There are good reasons why the NASDAQ stock index rose 40 per cent in 2020 - it's full of companies riding on a wave of disruption that will continue in 2021.
To shoot the lights out in 2020, international equity fund managers really only needed to own a decent chunk of one stock – electric vehicle and battery maker Tesla.
Tesla's performance was so astonishing – up 670 per cent in the year to December 24 – it skewed the performance of those who owned it and those who didn't.
Proof of this can be found in the 2020 performance figures for Nikko AM ARK Global Disruptive Innovation Fund and Baillie Gifford Long Term Growth, two of the best performing international fundies in the year to the end of November.
Nikko's fund, which was up 96.9 per cent in the year to November 30, held 10 per cent of its assets in Tesla shares. The Baillie Gifford flagship international fund was up 87.7 per cent. It had 10.5 per cent of its assets in Tesla, according to its November fund report.
Chanticleer's own self-managed super fund owned Tesla shares for a brief period in 2020. But after the stock doubled in value the fund's conservative trustees decided to dump the stock.
A contrarian view on Tesla published this week by Michael E Lewitt, editor of the Credit Strategist, is included later in this column in order to provide some balance to the effusive bullishness about Elon Musk's creation.
While Tesla was the standout tech stock in 2020 there is strong evidence to show that outstanding investment success in global equities was not the preserve of those owning a narrow basket of tech stocks.
This marks a profound change in tech investment. There was a time, not so long ago, when investors seeking alpha (outperformance against a benchmark) only had to own all the FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – in order to achieve market-beating returns.
Today, astute fund managers focused on tech disruption have been able to deliver market-beating returns while owning only one or two of the FAANGs.
A good example is the Loftus Peak Global Disruption Fund, which is on track to deliver a 40 per cent return for the 2020 calendar year. It was up 39.4 per cent in the year to November 30, or about 33.6 per cent better than its benchmark, the MSCI All Countries World Index as measured in Australian dollars.
According to a Loftus Peak newsletter going out to fund members later this week, its top 10 contributors to the 40 per cent return were: Roku, Apple, Qualcomm, Amazon, Xilinx, Tesla, Nvidia, Tencent and CrowdStrike.
Alex Pollak, Loftus Peak's chief investment officer, says Xilinx and Nvidia are classic examples of companies benefiting from the acceleration of the use of faster and more efficient technology across all sectors of the economy.
He says the fact that Nvidia's market capitalisation at $US321 billion ($421.7 billion) is now one and a half times larger than Intel's market cap is directly attributable to Intel's failure to keep pace with the change in semiconductor chip advancement.
"Intel has really fallen down on the next process node for 10 and seven nanometer," Pollak says.
"The miniaturisation and, therefore the enhanced performance at lower power, is increasingly a problem, which has meant that companies that are in the acceleration game, like Nvidia and Xilinx are creating the performance leaps that otherwise couldn't have happened."
Pollak, who has delivered a 26.8 per cent per annum return over the past five years, believes US President-elect Joe Biden will do a "chunk of stimulus" to get the US economy restarted.
He points to an interview Biden did with New York Times columnist Thomas Friedman in early December as an indicator of what might happen in 2021.
“I want to make sure we’re going to fight like hell by investing in America first,” Biden told Friedman. Biden sees areas such as energy, biotech, advanced materials and artificial intelligence as being ripe for large-scale government investment in research.
“We should be spending $20 billion to put broadband across the board,” Biden told Friedman. “We have got to rebuild the middle class,” but “especially in rural America”.
Pollak says increased investment in digital infrastructure in the US will have an impact on more than just tech stocks.
"Technology keeps getting kicked up further and further in terms of driving all of the things that are around us," he says.
"At some point, all that increased demand has to find its own outlet through better and faster chips, more acceleration of digital infrastructure, which ultimately means more Uber cars driving around, more packages being shipped by Amazon. This doesn't just lift our companies, it lifts all companies."
Another top-performing fundie who is bullish about tech stocks in 2021 and over the next decade is Mark Arnold, chief investment officer at Hyperion Asset Management.
Hyperion's Global Growth Companies Fund returned 41.7 per cent in the year to the end of November and the fund's five-year return is 22.6 per cent per annum.
Arnold says he will continue to back stocks that benefit from disruption such as payments companies PayPal and Square while shunning those that are going to be disrupted such as companies in the transport and energy sectors.
"We're quite confident that the stocks that we have in the portfolio will drive some very solid absolute returns over the next decade or so," he says.
"And in a relative sense, we think the returns will be quite attractive as well, because we think the major indices – they'll have a recovery in terms of earnings growth over the next 12 to 18 months – but beyond that, it gets more difficult because you've got a lower growth economic environment.
"The indices have already enjoyed the benefit of lower discount rates which are as low as they will go.
"So, it really comes down to organic revenue growth and then creative disruption and what's going on with the major components of the indices.
"The combination of low growth and lots of disruption going on means that the indices are going to find it more difficult over the next five to 10 years in terms of producing attractive returns."
This is, in effect, is a warning to those who just own passive index funds, which are full of stocks that Arnold believes will potentially be destroyed by disruption.
For example, two of the largest holdings in the Global Growth Companies Fund are Square and PayPal, which, Arnold says could make banks obsolete.
"We think that Square is very disruptive business and longer term has the potential to really disrupt the banking industry," Arnold says.
"PayPal is less aggressive in terms of the disruption. But because they've got such a big user base, they have the potential to become a neobank eventually as well."
PayPal has 361 million active accounts and serves 28 million merchants. Square's Cash App is experiencing phenomenal growth. Its Bitcoin revenue rose 11 times in the year to September to $1.63 billion and excluding Bitcoin Cash App, revenue rose 174 per cent year-over-year to $US435 million.
"We think the banks are becoming less relevant to a lot of consumers and we think that trend will continue," Arnold says.
"These neobanks really cherry-pick the most profitable income streams of the banks and over the next decade they'll do more and more of that. Eventually, the banks will have very little relevance."
The top five stocks in Hyperion's portfolio as of November 30 were Tesla, Square, Amazon, PayPal and Workday.
That seems to be a reasonable segue to the Tesla contrarian view from the Credit Strategist's editor Lewitt.
"Pending its inclusion in the S&P 500 index (which nearly doubled its already Brobdingnagian market cap), TSLA sold another $US5 billion of stock in December through at-the-market sales rather than via an underwriting, allowing it to put the Robinhood crowd out of its misery," Lewitt wrote.
"What’s interesting about this – other than that it avoids SEC scrutiny of an offering document – is that the company could easily sell 10 times that much stock in this manner over the course of a month without significantly hurting its stock price in today’s bubble environment.
"And that’s precisely what it should be doing. Whatever its market
cap, TSLA will struggle to compete with the manufacturing and engineering capabilities of GM, Volkswagen, Volvo and other much larger automakers unless it adds significantly to its own manufacturing capacity over the next three to five years.
"If it is not turning out at least 2 million vehicles annually by 2025 (still rendering it a relatively minor player globally), which is going to be a stretch with its current manufacturing facilities, it will risk being left in the dust by the rest of the industry.
'There is a big difference between being a sharemarket darling and an effective competitor in the industry. A grossly inflated market cap supported by central banks and market structure rather than underlying profitability is not going to sustain the business over the long term."
Lewitt believes the US stock market is in a bubble and that there are forces at work which point to the need for investors to be cautious.
"The foundations of our economy and markets grow increasingly fragile as policymakers treat the symptoms but not the underlying disease eating away at not just the American but the global economy.
"The symptoms are low productivity, massive overcapacity, massive speculation, and widening wealth inequality, and the disease is runaway debt caused by misguided fiscal (including tax, especially tax) and monetary policies promulgated by intellectually and morally corrupt ruling classes.
"Waiting for this regime to change is not a promising investment strategy, but riding it to the end is even more dangerous.
"Investors need to avoid the most egregiously priced securities (which includes not only the nutty technology stocks but all fixed-income securities) and focus on capital preservation rather than chasing returns that are not generated by economic growth but instead by central bank money printing and momentum-driven market structures.
"And, as always, they need to own gold in order to save themselves."
Mike Wilson, chief investment officer at Morgan Stanley, is bullish about US stocks in 2021 because of the opportunity for outperformance by stocks positively correlated to 10-year yields and the shift in price momentum to cyclical and small-cap stocks.
He says the trend is one's friend and "the consensus is generally right 80 per cent of the time".
"In fact, given the growing popularity of price momentum over the past decade, that percentage may be closer to 95 per cent.
"Stocks positively correlated to a rise in 10-year bond yields are banks, diversified financials, commercial and professional services and transportation automobiles and components.
Disclosure: The author's self-managed super fund has units in the Loftus Peak Global Disruption Fund.