Growth stocks have been some of investors’ favorites for almost all of the past decade. But in the years ahead they face challenges many of them won’t be able to overcome.
That’s the view of Ash Williams, the executive director and chief investment officer of the Florida State Board of Administration, which manages $195 billion in assets for the state’s public pension fund and others.
“We’re in a world that has very little growth,” he said at the recent Delivering Alpha conference sponsored by CNBC. “Just about all of the major industrialized democracies have negative or barely positive growth rates.”
That creates a limit on how much growth the global economy can achieve, and in turn that affects company profits. Williams says there are only two ways around that growth dilemma. One is immigration, which he says hasn’t been very effective at fighting that constraint. The second is technology that increases productivity.
While consumer-facing technology companies often draw bigger headlines, Williams said some of them have questionable profitability and sustainability. Business-oriented tech companies like enterprise software don’t hae that problem. He called enterprise his favorite part of tech and said the board has “huge” investments in it.
“Six of our ten largest positions in our PE portfolio are tech positions, and 30% of those or more are enterprise software applications,” he said. “They boost productivity, people want them, those businesses scale like nothing else, and it’s one of the few places where putting more money to work makes better deals and not less good ones.”
Investors interested in exposure to the sector could consider the Global X Cloud Computing ETF.
Williams said the market for the services those companies provide has expanded dramatically in the past few years, to the benefit of the board’s private equity division.
“If you look at the trailing 1, 3, 5, 10 and 15 year periods, our private equity business, net of all costs, is our top performer,” he said.
Williams noted that much of the excitement and the controversy in tech investing surrounds late stage venture companies, and said “It’s better to be running the other way” when the market is embroiled in a situation like that because the best opportunities to invest are elsewhere.
While he’s focusing on high-growth investments, Williams said he also applies principles from value investing to selecting the best tech companies.
“I have a value background and oddly enough, that applies very well in this growth background,” he said. “You have to ask the question ‘Is there a moat?’ and if so, how wide is it and how deep is it, and does it have some sharks in it? … Ideally the answer is ‘wide, deep, cold, and full of bad things that will bite anybody who gets in it.”