GAMAX Funds Junior: More Microsoft, less Amazon

mayo 12 2014
Weak macroeconomic indicators and rich valuations have contributed to the relative underperformance of growth stocks since the start of the year. Portfolio manager Moritz Rehmann sees stability with potential for growth in the technology segment with Microsoft right now, where a drastic change in strategy has provided positive stimuli.

Weak macroeconomic indicators and rich valuations in developed markets, coupled with uncertainty following the Crimean crisis and disappointing growth figures in China have contributed to the relative underperformance of growth stocks since the start of the year. Despite this, the Nasdaq index for US technology shares increased by 18.7 per cent in the last 12 months. However, the volatility of these shares has markedly increased over the last few weeks, observes Moritz Rehmann, portfolio manager of GAMAX Funds Junior, and expert at DJE Kapital AG on companies with strong international brands.

Rehmann explains: 

“Especially for the stars of the stock exchange, such as Amazon or Starbucks, the potential for further growth after an increase of 59 per cent and 48 per cent in 2013 is somewhat limited. Given the ongoing sector rotation towards more defensive companies, we selectively trimmed our exposure to technology and growth stocks to reflect the change in market sentiments.” 

For instance, the GAMAX Funds Junior portfolio manager has now reduced the fund’s position in Amazon and Starbucks. 

Meanwhile, the proportion of Microsoft shares in the fund was increased. Rehmann sees two reasons behind the attractiveness of “dear old Microsoft”: the continued stable earnings base, and a promising new focus on the markets, regions,and services of the future.

Substance meets perspective: IT giant Microsoft’s successful facelift

When compared to the current shooting stars of the IT industry such as Google or Facebook, Microsoft Corporation, which dates back to 1975, looks like a dinosaur which may have seen better days. That said, over the years, the software giant has succeeded in building a dominant position in operating systems and software. More than 1.3 billion people use Windows every day, and one in every seven people worldwide use at least one Office program. 

Windows and Office licences together make up around 80 per cent of the group’s operating profit, as disclosed from the April 2014 quarterly figures. Rehmann has something to add here: 

“Microsoft ended the last quarter with a 7 per cent drop in profits, falling to 5.66 billion US dollars. Thanks to its successful cost reduction programme, however, the result was still above projections and this was rewarded with a 3 per cent price increase on the stock exchange.” At the same time, Microsoft is finally addressing the challenges of rapid changes in user behaviour and the competition – including mobile end devices and new business models. “An important step, as market analysts such as Gartner predicts a further drop in PC sales of 6.6 per cent in 2014, and a booming tablet market with plus 39 per cent. Microsoft achieved a growth in sales of 50 per cent in this market with its own “Surface” tablet in the last quarter, although with total sales of 494 million US dollars, its market share is still a disappointing 2.1 per cent (Gartner 2013),” Rehmann adds. 

With a change in management, Microsoft opened a new chapter in its strategic orientation on 4 February 2014. Steve Ballmer who came from sales was succeeded by Satya Nadella, an engineer from product development.

Rehmann explains: 

“Nadella embodies Microsoft’s new strategy, “Mobile First, Cloud First”, which the software giant hopes will take them in a new direction. Tablets, mobile phones and all form factors in between are the future drivers of growth. Nadella has opened up widely avenues of change which were not available previously: Officeis now available for iPads; Nokia’s phones, the company’s own phones, are now featuring Android as operating system, while the launch of Office 365 as a cloud solution was very successful, acquiring over one million subscribers in the first quarter of 2014 alone.” 

The two businesses of Office 365 cloud service and Azure for big data analysis posted a combined growth in sales of 31 per cent and growth in profits of 80 per cent to 475 million US dollars in the first quarter. These encouraging figures are a testament that Microsoft’s new products and services are striking a chord with their target audience.

Where Microsoft is Going: future prospects and challenges ahead

It is not yet possible to say for sure whether this new strategy will also be successful in the long term. Rehmann sees a few challenges which Nadella and his team must overcome. 

“It remains to be seen whether the opening up of operating systems and applications can be sufficiently monetised in the long term. A viable strategy must also be developed for the smartphone market, in the face of strong competition from Samsung and Apple,” Rehmann warns. “Nokia’s strong position in the low-cost mobile phones segment in emerging markets could, however, prove very promising. This will surely be one of the largest growth markets in the mobile segment in the future.” 

Rehmann sees that Microsoft is now on the right track and has therefore added to its position in the fund he manages, GAMAX Funds Junior. “Microsoft’s share price has increased by around 8 per cent in the past three months since Nadella took over, and even by as much as 20 per cent since the changeover was announced in August 2013.”