Vontobel Viewpoints: Why IT Stocks are Well Suited for Quality Growth Investors
Written by: Douglas Bennett, Vontobel Quality Growth Investment Team
Steve Jobs famously declared as he unveiled the iPad 2 in March 2011, “It’s in Apple’s DNA that technology alone is not enough – it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our heart sing, and nowhere is that more true than in these post-PC devices.”1
At the Vontobel Quality Growth Boutique, we believe that to invest in technology alone is not enough. We invest in technology businesses that we strongly believe in and that we think can provide outsized returns for our clients over many years. By employing our time-tested approach of quality growth investing at sensible prices, we have found a few choice Information Technology (IT) companies meeting our high hurdle rates.
Our investments in IT have grown substantially over the past years. In our Global Equity strategy it is currently the #1 sector at 26%, having mushroomed from just 3% of the portfolio in 2001. And looking across our portfolios, IT has become either the first, second or third-largest sector we own in five of the six strategies we manage. The main factors driving our increased exposure to the sector are 1) since the technology bubble burst in March 2000, we have accumulated knowledge about a select group of IT companies, and gained confidence in their ability to consistently grow profits; and 2) the IT opportunity set has changed over the years due mainly to a number of IPOs in the IT Consulting & Other Services and Internet Software sub-sectors.
As “bottom up” benchmark-agnostic investors, we focus on the relative opportunities we find in individual companies. Although there are thousands of large and liquid technology companies in which we could invest, we have found just a few that we consider high quality growth companies trading at sensible prices. The members of this select group offer the following attributes:
- High quality businesses as exemplified by consistent margins, profits and ROEs, as well as one or even several moats surrounding them, such as strong brands and patents, high switching costs and strong network effects, and economies of scale in their manufacturing processes.
- Some of the fastest-growth in sales and profits we can find. These companies benefit from the growth of the IT sector in general, as well as their ability to expand into other sectors.
- Reasonable valuations for the companies when considering their long-term growth potential.
1 Andrew S. Grove, Only the Paranoid Survive, 1999