A new report by M&A and strategic advisory firm, Aquaa Partners, has found that the value-led investment approach in non-tech companies common among many institutional investors is undervaluing the significant role tech companies play in delivering investor returns.The new report, titled, ‘The death of value investing and the dawn of a new investment paradigm’, highlights the changing nature of tech stocks and their increasing capacity to confound traditional investment expectations by delivering significant value compared to traditional stocks coupled with lower volatility.
The report compares compounded total shareholder returns (TSR) of the key tech and non-tech indices over time. It shows that since 1999 tech indices have significantly outperformed non-tech indices. The Nasdaq 100 Tech index has delivered a TSR roughly two and a half times that of the Nasdaq 100 Non-Tech index (11,630 per cent compared to 4,543 per cent), despite the latter including tech giants Amazon and Alphabet). Over the same time period, the TSR of the Nasdaq 100 Tech Index was almost 13 times greater than that of the FTSE 100 Non-Tech index (838 per cent). The analysis also shows how, since 2009, these differences are becoming more pronounced.
The report also shows how similar patterns are observed when comparing the Nasdaq 100 to European indices, such as the FTSE 100, the CAC 40 and the DAX 30. The former being a tech company-heavy index compared to the European indices, which are comparatively tech-lite.
The report investigates perceptions that tech stocks have a higher risk profile than non tech stocks. Using the maximum point of loss each year since 1995 for individual tech and non tech stocks, yearly averages for both categories are calculated. Once again, the Nasdaq 100 index and European indices are used as proxies.
The authors herald a paradigm shift based on a reversal of risk. The figures suggest that since the late 1990s, which encompassed the dot-com boom and the emergence of the Internet, to today, the tech sector has transitioned from being volatile and risky to becoming a safe haven of value over the long term.
In the 12 years from 2009 to 2020 (seven months to 31 July, 2020), the average of the maximum point of loss for the tech sector was only 7.6 per cent, compared to 12.7 per cent for the non-tech sector. During these 12 years, non-tech had a maximum point of loss that was higher than tech’s maximum point of loss each year except for 2019, in which tech’s maximum loss of only 3.4 per cent exceeded non-tech’s maximum loss of 1.3 per cent.
The authors point out that this year, characterised by significant market uncertainty owing to the COVID-19 pandemic, the year-to-date maximum point of loss to 31 July, 2020 was only 21.2 per cent for tech, compared to 36.4 per cent for non-tech.
To demonstrate that the trend observed is not simply a symptom of the growth of ‘Big Tech’, the report cites the growth in of both ‘unicorn’ tech companies and their aggregate post-valuation and venture capital investment.
Countering claims that declining interest rates have been the primary driver in the growth of venture capital and unicorns over the period from 1998, the authors argue that the data presented in the report shows that the returns from dividend yield-based investing does not match the pace of returns generated from growth in the value of technology stocks.
It is this shift, they argue, combined with the recent reversal of the risk-reward dynamic between tech and non tech matched with the continuing deterioration of cash flow (necessary for dividends) at traditional companies will lead to traditional value investing becoming constrained. Growth investing, ie investing in technology companies, has become the new value investing.
Despite anticipated peaks and troughs over the coming two decades due to the cyclical nature of financial markets, the authors are confident in their prediction that the tech sector will continue to see exponential growth for several decades, while traditional stocks, by comparison, stagnate.
Paul Cuatrecasas, founder and CEO of Aquaa Partners, says: “The research presented in our report is compelling. It demonstrates why many of the traditional value-based strategies pursued by many pension funds, endowments, insurance companies, family offices, unit trusts, and other institutional investors and their professional advisors are wrong. Those strategies focused on non-tech companies undervalue the critical role tech companies play in delivering superior investor returns and are likely to continue to play over the next several decades.
“Since the financial crisis tech stocks have delivered huge value compared to traditional stocks, combining higher returns with lower volatility, which confounds traditional investment expectations. The fundamental risk-reward relationship in finance is now consistently being broken: Tech now offers higher reward and lower levels of risk relative to traditional stocks.
