the Covid crisis, as a way for us to get exposure to accelerated ecommerce off Amazon.

And so far, so good, it’s a really terrific performer of late.

Richard Hunter:  And, finally ,Ben, given the skew that you mentioned towards the US, what with the extraordinary positive performance we’re seeing in the year to date from the Nasdaq index, for example, is it a fair assumption that the trust has actually been holding up pretty well, given the challenges that we’ve seen in the global economy as a whole this year?

Ben Rogoff:  Yes I mean I think it, I think the action of markets is nearly entirely the credit, if there’s any to be given, is to policy makers who have been completely alive to the challenge associated with Covid-19. And the support that’s been given in monetary and fiscal policy is extraordinary in any historical context.

At some point the piper may need paying, but right now, our interest as investors is, are very well aligned with policy makers who are very, obviously, wanting to avoid worse case scenarios associated with recessions that can become Steinbecky and they can become self-fulfilling and very difficult to kind of address.

So, the support is there, the recovery in risk assets, you know, has a lot, you know, is really due to policy makers. The tech sector, however, has done a good job itself, of course, you know, if in the end all companies collapse and the world falls apart, then no one’s buying tech.

But with that support being, you know, being present today, the shift towards online, away from physical, and the disruption that tech has been causing and the acceleration of that disruption, is resulting in a very profound shift of profit pools from certain companies to other companies.

And if people are not using ATMs and they’re using PayPal, then the value of those respective businesses is changing. And as behaviours change, so we’ve seen this in the past, and this acceleration clearly playing a part today, tech companies are beneficiaries of those, of that reallocation.

Without policymaker support, I suspect we would be sharply lower in markets, and indeed we were before they stepped up. But the tech sector has also done a very good job of keeping the global economy going. Imagine remote work 20 years ago in the first coming of the internet.

Imagine how we would have kept children occupied and remotely taught, without computing platforms or without video games, after their work was done. And so on, you know.

So, the internet, the tech sector has at least made some of its own luck, let’s say.