- Putnam’s Global Technology Fund has outperformed nearly all of its peers over the last five years.
- Di Yao, the fund’s co-manager, said he and his partner have focused on companies that the market either doesn’t understand or with which it’s not familiar.
- They’ve found some of their best bets overseas and among smaller companies in the US; but they’ve also placed some winning bets on some of the tech giants.
- Yao told Business Insider about 3 stocks he particularly likes in his portfolio — Microsoft, Sea Limited, and Applied Materials.
- Visit Business Insider’s homepage for more stories.
Di Yao isn’t afraid to make big bets on well-known stocks or to invest in companies that few people in the US know about.
As the co-manager of Putnam’s Global Technology Fund, he’s done both. And the strategy has paid off in a big way. Of all the tech-focused mutual and exchange-traded funds, Yao’s ranks fourth in performance over the last five years, topping not only most other actively managed funds, but all the passive ones also, according to Morningstar Direct.
Yao and co-manager Neil Desai are big believers that the tech industry provides big opportunities for growth because of all the innovation and disruption that happens.
But they also believe that the market is inefficient, and there’s money to be made when investors as a whole fundamentally don’t understand a company or its potential, whether it’s one of the tech giants or a relatively unknown firm overseas, Yao told Business Insider in an interview last week. Instead of spreading their bets on all the usual suspects in technology, Yao and Desai focus on those underestimated companies, sometimes in a big way.
“We want our bets to be meaningfully generating performance,” Yao said.
Yao and his team have found many of their favorite bets overseas and among smaller tech companies in the US. Part of the reason for that is that many of those companies, particularly the ones that are located outside the US, tend to fly under investors’ radar screens. Generally, there are few financial analysts who study and write reports about those companies, few institutional investors that own their stocks, and little written about them in the press.
Yao and his team look at second- and third-order effects
What makes such companies particularly attractive is when they stand to benefit from long-term but not well-appreciated trends that are in their favor, Yao said. He and his team like to look at both big trends in tech and major news events to figure out what their longer-term second- and third-order effects might be and which companies are likely to see a boost from them.
For example, when Apple announced earlier this month that it would replace Intel’s chips with its own processors in its Mac laptops, Yao and his colleagues didn’t spend too much time thinking about what that move might mean for Apple or Intel’s stocks. Instead, they started thinking about how the move might shake up the PC chip industry and even the entire supply chain for notebook computers, he said.
Companies that aren’t well known or understood that are likely to benefit from such long-term trends make for ideal investments, Yao said.
“These are typically what we see as multi-bagger stock opportunities that we want to invest in,” he said. “Once [such a stock] is well understood by the Street, we tend to move on to our next opportunity.”
But Yao and his team have also found big opportunities in the tech giants. About five years ago, they made a bet on Amazon, figuring that Wall Street didn’t understand the potential value of Amazon Web Services, its cloud computing business. That business has since driven Amazon’s huge and growing profits and helped send its stock soaring.
“At that time, Amazon’s AWS asset was entirely underappreciated,” he said.
Yao sees similar opportunities today in large tech companies, smaller ones, and those operating overseas. Here are some of his favorite bets in his fund’s portfolio:
What it does: Offers productivity software, cloud services, and video game hardware and software.
Shares owned by the Global Technology Fund (as of 2/29/20): 513,108
Value of the fund’s stake (as of /30/20): $104.4 million
Portion of portfolio’s total assets (as of 5/31/20): 18.4%
Yao’s thesis: Microsoft today offers a similar opportunity as Amazon five years ago. Many investors see the company as simply a runner up to Amazon in the cloud computing business. But Microsoft’s cloud offerings, which collectively go by the name Azure, are broader and distinct from Amazon’s, he said.
Yao’s take: “Microsoft’s Azure cloud capability is a vastly underestimated asset.”
What it does: Operates online retail stores and an internet-based video game service targeting Southeast Asia and Taiwan.
Shares owned by the Global Technology Fund (as of 2/29/20): 319,907
Value of the fund’s stake (as of 6/30/20): $34.3 million
Portion of portfolio’s total assets (as of 3/20): 3.1%
Yao’s thesis: Sea operates in the markets dominated in China by Tencent and Alibaba and has the potential to be as big as both of them combined. The countries it operates in have about the same average gross domestic product per person as China, but their populations are younger, and their e-commerce and online gaming markets are less mature, Yao said. Sea has a chance to become the dominant provider of both in Southeast Asia, he said.
Yao’s take: “This market has a huge potential.”
What it does: Manufactures equipment used in the production of semiconductors.
Shares owned by the Global Technology Fund (as of 2/29/20): 188,843
Value of the fund’s stake (as of 6/30/20): $11.4 million
Portion of portfolio’s total assets (as of 3/20): 2.4%
Yao’s thesis: Applied is a leading player in a very consolidated industry that has historically posted strong returns on invested capital, he said. It and its rivals have often been discounted by investors because the business is cyclical; business goes up and down as chipmakers ramp up for new generations of technology. But some emerging business trends are likely to even out some of that cyclicality, he said. Most notably, the push, in the wake of the trade tensions with China and the coronavirus crisis, to reverse globalization and bring back production to the US and other countries is likely to spur the construction of new factories, each of which will need chip-making equipment. That’s going to translate into better earnings and stock price growth than investors are anticipating, Yao said.
Yao’s take: “When we see a company with both earnings upside and also valuation upside, we bet big on this company and look to long-term returns.”
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