Is tech the only equity sector with alpha left?
BY Martha Porado | February 6, 2020
If institutional investors want alpha, there’s one sector in particular where they can find it, said Jeremy Yeung, vice-president of portfolio management and portfolio manager at Signature Global Asset Management.
“Technology is an inefficient market, that’s where all the alpha is,” he noted, speaking at an event hosted by the CFA Society Toronto on Wednesday.
But in some ways, it’s no longer useful to think of technology as a sector, he said. “Technology is not a sector, it’s the centre of a new investment universe.”
Technology has the ability to disrupt virtually all areas of business from music to banking to retail, especially where harnessing the increasing availability of data is concerned, he said. The use of technology itself, across sectors, will differentiate which enterprises have an edge that will push their growth going forward.
With 5G networks just around the corner, artificial intelligence in its initial stages and the world synched up through more internet-connected devices than ever before, companies that can adapt to, and use, new technologies quickly will win, he said.
He gave the example of Walmart Inc., as a long-standing retailer that has been analyzed about as much as it can be by equity investors and had been broadly expected to provide consistent levels of modest growth. This is one example of a legacy enterprise, which characterizes the broadly low-growth world investors are acting in. Simply put, there’s no more alpha to squeeze out of a company like Walmart, Yeung said.
But the disruption from an online retail giant like Amazon.com, Inc. more or less sent even mild growth expectations for Walmart down the drain, he added.
And the growth that allowed Amazon to become the behemoth that it is today didn’t happen overnight. Starting as an online book seller, the company pivoted multiple times, opening up new channels of business. That commitment to finding new channels of expansion has made the company that darling of Wall Street, with a free pass to spend as much company capital as it likes without shareholders worrying about profitability, he said. “Amazon’s eating Walmart’s lunch.”