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Allianz Tech says bye-bye to Amazon, Facebook and Tesla

Allianz Technology Trust manager Walter Price says if tech companies want to survive they need to start giving back to shareholders
February 25, 2016

What do Amazon (AMZN:NSQ), Facebook (FB:NSQ), Palo Alto Networks (PANW:NYQ) and Tesla (TSLA:NSQ) have in common? They're all on Allianz Technology Trust's (ATT) cutting room floor following a de-risking portfolio purge.

Investors had been throwing money at the risky end of the tech sector but this year the party came to an abrupt end, and Silicon Valley's most popular tech stocks found themselves out in the cold. Allianz Technology Trust is down by more than 15 per cent this year as a result - 10 per cent below its index - as investors pile out in search of safer ports.

Walter Price, manager of Allianz Technology Trust, is now eschewing the high-risk innovators which were very popular in 2015 in search of older companies with comforting dividends. He has cut the high-growth chunk of his portfolio by 10 per cent and re-allocated it to safer industry stalwarts paying out income.

"In response to this decline in the market we've increased the value part of our portfolio - low-growth stocks at the end of the technology lifecycle," he says. "This includes companies like Microsoft (MSFT:NSQ) and Apple (AAPL:NSQ), which aren't growing very fast but pay out a lot of the benefits of their cash generation to shareholders."

 

Allianz Technology Trust's manager doesn't see Twitter making it into the portfolio 

 

On the other hand Mr Price has slashed exposure to Amazon, Facebook and Palo Alto Networks, and sold out completely of companies such as FireEye (FEYE:NSQ) and Salesforce (CRM:NYQ). The high-growth, 'innovator' chunk of his portfolio now stands at 20 per cent of assets, and after accounting for a significant part of the portfolio at around 10 per cent of assets, Amazon now accounts for just 3.5 per cent.

"We are enthusiastic about the growth rates for Amazon, Palo Alto Networks and Facebook over the next four years," explains Mr Price. "After this adjustment period we do want to own those stocks. We have a long-term price target for Amazon of $1,000. But we recognise it's not a straight line to $1,000. People are overly enthusiastic about Amazon periodically, and when you have a period where people are adjusting growth rate expectations, Amazon is very vulnerable."

Mr Price has been backing away from the FANG stocks - Facebook, Apple, Netflix (NFLX:NSQ) and Google - which were subject to astronomical hype but now are experiencing a frenzied sell off.

"In 2015 we had a very concentrated market in the FANG stocks and that's because all of those companies were executing very well and growing very rapidly, and investors crowded into them," he says. "As a result, when investors decided to go risk off, those stocks - particularly Amazon and Netflix - were sold down very hard."

In 2015 FANG returned 64.4 per cent but in the year to date they have plummeted 14.4 per cent. The last time results were that low for the group was during the 2008 recession "so we've basically seen as much damage as that period without the same sort of recession," says Mr Price. "But we're not going to have a recession like 2009, so we think a lot of the risk is now out of these high growth companies which is why we've started to selectively buy them."

Although he blames the trust's performance this year on a failure to sell the right companies at the right time, Mr Price is keen to buy back into high-growth tech stocks when things calm down.

But two companies he will not be buying in a hurry are Twitter (TWTR:NYQ) and Tesla. He has previously referred to Twitter as destined for the "internet graveyard." He says: "The problem with Twitter is that they want to be a Facebook or a YouTube and they're not - I don't think they ever will be. And as long as they keep spending money on trying to be something they're not they will have trouble meeting expectations."

Tesla is another company he believes has been buoyed up by optimism and which now needs to focus on cash flow in order to be successful. "I think now they understand the world has changed and money is harder to get. People want to get paid back and see cash coming in so this is a critical year for the company," he says. "We said we were going to step back and see how they do this year because we think it's very risky."

In a world where markets are tanking, he says investors will be less and less happy about funnelling money into loss-making companies. Last year all talk may have been about the growing number of tech unicorns - private companies with minimal earnings streams valued at over $1bn - but investors are likely to be less patient in 2016.

Among the companies affected will be the component suppliers riding on Apple's coat tails.

"If you are a component supplier, your major customer is Apple and you think you are going to keep growing 20-40 per cent a year, you won't be able to do that," he warns.

His advice for those companies? "Give up on growth and pay back shareholders instead."

One success story is Taiwan Semiconductor (2330:TAI). "Of course it was growing rapidly when Apple was growing rapidly, but now it's just boosted its dividend by 12 per cent and is buying back stock, so basically becoming a value company," says. "It's almost as cheap as Apple so we think it's a good holding."