Joshua K. Spencer steered his T. Rowe Price Global Technology Fund to become the best-performing mutual fund in the past five years with big bets on Amazon.com Inc. and Tesla Inc.
With many traditional tech stocks at sky-high prices, he’s now focused on companies with stable business models and “sticky” customer relationships that produce recurring revenue regardless of economic conditions.
The $4.9 billion fund’s No. 1 ranking is based on Morningstar’s analysis of open-ended mutual funds (ETFs are excluded) by average annual total return for the five years through June 12.
|Average total return – 5 years||Average return – 10 years||Average return -15 years|
|T. Rowe Price Global Technology Fund||25.7%||16.0%||15.2%|
|MSCI All Country World IT Index||18.0%||9.1%||8.8%|
|S&P 500 Index||15.3%||7.3%||8.1%|
|Sources: Morningstar, FactSet|
Spencer started as an analyst for T. Rowe Price TROW, +0.14% in 2004 and was on the fund’s investment committee beginning in 2005 before taking over as the fund’s manager in mid-2012. In an interview on June 15, he attributed the fund’s success to a team of 20 analysts around the world.
“We get to know these companies quite well, including meeting with management,” Spencer said.
“When sentiment lifts, that is when we usually take money off the table. That is hard to do. It feels bad to sell when stocks do well.”
Selling stocks that are rising
“We try to be contrarian growth investors,” he said, referring to the fund’s concentrated strategy.
He gave two excellent examples.
“In the beginning of 2014, Amazon.com AMZN, +2.44% was deeply out of favor,” he said, pointing out that the company wasn’t then breaking out the sales of its web services revenue, “when people didn’t know it was a business with a 30% margin.”
So the T. Rowe Price Global Technology Fund was buying Amazon’s shares aggressively in 2015, and Spencer said it was the fund’s top holding at the beginning of 2015 and eventually made up more than 10% of the portfolio. The stock has more than tripled since the beginning of 2014, and Spencer said he had sold quite a bit of the position.
Shares of Amazon.com have more than doubled from their lowest points in 2014 and 2015.
Another example Spencer gave was Tesla TSLA, -1.05% which investors were shying away from only eight months ago, amid controversy over CEO Elon Musk’s decision for a merger with SolarCity, which was completed in November.
Spencer said investors overreacted to the SolarCity acquisition, even though the deal was dilutive to Tesla’s shareholders, because “the acquisition was less than 10% of the market value.”
But the negative reaction led to an opportunity for Spencer to buy Tesla shares at $175. The shares are now over $350 and Spencer has completely sold the position.
Tesla’s shares have been on a tear as the company’s Model 3 electric car moves closer to production.
The decision to sell a company’s shares doesn’t mean Spencer has soured on the business or strategy. In fact, he expressed great confidence in Tesla’s long-term success.
“When sentiment lifts, that is when we usually take money off the table. That is hard to do. It feels bad to sell when stocks do well,” Spencer said.
Joshua K. Spencer, manager of the T. Rowe Price Global Technology Fund
Shifting to business-software stocks
“I have learned from experience that it is difficult to predict what will drive a stock down, but when things are elevated, it is best to be cautious,” Spencer said. Over the past two months, he has been holding more cash than before as he reduces or eliminates positions in “more extreme winners.”
With the tech sector so high, Spencer emphasized the importance of focusing on companies with stable business models and “sticky” customer relationships that are “very resistant to economic fluctuations.” He named three companies:
Intuit Inc. INTU, -0.36% is the developer of TurboTax and QuickBooks software. TurboTax is continually updated as tax rules get more complicated, while small businesses using QuickBooks for various operations, including payroll, billing and bookkeeping, are unlikely to switch to another product, which gives the company pricing power.
“The stock has done very well lately, but it is still attractive on valuation,” Spencer said.
Intuit shares are up 23% this year (through June 14), compared with about 10% for the S&P 500.
Ultimate Software Group Inc. ULTI, +2.53% provides payroll and human-resources software to companies with 500 to 5,000 employees, representing a different market niche from the one served by Intuit with QuickBooks.
“If you think of a company that has to withhold taxes in multiple states and jurisdictions, that really cannot be done by hand anymore,” Spencer said.
Ultimate Software Group has a 97% annual retention rate for customers, who pay monthly for their subscriptions, he said.
“I think they have many years of growth ahead of them, since they are just a fraction of the size of Automatic Data Processing Inc. ADP, +1.29% and Paychex Inc. PAYX, +0.61% the Goliaths of the sector,” he said.
Ultimate Software Group’s sales have grown an average of 26% a year over the past 10 years, according to FactSet. The company’s shares are up 14% this year (through June 14).
While Intuit and Ultimate Software Group serve small and medium-sized businesses, respectively, Workday Inc. WDAY, +0.12% provides HR software to large enterprises. The founders of Workday, CEO Aneel Bhusri and Dave Duffield, had worked together at PeopleSoft, which Duffield had founded. PeopleSoft was acquired by Orcale Corp. ORCL, +0.92% in January 2005, and Workday was founded in March 2005.
“So they are doing everything they did well at PeopleSoft, while fixing what they had done wrong,” Spencer said, adding that Oracle had not been investing heavily in the acquired business over recent years.
Workday is “running at about $2 billion in revenue, and I think they can grow that to $10 billion,” Spencer said.
Workday shares are up 49% this year (through June 14).
Here’s a look at impressive sales-per-share increases for the three software companies:
|Company||Ticker||Sales per share – past 12 reported months||Sales per share – previous 12-month period||Increase in sales per share|
|Intuit Inc.||INTU, -0.36%||$19.63||$17.47||12%|
|Ultimate Software Group Inc.||ULTI, +2.53%||$27.11||$22.19||22%|
|Workday Inc. Class A||WDAY, +0.12%||$8.49||$6.55||30%|
The fund’s holdings
Here’s a geographic breakdown of the T. Rowe Price Global Technology Fund’s stock investments as of May 31:
And here are the fund’s top 10 equity positions (out of 56) as of May 31, which made up 60% of the portfolio:
|Company||Ticker||Industry||Total return – 2017 through June 14||Total return – 3 years|
|Alibaba Group Holding Ltd. ADR||BABA, -0.16%||Internet Retail||56%||N/A|
|Alphabet Inc. Class C||GOOG, -0.27%||Internet Software/ Services||23%||73%|
|Intuit Inc.||INTU, -0.36%||Software||23%||84%|
|Liberty Global PLC Class C||LBTYK, +1.00%||Cable/Satellite TV||-5%||-17%|
|Microchip Technology Inc.||MCHP, -0.42%||Semiconductors||30%||82%|
|Netflix Inc.||NFLX, +0.41%||Movies/ Entertainment||23%||149%|
|Salesforce.com Inc.||CRM, -0.31%||Software||27%||61%|
|Taiwan Semiconductor Manufacturing Co. ADR||2330, +0.71%||Semiconductors||14%||85%|
|Ultimate Software Group Inc.||ULTI, +2.53%||Software||14%||58%|
|Workday Inc. Class A||WDAY, +0.12%||Information Technology Services||49%||18%|
|Sources: T. Rowe Price Investment Services, FactSet|
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