Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Walter Price, manager, Allianz RCM Technology Fund.
It's been an interesting year for tech investors and we expect 2014 to be no less eventful. We saw economic and political headwinds begin to subside, escalating battles to dominate cloud technology, and the dramatic results of monetising mobile internet usage.
With a seemingly friendlier macroeconomic picture for the coming year, we expect the trends we saw in 2013 to accelerate, which will create opportunities for investors able to separate the winners from the losers.
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Given our emphasis on identifying emerging leaders in the sector, we tend to have a higher-than-benchmark allocation to high-growth, mid-sized firms that tend to be more innovative and offer better long-term investment opportunities than their large-cap counterparts.
In fact, it was a tough 2013 for many large- and mega-cap tech firms in the traditional software and hardware segments.The first half of the year was challenging because of continued declines in PC shipments, weak demand from Europe and Asia, and US government spending cuts. For 2014 it appears the worst may be over in some of these areas although the looming threat of new cloud technology remains.
Some tech incumbents are determined not to succumb to the cloud by building out their own as-a-service' offerings under which they offer software and other products they host themselves while others are finding an unexpected partner in the cloud. Microsoft (Nasdaq: MSFT) and Adobe (Nasdaq: ADBE) in particular appear to be successfully converting their physical products into subscription-based products.
Components makers such as Western Digital (Nasdaq: WDC) and Seagate Technology (Nasdaq: STX), previously thought to be casualties of languishing PC sales, are finding good demand from the expansion in data centres needed to store data and deliver cloud services. We expect these companies to deliver strong returns in the coming year as their valuations are re-rated higher.
Firms with larger exposures to the cloud also faced a number of challenges this year, including macro headwinds and more competition. Still, we believethere's been a change in sentiment among larger companies that have been slow to adopt cloud technology.
After observing the successful deployment across many mid- and smaller-sized firms, we think larger organisations are growing more comfortable with progressively off-loading their IT infrastructure. We think this market expansion could benefit established cloud leaders such as Salesforce.com (NYSE: CRM) and Amazon.com (Nasdaq: AMZN).
Bucking the trend of lackluster performance for the broader sector, consumer internet stocks hit their stride in the last year. Companies such as Facebook (Nasdaq: FB) and Yelp (NYSE: YELP) saw positive inflection points in their sales growth as they monetise traffic from mobile devices more effectively.
We expect these companies' shares to pause as their fundamentals catch up with valuations. However, our long-term positive view on the space is intact. There is a long runway for consumer/mobile internet companies to grow revenues through their ability to engage with customers in a more targeted, higher-return format than traditional advertising.
Walter Price is the managing director and portfolio manager of the Allianz RCM Technology Fund since 1974, based in San Francisco, California. Walter graduated from Massachusetts Institute of Technology. He shares his expertise on MoneyWeek’s share tips.
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