“Net long-bias with teeth” is how Paul Wick, lead portfolio manager of the sector-specialist Seligman Tech Spectrum, describes the strategy’s positioning in the market.
Launched in the early 2000s to capitalise on the wealth of opportunities arising from the dotcom crash, Seligman Tech Spectrum – which marks its 20th anniversary next month – combines a net-long-bias book with a “meaningful number” of individual short positions across the technology, media and telecoms industries.
The USD1 billion long/short sector-specialist strategy, which is managed by Menlo Park, California-based Seligman Investments, has built a formidable track record over the past two decades, successfully trading through a range of market environments with its fundamental, bottom-up approach to stock selection.
The strategy has a generated a 13.83 per cent net annualised return since its June 2001 launch, outflanking both the S&P 500’s 8.3 per cent gain and the NASDAQ’s 10.7 per cent rise over the same period.
Wick, who has more than 30 years’ experience of tech investing, has run Seligman Tech Spectrum since inception, as well as the firm’s two tech-focused long-only mutual funds since 1990. Altogether, Seligman Investments — whose New York-based parent firm J W Seligman & Co was acquired by Minneapolis-based financial services giant Ameriprise Financial in 2008 — manages about USD14.5 billion across all three strategies.
‘Bubble’
“There were so many bad companies that had went public in the ’99-’00 bubble that by late 2000, as the NASDAQ was melting down and the internet bubble was bursting, it occurred to us that we needed a hedged product for our clients,” Wick tells Hedgeweek of the long/short strategy’s origins.
“We launched in 2001, and there was still a lot of room to take advantage of the overpriced technology companies, many of which were unprofitable and of questionable merit in terms of going public.”
The strategy initially got off to a flying start, enjoying a strong first year and weathering 2002’s difficulties, before building a strong momentum over the next five years. While many of Seligman’s initial staff have retired or left since launch, Wick stresses that the original guiding principles have remained the same: “growth at a reasonable price.”
More recently, Seligman Tech Spectrum has made a strong start to 2021 ahead of next month’s 20th anniversary. A stellar 13.44 per cent February gain helped drive its Q1 returns to some 17.16 per cent, and by mid-May the strategy was up roughly 18 per cent.
Long positions are predominantly based around technology stocks, as well as pockets of media and telecom names. In tech, the focus has been on US-based consumer electronics, data processing, semiconductors, network equipment, computing, storage, software and internet companies. US media names such as Discovery, Comcast and Fox have also brought solid returns for the strategy.
The strategy seeks out profitable companies which are cash-flow positive, have considerable intellectual property and are a plausible takeover target, explains Wick, who heads an 11-strong team focused on “deep and comprehensive” research coverage across the strategy’s investment universe.
“We like companies that are actively repurchasing their own shares. We look for companies who appear to be reasonably valued and have a degree of valuation support in case something goes wrong or the market is weak,” he adds. “We also like companies that have best-in-class products that are gaining share, with a strong competitive position, with innovations and patents. Companies that aren’t grasping.”
He points to consumer-focused cybersecurity products as one key area that has proved bountiful for returns, including successful bets on McAfee, NortonLifeLock, and AVG, which was acquired by Avast in 2016 for USD1.3 billion.
“These are very profitable businesses, with mostly recurring revenue,” he notes. “Yes, there is some churn, but it’s not astronomical. We’ve done very well in the consumer security space for a long time.”
‘Meltdown’
In shorts, meanwhile, the strategy has periodically invested more in healthcare companies in some years than in others, while lately it has ramped up its bearish bets on selected consumer stocks.
“We’re attracted to short companies that have persistent losses and cash burn; companies that disclose in their prospectus when they’re going public that they anticipate losses for the foreseeable future. That’s always something that catches our attention,” says Wick. “Also, we look out for companies with unethical conduct, or aggressive accounting.”
He continues: “We look to find badly-managed, grossly overvalued companies; companies with self-dealing CEOs, companies that were flash-in-the-pan and didn’t have a sustainable business.”
One key short was Kit Digital, a US video technology and production firm that went bankrupt in 2017 as a result of securities fraud. “It was a spectacular meltdown,” he says.
The solar panel industry – “an incredibly competitive business, with cutthroat pricing and minimal intellectual property” – has offered fertile hunting ground for shorts, along with companies that have had “extreme valuations”, trading at up to 20 or 30 times their venue.
“Because of the low interest rates, and the mania that we’ve had with retail investors bidding up these ‘story stocks’, there are a lot of companies that check that box,” he continues.
Seligman Tech Spectrum has also found short ideas in the burgeoning SPACs sector, where some SPACs have merged with low-quality companies.
“The SPACs craze has really gone off the deep end in the US,” Wick adds. “We’ve been very active in shorting SPACs, especially electric vehicle SPACs.”
‘Reinvigorated’
Over the past year, the fallout from the Covid-19 pandemic has thrown up an assortment of investment ideas both long and short. While many technology sectors have been “reinvigorated” as a result of the changes to the workplace, for others the last 12 months have proved a negative.
“More people are working remotely, studying remotely, and companies are moving toward a hybrid model of homeworking and office working,” he observes. “There are laptops in every room in the household. This has resulted in a greater emphasis on security software for remote working, and put additional demand on cloud data centres, since people are doing more over the internet with collaborative work and video conferencing, which eats up a lot of bandwidth.”
He continues: “Companies like Hewlett-Packard have done extremely well. But others, like Uber, have taken a hit. If you are going to drive, people would rather get in their own car.”
Wick concedes Seligman Tech had a “tough year” in 2020 as a result of the far-reaching impact of the coronavirus. It ended the year in positive territory, albeit only in low single digits, with key short positions in names like Tesla and Teledoc faltering. But it has rebounded, generating an 18 per cent gain year-to-date.
“We are still bearish on a number of those types of companies, and now it feels like things are reversing — we’re having a very good year this year.”
Historically, the strategy’s investors have been family offices across the globe, including in the US, the UK, Singapore, and Hong Kong. Seligman also counts a large Switzerland-based private bank, a large sovereign wealth fund, and some funds of funds among its long/short strategy’s clients.
Observing the present allocator mood, Wick suggests there has been little movement among investors in hedge funds this year, given the industry performed well in 2020, and believes there is a “degree of complacency” among the allocator community.
But as the conversation draws to a close, Wick – who has been with Seligman since 1987 - sounds a note of optimism regarding the strategy’s prospects for its 20th anniversary and the second half of the year.
“Inevitably, what we’ll see happen in six months is that they’ll get nervous if the trends that are happening today – the sell-off in technology stocks, especially the very high-valuation names – continues,” he observes of the shifting tech backdrop.
“People will become less enamoured with sticking with the funds that they’re invested in, and will probably want to make some changes towards year-end.”
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