By Elliot Gulliver-Needham
In this new weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from James Dowey, fund manager at Liontrust Global Technology Fund.
How does your fund stand out from others in the same market?
We believe innovation is the biggest driver of stocks. That said, not every great innovation is a great investment. We look for innovative companies that create huge value for customers by substantially driving down prices. When you do this, you create demand and new use cases and grow the market, which drives strong stock returns. There are many approaches we admire but this works for us.
Today we are right at the start of a new technology and innovation cycle driven by AI. Given our focus, we view AI as an exceptionally important innovation. We believe it will be the most deflationary innovation in history, which will produce some big winners and losers and gives our process an extremely rich opportunity set to exploit.
In many cases, the winners of this cycle are not going to be winners from the last cycle. So if you look at our fund we’re invested very differently to benchmarks, which strongly represent the last cycle’s winners. We have much less in the mega caps and much more in companies further down the market cap where we believe there are bigger opportunities.
Which of your holdings are you most excited about?
Synopsys, which provides software for semiconductor and other electronic systems design, is very well positioned for the new innovation cycle. Semiconductor productivity has increased over 10m times during the past 37 years since Synopsys was founded and they have been mission critical to this incredible achievement. But the demand for rapid innovation is stronger than ever given the rise of AI workflows across the economy, including new sources of demand for highly specialised chips from lots of new customers and rapidly growing new markets for Synopsys in broader computational design.
Synopsys has invested an average of 30-35 per cent of its revenue on R&D over the past 37 years, and these requirements, plus the very fast pace of innovation, make it exceptionally difficult to disrupt.
What excites us the most, however, is the breadth of potential in the fund. Last year, 40 companies contributed more than half a per cent each to the fund’s performance, and we see the ability to drive very strong returns across the whole portfolio over the years ahead.
What is the biggest mistake you’ve ever made in the fund?
If you invest in innovation and technology, then over the past few years, you’ve had everything, including the kitchen sink, thrown at you – rapid technological disruption, trade wars, Covid-19, interest rates, recession in the tech sector and the rise of AI. All of these things create turbulence, and this will always be the case. But because of the growth, the biggest losses in technology investing come from missing out. The most important thing is always the flexibility to change your mind whenever the facts change.
What’s one change you made in the fund recently? Why didn’t you make it sooner?
We sold ARM after it surged following its most recent earnings report. We believe it is one of the best-positioned companies in the world for the growth of AI over the coming years. But its price is disconnected from its fundamentals, so for now, it is sitting on our bench until we see sufficient valuation upside again.
