RYK VAN NIEKERK: Welcome to this Market Commentator podcast – my weekly podcast where I speak to leading investment professionals. My guest today is Rian Brand. He is a fund manager at Sygnia Asset Management and he is in charge of two very interesting funds: they are the Sygnia Itrix Fourth Industrial Revolution Global Equity [ETF] and the Sygnia FAANG Plus Equity Fund and this is, of course, a fund that looks at the big international technology companies such as Facebook, Amazon, Alphabet, Apple and Netflix, and a few more interesting choices there. Rian, welcome to the show.
These funds are quite young; the Fourth Industrial Revolution Fund was launched in October 2016 and the FAANG Fund only three months ago in August. How do you conceptualise such niche funds? Do you sit at a bosberaad and strategise and then someone jumps up and says, ‘hey, we need a FAANG fund’. How does that process work?
RIAN BRAND: No, not quite but it is looking at places that we don’t currently have the ability to have exposure [to] and where there would probably be a market. What we see is that internationally it’s relatively easy to get exposure to these new economy funds and stocks but in South Africa it’s a bit more difficult. So we wanted to give the investor the opportunity to invest in these kinds of companies. Thus, both these funds were born.
RYK VAN NIEKERK: Let’s look at the Sygnia Fourth Industrial Revolution Fund: it was launched in October 2016 and has already attracted nearly R1.5 billion. That must be one of the fastest-growing funds and I’m referring here to the fund size and the money invested. How does that compare to your other funds?
RIAN BRAND: It’s definitely grown fast. Some of it was institutional money, to be fair, but the fund has grown fast. It’s had a very good following also among retail investors; it seems to capture the imagination. Some of the other funds, which are a bit more vanilla, we find that there’s a lot more competition for. If you launch another Top 40 fund, a Top 40 tracker, we find that there’s a lot of competition out in the market for it and it doesn’t necessarily grow as fast. But with the Fourth Industrial Revolution Fund what we are trying to do is we’re trying to create exposure for the investor to the fourth industrial revolution or what they call the new economy.
Currently we’re seeing the fourth industrial revolution happening. Where the first industrial revolution was brought on by steam, the next by oil and steel and electricity, the third was the digital revolution in the 1980s and what we’re really seeing now is the fourth industrial revolution, where these technologies developed through the ‘80s and ‘90s are now becoming part of our daily lives and where it’s being integrated in new and very, very innovative ways of living and being. We’re seeing that ‘man meets machine’ is becoming fairly common place, where we carry a phone that has far more calculating power than some of the best computers around at the turn of this century.
What we’re trying to do with this fund is we believe that these companies, some of them are going to be the future. They are going to be the future Google and Apple and Microsoft and IBM, if we go further back, and we are trying to get exposure for the investor to those companies.
What we then did is we are tracking a number of indices that have been provided by [US data-analytics company] Kensho and what they do is they use natural language programming to go into the filings of all these different companies and find companies that have exposure to these industries such as space or drones or 3D printing for that matter; there’s an index for virtual reality.
RYK VAN NIEKERK: What do you mean by filings?
RIAN BRAND: Filings [as in] regulatory filings. There are documents that listed companies have to put out, as mandated by the exchange and by law. For instance, in South Africa that would be a typical SENS announcement, but in America there’s quite a bit more they have to put out. What Kensho has done is they have used an analytical engine that they have built and they [forage this text] to look for certain industries that these companies are involved in, they actually used this [foraging] of this text for a wider analytical database that they use in other products.
Investing directly in shares
RYK VAN NIEKERK: If I look at the fund, what you are saying is you invest in different exchange traded funds and how do you choose those funds?
RIAN BRAND: It’s actually not the exchange traded funds that we invest in. What we do is we take the indices themselves and then we blend them together and then we look through and find the securities that we have to invest in in order to get the specific exposure to each index. So we would be investing directly in the shares. But, for instance, we would be looking at different indices such as smart buildings, virtual reality, genetic engineering. We then blend those together and the sum of that becomes the portfolio that we track.
RYK VAN NIEKERK: I’m looking at the fact sheet and I’m looking at the top ten holdings and the percentage they represent in the fund is very small. The biggest counter is Elbit System, 1.8% of the total portfolio, Apple 1.7%. How many shares or companies are in this fund?
RIAN BRAND: That’s the wonderful part of it. At the moment there are 306, so it’s a very, very well-diversified fund in one sense, so we capture a very large part of these companies looking at these industries. So even though the fund is very focused on one specific, call it, factor or theme, it is diversified amongst a whole lot of different companies. There are some very, very small companies, for instance, that also make it into the fund. If we just look at clean energy, where we have somebody like American Superconductor, which is in solar power, or for that matter Therapeutics, which is biopharmaceuticals. So we’ve got all these smaller companies that are doing amazing innovative things and we have some exposure to each of them as well. But obviously it’s very, very well diversified and the small exposures all adding up to these bigger exposures.
RYK VAN NIEKERK: Let’s look at the FAANG Plus Equity Fund. Obviously the FAANGs are more focused on the big counters – Facebook, Alphabet, Netflix, Apple, Amazon [and Google] – but looking at your top ten holdings there are many other companies in there. How big is this portfolio?
RIAN BRAND: The portfolio currently is not incredibly large…are we talking about assets under management, where, as you see on the fund fact sheet is about R230 million. So in terms of the FAANG shares it’s actually fairly small, if we can put it that way – these companies are massive. What we found is that partly due to regulatory reasons we were not able to only buy FAANG shares, but we also like some of the diversification and the fact that we can go and find shares that are consistent with the theme but not necessarily specifically in that FAANG – in other words Facebook, Amazon, [Apple], Netflix and Google.
So what … we do diversify it slightly but it is a far, far more concentrated portfolio. In the Fourth Industrial Revolution Fund we have a very broad set of companies that we invest in. Here we’re looking at roughly 15 companies at most that we’re investing in, although we do have some holding also in the Fourth Industrial Revolution Fund inside the FAANG Plus.
RYK VAN NIEKERK: But you launched this fund three months ago – some may argue that you may have missed the boat. Those shares have run incredibly hard over the past few years and this year there has been some repricing. What do you think the prospects are of this fund within that context?
RIAN BRAND: You are absolutely right, the shares have run very hard up until the third quarter and yes – and I will probably use the word correction, I don’t know if you want to go for the technical terms of correction – and it has possibly been just that, some of these shares have run possibly too hard. If we look at something like Netflix, which is absolutely priced for perfection, it’s running at a PE of I think about 100 at the moment and it’s priced as if the entire world is going to be watching Netflix five years from now. Yet, we are seeing other companies, Disney for one, coming in and all starting streaming services. So there is definitely an argument that says that it’s run too hard, but at the same time these companies are growth companies. We have seen incredible growth from them over an extended period of time.
In almost each one of these cases they are taking over an industry and a sector completely and that domination should give them a lot of leverage in future.
The danger is definitely there that their dominance of each one of their sectors is now becoming so large that they are going to start competing in between and interfering in each other’s area or turf. But we do feel that it is a great way to get exposure to these technology stocks.
How to reconcile expensive PEs
RYK VAN NIEKERK: But they are incredibly expensive and the whole notion of value investment actually for many fund managers has gone out the window; it’s purely momentum investments. How do you actually determine whether one of these companies is too expensive? Like Netflix, you’ve said you have a PE of over 100 for Netflix, and Apple I think is around 17 or 18. How do you reconcile those?
RIAN BRAND: These are expensive PEs but Netflix, if we look at what Netflix has done, just as a matter of interest, Netflix at the moment is underweight in our fund, specifically because we are concerned, they are still raising capital and they do see other vendors pressing in on their market. But in the same way that Microsoft back in the ‘90s was able to carve out a niche that nobody could dislodge them from for many years since, so we are seeing some of these companies just establishing themselves and nobody can move them out.
Admittedly some will fail. The big example everybody always brings up is Yahoo. When I was at university Yahoo was the way that you searched and I can still remember the first time I did a Google search and realising how superior Google was to Yahoo in terms of search results. So we do see some of these companies falling by the wayside, but as a theme and as a group of companies to not have some exposure to them is something that one has to think very carefully about.
RYK VAN NIEKERK: It could leave you red-faced. Just lastly, how do you actually pick the weightings of these shares?
RIAN BRAND: The weighting of the FAANG Plus is to some extent determined by…in other words, we are not allowed to have more than a certain percentage of each share, so we do have to limit ourselves there. Then in terms of how we pick the different shares and the overweights and underweights we do keep a close eye on them. There’s a lot of work that can be done and has been done on these shares and we discuss it and make certain calls.
RYK VAN NIEKERK: We’ll have to leave it there. Thank you, Rian. That was Rian Brand. He is a fund manager at Sygnia Asset Management.