People ask me if there is any place like Silicon Valley,’ says Walter Price, 68, the US-based fund manager who has been a technology investor since those distant days of the Sony Walkman. ‘I tell them the only place is China.’
This should not surprise. China’s recent advances in developing new technologies have been remarkable, ranging from the world’s largest radio telescope to a quantum communications satellite that should make data breaches history. Moreover, before too long, it will challenge the West’s domination in widebodied aircraft. At another level, its solar technology has become a ground-breaker; and its smartphone applications are such that China could become the world’s first cashless society.
However, what is surprising, given his admiration for China, is that Price has so far restrained himself when reaching for the Chinese cheque book. Allianz Technology (ATT), the £240 million investment trust he has managed since its inception in 1995, has just 4 per cent of its assets invested in the Asia Pacific region. Its small positions in China are widely held ‘red chips’ that are incorporated outside of China and listed in Hong Kong. Among the positives for China, he cites the availability of ‘a lot of venture capital’ and the ‘very entrepreneurial’ nature of the business community.
The case against buying into companies behind some of China’s most promising innovations is, as he sees it, straightforward. In a word: government. ‘The government sees something great and it wants a piece of it.’ Yet its dead hand ‘can mess it up’.
Still, he is a frequent visitor to China and keeps a close watch on innovations. Right now, he identifies driverless cars as an area of particular interest. ‘The companies doing the best job [globally, in developing this technology] are in China.’ In part, this reflects the urgency of easing the country’s acute pollution problems.
But the supremacy of the US in the world-changing technological revolution is not under threat. While many wake with a blend of fascination and horror at what president Donald Trump might have done overnight, Price has his eye on the main chance. And at the moment, the impact from Trump’s proposals to allow US corporations to repatriate their foreign cash hoards in exchange for a 15 per cent flat tax tend to be overlooked. Price says: ‘There is $1 trillion (£800 billion) trapped abroad and it will be good to bring it back and put it to work.’ Congress needs to approve the legislation this year, he adds. ‘This is happening.’ Much of this $1 trillion will be used to raise dividends and finance share buybacks, thus enhancing earnings as well as encouraging takeovers. The combination of these factors explain ‘why the level of optimism is going up'. Almost one third of his holdings are in companies he suspects are takeover targets.
Indeed, he believes technology is one of the sectors best-placed to benefit from Trump’s various measures. Corporate spending on technology will reflect the increased amount of cash flowing through the system and ‘companies will be allowed to write-off their technology investments right away'.
Making up for lost ground
Technology stocks were largely left behind in the euphoria that followed president Trump’s victory, but have since made up for lost time. This has propelled Allianz Technology to a gain of 60 per cent in the past 12 months, a rise that falls a little short of the gains in the Dow Jones World Technology index (sterling-adjusted) benchmark. Over the past five years, the trust has chalked up a gain of some 180 per cent, a far superior performance to the index.
Price says he is ‘benchmark-aware’ but not benchmark-driven. For instance, one of his biggest positions is in Amazon, the giant cash-generative online retailer. Amazon is not a technology stock, but an operation based on technological innovations.
Critics gripe from the sidelines that Amazon is not profitable. Price has a somewhat simplistic view on this. ‘Amazon will make money when they [the board] want it to,’ he says. Rather than profits, the company has chased growth. ‘It keeps investing in new things.’ For instance, Amazon started its operations in India, which it believes will become its second-largest market, just four years ago. ‘It is now India’s number one online retailer.’
Amazon is clearly a high-growth company and Price reflects that making money in technology has become ‘a little harder’ as the numbers of high-growth companies become fewer. But during his career, he says, technology has grown to be the largest sector in global indices and, in the US, now represents over 20 per cent of the stock market.
‘Because it is so large, it is now much more diversified. There are still some high-growth stocks around, but there are more and more that are medium growth – seeing five to 15 per cent growth a year. And a lot of companies are growing faster and enhancing value by corporate mergers.’
Valuations not excessive
Overall, he believes valuations are ‘not excessive’. Higher growth companies sell on some 20 times forward earnings per share, while there is a whole host in the range of 10 times. These include IBM and Hewlett Packard, once among the biggest hitters in the business. Now, this mantle has been taken by heavyweights such as Facebook and Apple.
Price did not join the ranks of those who lined up to buy Snap (parent company of social-photo network Snapchat), the latest multibillion stock offering. Snapchat, which Price describes as a ‘very clever company’, is not profitable and the prospectus made no promises it will ever make money. Its selling point, largely to ‘millennials’, is its photographic capability. Pictures are sent from a smartphone and, once the recipient opens the picture, it dissolves within 10 seconds. Its main users are teenagers, who use Snapchat for purposes their parents might not wholeheartedly approve of.
But Allianz Technology does own Facebook, and that company has basically copied the Snapchat model. ‘They didn’t do well when they first copied it,’ he says, but things are now much more positive.
Price is a great fan of Tesla, the would-be breaker of the world’s automotive industry as we know it. Like many, he was no great fan of the Model X, ‘the SUV product’. Tesla spends money like drunken sailors in distant waterfront bars and last year raised a further $1.5 billion to finance its latest model. Price took this as a buying opportunity.
He has great hope for the new Model 3, a middle-sized passenger car with ‘a lot more passenger room. It looks like a BMW.’ But will Tesla make money? ‘They are going about it the right way and the changes they have made to production lines will make it easier to make money.’
The internal combustion engine has some 500 parts but the propulsion unit for the electric car has just three basic parts. ‘Ford and other big auto companies are starting to get a little worried. I’ve seen a lot of revolutions in technology and this reminds me of when the PC came along.’
Price accepts that the big auto companies are not letting Tesla eat their breakfast unchallenged. But, outside China, he is unimpressed by their progress. Many are still five years away from making their own batteries, he says. ‘The big [global] companies are way behind in developing the technology for their batteries.’
Driverless cars, at least in big cities, will also have a ‘huge impact’, possibly in as few as 10 years, he reckons. ‘In 10 years you might not be allowed to drive in the city unless you have an automated [driverless and electric] car. But 10 years is a long time in technology. Just think where smartphones were 10 years ago. And how they have since changed lives.’
Artificial Intelligence (AI) machines will similarly make a dramatic impact, he predicts. In the US, for instance, the Water Polo Association has just employed AI to referee contests. And baseball is already starting to experiment with AI in strike zones. The scope is enormous, he reckons. Football games where outcomes have been influenced by poor refereeing decisions, for instance, would become a thing of the past.
Opportunities also exist in healthcare, where non-human diagnosis will improve a patient’s lot by prescribing the right drugs. But, he says, developing AI for healthcare is a little trickier than it is for, say, sport. However, he says, ‘the hardest one to crack will be the classroom. Online learning can be a great supplement and you have to be enlightened in the way you approach it.’
Price says he is now much more optimistic about the potential for voice recognition than he was a year ago. Travellers can now talk into their phone in, say, Japan, and it is immediately translated into Japanese for the person you’re addressing.
What, given the relentless rate of technological progress that is transforming human existence, is going to become of us? ‘Productivity is a magical thing in increasing wealth and making lives that much better. My hope is that it can continue.’