The information technology space is particularly interesting right now.
“The reason we’ve come to like a number of names in this sector is there are some good long-term secular tail winds, and those tailwinds are quite diversified,” says George Dent, portfolio manager at Walter Scott & Partners Limited in Edinburgh, UK. His firm manages the Renaissance International Equity Fund.
In terms of sector trends, he says he and his team have found the shift from cash to credit cards is driving the growth of companies like MasterCard. For Internet giants like Google, the shift to online advertising allows them to calculate ROI and find out where people are spending their time.
When it comes semi-conductors, they say, “The advent of smartphones and tablets, and the increasing use of [tools like] microchips and everything that goes with that” helps drive valuation.
In this sector, some good names are inexpensive.
We’re focusing most on the “increased adoption and richness of the Internet,” says Dent. His team has found this trend has the potential to drive many interesting areas, including “data centres that are going to increase [due to] demand, [as well as] companies like Google who benefit from the richness of…Internet content.”
Consider how YouTube has transformed over the past four years, he adds. He and his team first saw “videos being made by people in their living rooms, and now you’re getting more professional, high-definition content. It’s providing an experience just as good as T.V.”
In essence, they find the “the increase in the prevalence of the Internet and the amount of time people are spending [using] it, along with its expansion onto new devices…is a really strong secular driver.”
The sector still has risks, however. Dent and his team recently met with Google’s CFO, Patrick Pichette, who told them three things could threaten the search giant’s success:
- a breakdown in Moore’s Law, which predicts the number of transistors on integrated circuits will double approximately every two years;
- a stop in the trend towards greater bandwidth being available; and
- the increase of data storage costs.