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Why Hyperion says tech stars will keep soaring

Hyperion’s stellar results have been built in part around tech stars such as Microsoft, Tesla and Amazon. But it believes they’re even better value now.

They’re the sort of results that most fund managers crave.

Last week, Hyperion Asset Management’s Australian growth companies fund ranked second in Mercer’s list of 137 long-only Australian equities funds, delivering a return of 19 per cent for the year to June 30, versus a 7.7 per cent fall in the ASX 200.

Hyperion fund mangers Jason Orthman and Mark Arnold. Paul Harris

Last month, Morningstar ranked Hyperion’s global growth companies fund first out of 294 equity funds in terms of five-year returns to April 30; the fund delivered an annualised return of 18.3 per cent over that period. It returned 19.7 per cent for the year to June 30, compared with a 4.1 per cent return from the MSCI All Country World Index (in Australian dollars).

But don’t expect to find Hyperion’s understated chief investment officer and managing director Mark Arnold, doing cartwheels. Instead, the word that seems to sum up his view of his portfolio is this: comfortable.

Still, that’s not a bad way given the volatility created by a pandemic that has sent many portfolios through extraordinary gyrations.

The Hyperion philosophy is arguably well-suited to these chaotic times. Where most of us are fretting about the state of the economy over the next six months, Hyperion is still hunting growth stocks that it thinks will appreciate in value over a 10-year horizon.

It looks for big-picture trends over cycles, such as the shift from cash to electronic payments, the shift to e-commerce and cloud computing.

Deputy chief investment officer Jason Orthman says COVID-19 has given the world a preview of the sort of world Hyperion has based its portfolio around. The pandemic has highlighted the different ways we consume, pay and work.

“It’s really just given us a snapshot of the future,” Orthman says. “It’s built conviction.”

The market seems to share that conviction. The top holdings in Hyperion’s global growth fund are Amazon, (up 49 per cent in the last 12 months), Microsoft (up 48 per cent over the same period), Tesla, (up 477 per cent), Google’s parent company Alphabet (up 33 per cent) and PayPal (up 47 per cent).

The stars of its Australian growth fund include CSL (up 26 per cent in the last 12 months), Xero (up 47 per cent), Domino’s Pizza (up 97 per cent) and Macquarie Group (down 2 per cent).

Arnold and Orthman aren’t concerned about the sharp rises in US tech stocks over that period. While they continue to dynamically manage their portfolios – trimming and adding to positions to how share prices move against the 10-year intrinsic valuation Hyperion places on the company – they also argue many of the tech stars look even more attractive than before the virus struck.

This is because the acceleration of digital trends has actually brought earnings and cash flow forward from a 20-year horizon to the 10-year horizon that Hyperion focuses on.

“We think they’re better value now than they were in January,” Arnold says.

“They’re highly innovative. There’s a lot of optionality embedded in those businesses, and a lot of smart people are incentivised to create better features for existing products and expand product ranges.

“We are pretty comfortable that the value is there and the returns should be there over the next five to 10 years.”

The most recent thematic Hyperion has focused on is around the shift to green energy and transportation, best represented by the Tesla bet.

While the stock’s surge has bemused many investors, Arnold says Tesla already has an enormous advantage over rivals in terms of electric vehicle software development and the data that will be crucial to developing commercially viable autonomous vehicles.

Traditional car makers might have an advantage in capital and manufacturing know-how, but Orthman argues they still cannot profitably build an EV, and there is no sign they are anywhere near matching Tesla’s ability to update the software of its vehicles each night.

If COVID-19 has made Arnold more certain about the stocks he wants to be in, it’s also made him surer about where he doesn’t want to be.

“It really reinforces our view that we are permanently stuck in a no-growth or low-growth world. We think that’s going to be a big drag on earnings per share growth for the major indices around the world for the next 10 years,” he says.

“You’ve really got to back the winners. If you’re on the other side of the divide, you’re really going to struggle.”

While it’s easy to write this off as an active manager talking down passive management, Arnold’s warnings are food for thought given that we’ve seen a relatively small number of tech stocks drive Wall Street – and to a lesser extent, the ASX – higher in recent months.

If economic growth is depressed amid the pandemic and tepid after it, do you really want to be weighed down by the large industrial companies, established financial services players and big resources houses that still dominate indices around the world?

This article was originally published in Australian Financial Review.

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