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The big winners and losers from cloud computing

by Gavin Lumsden Jul 22, 2016 at 07:00

Ben Rogoff of Polar Capital Technology (PCT) investment trust explains why 'cloud' computing and the collapsing price of data storage is a massive story for investors today. 

Can't watch now? Read the transcript instead.

Gavin Lumsden: Hello, with me today is Ben Rogoff, manager of the Polar Capital Technology Trust. Ben, thanks very much for coming in. Can we talk a bit about the ‘cloud’ because it’s a huge theme within your fund and within the sector? You’ve often referred to it and the technology sector in general as being in a ‘pernicious phase’ of winners and losers. So what is cloud and why is it producing winners and losers?

Ben Rogoff: So the cloud is one facet of the Internet delivery mechanism, the model that we’ve all become accustomed to as consumers, how we access Amazon or eBay or whoever that may be. Our excitement is to do with this idea that instead of having computing within an organisation or doing it yourself on a hard drive or whatever it might be, computer storage moves outside of the enterprise, beyond the firewall into something like an Amazon or a Microsoft that will mass produce units of computer storage for vastly lower prices than we could hope to achieve ourselves. And in so doing it creates huge deflation in price terms and that deflation is fuelling a whole bunch of new applications that wouldn’t have been possible at the old price points.

If you think about something like Youtube where ultimately the user-generated content is primarily being advertised against. When storage costs were a hundred times more than they are today that business model might not have existed but at these price points that’s an incredible business. And so Facebook is an example of that. A business that becomes possible because of smartphones and cloud deflation. And so it is the story.

GL: We all know what Facebook is but what is it doing that’s been enabled by the rise of cloud?

BR: So ultimately the computers at Facebook – and Facebook are obviously the beneficiaries of two things: the smartphone story, because obviously mobile is where most of the activity takes place. There are 1.6 billion people coming to that site every month. That’s a gigantic proportion of the smartphone installed base but also of the human population frankly.

And what are they doing? They’re taking that network effect and benefiting from it by selling advertising into the user stream and that advertising has long been considered an ill, something you have to tolerate in order to get to the news, but actually if you can deliver targeted advertising it may not be an ill in future generations and the value I get as a user of Facebook is phenomenal and I’ve very happy to be advertised against.

GL: Now these are huge companies you’re mentioning: Amazon, Facebook and Microsoft. It’s creating winners and losers – the winners are becoming natural monopolies. What does that mean for you as an investor and developing a portfolio? You have to bet big on some big companies.

BR: Well it is exactly right. If you go back to the mid-90s the promise of the Internet was the long tail where there was a whole bunch of new companies that were going to reinvent a whole load of things and what happens is you’re ending up with scale matters. It matters a lot. And it’s why our Google position and our Facebook position are vastly bigger than our position in Twitter which remains quite binary and appeals to a sub-set of the phone, social user backdrop.

And so you have to have exposure to these companies. And as a UK investor it’s difficult to do that. And when you think about last year in the US. You know 60% of all incremental online commerce went to Amazon and I think in advertising it was nearly 80% of incremental. So all the growth is going to a handful of companies that are big holdings for us.

GL: It’s an amazing story but why shouldn’t I just invest in a US technology tracker, index tracker?

BR: So – obviously you can! – we’ve outperformed over time, there’s no guarantee we’re going to be able to do that but over time what we try to do is build a trust that per annum can do 2-3% above the benchmark after fees. And we’ve delivered to that.

GL: Presumably, also you’re trying to avoid some of the losers that will be sitting in the index?

BR: Yes!

GL: So who are the losers?

BR: That’s critical. So over time our approach has been right, we’ve been flexible in that approach, we’ve moved what we call our active share – so the amount that isn’t explained by the benchmark – has moved from the 30s into the 50s because we see the cloud as ‘pernicious’ ie, coming at the expense of a whole bunch of companies that deliver enterprise computing to traditional companies. And those companies are at risk from the cloud, they’re not net neutral.

It’s like empires rise and fall, if you’re not rising you’re probably falling. And we’ve been losing companies like Oracle, we sold IBM some years ago, Hewlett Packard gone forever, and instead we’ve bought Amazon which the index people don’t consider as a tech company, they think it’s a retailer, and we’re buying into companies like Medidata, which create software for clinical trials, made possible by the cloud. And we’ve been investing in companies like Taser, which people might know as a weapons company, but which make on-officer cameras.

GL: There’s a company called Taser!?

BR: Taser, right. Not something that you want to have direct contact with but as an investor it’s been great. And this company benefits from the cloud because now I can put a camera onto a police officer and I can stream or back up all of the video data I capture in a day and I can store it in Amazon cloud.

And now if there is a question mark over how an officer has behaved, or indeed how a potential perpetrator has behaved, we can see. We don’t have to take someone’s word for it, we don’t have to have $2 billion of legal fees a year and as the events in Dallas have very sadly highlighted over the last few days I think this is something that is going to become very mainstream. And I think our children, or their children will look back and say: ‘do you really mean that police officers didn’t have to carry cameras before?’

And so beneficiaries of the cloud are frequently not considered tech companies in their infancy, they’re considered involved in biotech or involved in weapons but the reality is these are the beneficiaries of cloud deflation.

GL: As you say technology is very broad and getting broader all the time.

BR: Absolutely.

GL: Well at least we’re not talking about ‘Brexit’!  It’s been very interesting to talk to you Ben, thanks very much.

BR: Thank you.

Add a comment

Comments  (3)

  • Briesmith: 

    As articles go, I thought this one was a little so so.

    14:22 on 22 July 2016

  • Alan Selwood: 

    The article would read better if Ben Rogoff stopped using 'so' again and again in places here the word doesn't belong or make grammatical sense.

    Apart from that, he doesn't really say much that is new.

    17:46 on 22 July 2016

  • Satisfied Pensioner - KL: 

    I couldn't keep up with Benn as he speaks like a gatling gun and the facts just spew out at too fast rate for me to take in.


    11:57 on 27 August 2016

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