Sycomore Asset Management – Paris

Johan Söderström joined Sycomore Asset Management in May 2020 to co-manage the new Sustainable Technology fund.  Previously he had been at Swedbank Robur for almost 10 years where he managed a large global technology fund (value >$7 billion as of 30.9.20). Before joining Swedbank, he was an analyst at H Lunden Kapitalforvaltning and a PM and analyst following tech at Brummer’s Manticore fund.  He has a PhD in Finance from the Stockholm School of Economics (’02 – ‘07).

Founded in 2001, Sycomore Asset Management is known for its responsible investing expertise, managing $7.9 billion (>€6.7 bn) in AUM through open-end funds and separate managed accounts. It has a proprietary model of fundamental business analysis aiming to identify drivers of sustainable growth. The Sycomore Sustainable Technology fund was launched in September 2020.  The fund is managed by Johan Soderstrom and Gilles Sitbon alongside Sabrina Ritossa Fernandez, ESG specialist.

Where does Sycomore Asset Management sit within the Parisian investment management sector?

Sycomore is seen as a pioneer in ESG.  We like to engage with companies we invest in.  Meetings with management are important.

The SST fund currently has AUM of €101.9 million, how large do you expect the fund to be?

There is no goal per se, but we hope we will win the favor of investors in sustainable technology.

What percentage of the fund is in equities?

All equities and no plans for non-equity investments. However, we can invest in up to 30% in fixed income securities.

Geographic split of assets?

74% US, 12% Europe, 9% Taiwan, 2% China, 1% Japan (at 10.28.2020)

Your co-managers are Gilles Sitbon and Sabrina Ritossa Fernandez – how do you split your responsibilities?

Gilles is co-manager of the fund and we have a similar way of thinking.  He also manages a long/short equity fund, so I tend to have more responsibility for weightings in the fund.  Sabrina heads our ESG efforts related to sustainable technology.  It is a very collaborative approach.

Investment horizon?

We expect investors in our fund to have at least a 5-year horizon.  When we make an investment, we have a forever perspective. We look for companies with a promising future – an attractive business model, we weigh up opportunities and risks, upside potential, changes for the better and worse, that meet our ESG requirements and that can grow into their valuations.  However, we do respond to changing valuations and business prospects.  We also have some sensitivity to business prospects in the near future.

Share price appreciation goal?

We do have price targets for individual stocks.  Generally, we look for the best risk/reward ratio.

Which screens do you use?

We use some multiples and ratio-based screens to capture liquidity, valuation and momentum for ideas generation vs. other investment possibilities.  We also use the Sycomore SPICE model.  We look at the business model, SWOT and ESG analysis to measure the environmental impact and effects on society.  We keep different scores for each company.  We use financial forecasts and DCF and multiple based analysis to value individual companies.

There are no style, sector, regional or market cap constraints – correct?

We don’t intend to invest in small caps (below $1 billion) as we look for liquidity.  We want the fund to be scalable.  We invest in Western markets, Japan, Hong Kong, Taiwan and South Korea.  As per our prospectus, we can invest a maximum 30% in emerging markets but currently we only have 2% in China, which we regard as an emerging market.

We widely define tech so we could invest in some parts of healthcare (medtech).  Also, internet and media are now in communications (GICS), but we still invest in them even though strictly speaking they are no longer defined as tech.  So, more what we think should count as technology. e.g. we see Netflix as part of tech.

From an ESG point of view, you focus on “Tech for Good” – goods and services with a positive social or environmental outlook – can you give us an example?

CyberArk – it prevents cyber attacks by protecting admin passwords.  Cyber attacks are big business for criminals who demand ransoms.  Attacks can really damage an organisation’s business.  CyberArk has a digital vault and 8 layers of security to prevent this.  It has an advanced solution.  We believe CyberArk positively contributes to society.

“Good in Tech” – responsible use of goods and services that will reduce negative externalities impacting individuals or the environment is another criterium – can you give us an example?

Mastercard – is in the business of trust and they manage this position well.  It makes payments safe and convenient.  They are data driven but have a policy of not sharing personal data with external parties.  This is a good example of how negative externalities can be reduced.

“Improvement Enablers” – companies making progress in the above two categories – again – can you give us an example?

Digital Realty Trust – is a data center provider.  It is classified as a REIT.  But it leases out data center capacity.  They have done a good job of reducing energy consumption and increased the use of renewables.  In governance, with shareholder interests in mind, it has also introduced a minimum stock ownership requirement for executives.  E.g. the CEO has to have 6 xs his salary in stock and 2.5 xs what is granted in an individual year.  This is what we like to see as a shareholder.  It is a positive trend in how it has improved its board structure over time.

Fund is currently 97% invested as follows:

  • 34% – software;
  • 27% – semis;
  • 19% – payments;
  • 9% – internet;
  • 7% – hardware;
  • 1% – IT services

Example of an European holding

We think SAP is a good value for the long-term after the reset. They need to show decent progress in the cloud transition from next year for the stock to start working again. But companies like Adobe and Autodesk have been able to transition and I do not really see why SAP should fail. SAP is the software backbone of large manufacturing companies and is likely to remain so.

What is your benchmark?

MSCI All Countries World Info Tech Index.

Compared to that benchmark – you are materially overweight in payments and underweight in hardware (notably Apple) – discuss

We believe there is good risk/reward long term in the payments space.  We hold Mastercard, Fidelity Information Services, FiServ and Global Payments.  These companies have been negatively affected by Covid because of their exposure to physical retail.  However, their exposure to e-commerce is positive.  They have been good compounders in the past and growth is likely to continue once the effects of Covid wear off.  There is secular growth given the switch to digital and on-line payments.  They represent good value given their growth prospects over the long term.

Hardware tends to be legacy tech companies.  We prefer modern tech.  Historically, we have been underweight Apple but have been recent buyers.  On the plus side, Apple has a solid franchise, near-time sell-side numbers are not aggressive, and we expect share gains from Huawei.  On the other hand, the valuation is high for the modest long-term growth and there is uncertainty surrounding App Store and license revenues.

Little China exposure – why?

In terms of growth and valuation, China is attractive.  Its growth is higher than many US and European tech names and valuations are lower.  However, there are ESG reasons surrounding data privacy and the Chinese government.  In terms of governance, there is also a lack of respect for minority holders.  And sometimes, accounting quality issues.  So, China can be a tricky landscape, but our stance is not set in stone.

Top 3 large cap holdings

  • MSFT,
  • TSMC,
  • MA

Top 3 SMID cap holdings

Ciena – discuss why bought – a value stock with decent, long term growth.  Clear leaders in their niche.  It has a lumpy order intake and is suffering from that lumpiness.  Growth is likely to return given increasing data traffic.  It competes against Huawei and Huawei is likely to lose share in Europe in particular and this will be good for Ciena and Nokia.

CyberArk – (see above)

Descartes Systems – discuss why bought – a Canadian company that has a strong niche in logistics software.  It has good organic growth and also makes add-on acquisitions.  It is the Bloomberg for logistics companies, they have a big logistics network.

Recent purchases

Mediatek – we like it for valuation reasons as it has a high teen multiple and much cash on the balance sheet and a big year of opportunities with 5G ahead of them.  It doesn’t get credit for all the business opportunities such as IoT and WiFi.

TSMC – is a really interesting company.  It is the world’s leading foundry by miles in terms of scale and perhaps more importantly, technology leadership.  It is the best company at mass producing the smallest transistors for the latest technology.  Apple, Nvidia, AMD and Xilinx rely on TSMC.  It is in their interests to have a close relationship with TSMC.  The whole world relies on this company! Itsvaluation is attractive relative to its growth.  It can keep expanding its margins over time.

Median market cap – €19.4bn ($23 billion)

In terms of corporate access, do you like to meet management before you invest?

We like to meet management whenever possible.  It helps us understand the company and its business model better.  Management can also benefit from the meeting as we can discuss ESG which is important for us.

Preferred method of meeting – group, conference, one-on-one? (Obviously all virtual currently)

It depends – if we don’t know a company then a presentation or a group meeting is useful as a first point of contact.  Once we know a company, we prefer a one-on-one.

How has MiFID II impacted Sycomore and corporate access?

We typically contact a company directly to book meetings.  Conferences are another opportunity.  We understand that we need to pay for services we think are important.

Any companies you admire in terms of investor relations/communications?

Many companies out there have good communications.  But Blake Jorgensen, COO and CFO at Electronic Arts (EA) is a good communicator, very used to meeting with investors and knows the company inside out.  That’s the most important thing – to know a company inside out – and it will usually be a good meeting.

Why should corporates target Sycomore?

We are long term-oriented stock owners.  If there is a pull back in the stock price, we are more likely to add (as long as not company specific). We are not a hot money asset manager.  We can also provide corporates with a view on responsible investing and how to improve.

How does working in Paris compare to Stockholm?

The job as a portfolio manager is quite similar wherever you are located physically.  Sycomore has been very helpful in facilitating my family’s move to Paris.  I need to improve my French language skills when things normalise.

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