Fund Seeks Overlooked Tech Gems; Health-Care Tech Gives Manager Relief From High Internet Valuations

Fund Seeks Overlooked Tech Gems

Health-Care Tech Gives Manager Relief From High Internet Valuations

MATT JARZEMSKY

Oct. 28, 2013 6:48 p.m. ET

T. Rowe Price TROW +2.68% fund manager Henry Ellenbogen has made a career of discovering and investing in startup technology companies including Twitter Inc., and his $14.3 billion New Horizons fund has ridden Internet stocks to market-beating returns this year. But lately Mr. Ellenbogen is focusing on other areas—such as firms aiming to improve electronic records, care pricing and other aspects of the health-care industry, as well as innovators in financial payments—that he believes many market participants have overlooked.Surveying the Internet sector lately, “we’re just deploying less capital, because of valuations,” Mr. Ellenbogen said in an interview.

His shift underscores the increasing investor trepidation over rising technology-stock prices relative to revenue and profits heading into Twitter’s initial public offering, which is shaping up as the most closely scrutinized IPO since Facebook Inc. FB -3.31% went public in mid-2012.

Many corners of the tech sector have been on a tear so far this year. Technology firms in the S&P 600 index of small-cap companies are up 36%, outpacing gains in the broader market.

The Global X Social Media Index exchange-traded fund, which tracks companies such as Facebook and LinkedIn Corp. LNKD +0.96% , has advanced 52% in the year to date.

The New Horizons fund “significantly increased” holdings of Internet stocks between May 2012 and the end of last year, Mr. Ellenbogen said. Recent years’ purchases have paid off during a technology-stock boom this year that has some observers harking back to the late 1990s. Among the fund’s savvy purchases: Netflix Inc., NFLX -4.28% which is up 239% in 2013, and Groupon Inc., GRPN -4.49% up 93%.

The fund gained 41% in the year to date through Friday, according to FactSet, topping the 36% gain in its benchmark, the Russell 2000 Growth index. In the past three years, its returns put it in the top 1% of small-cap growth funds, according to Morningstar.

Internet stocks aren’t the only ones Mr. Ellenbogen is approaching with caution right now. Business software has been among the hottest corners of the IPO market in 2013, with six such firms popping more than 75% in their trading debuts in 2013, according to Dealogic. “The valuations are very, very high,” he said.

Dave Stepherson, who manages $750 million as chief investment officer at Hardesty Capital Management, agrees that social media companies and business-software makers that have gone public lately look richly valued. He looked into buying shares of cyber security firm FireEye Inc., FEYE -2.98% but declined after the stock doubled in its opening trade.

“Obviously we’ll look at something like Twitter but we’ll see a pretty lofty valuation, I imagine,” Mr. Stepherson said. “There’s going to be huge demand for it. We’ve already had clients asking for it.”

Mr. Ellenbogen isn’t in the business of placing bets on entire industries. He makes long-term investments in small companies with the potential to become large, as well as established, persistently expanding businesses with a unique operating mode or competitive advantage.

Facebook, which the New Horizons fund didn’t own as of Sept. 30, rallied 83% the two months after July 24, when it reported progress selling ads on mobile devices. Twitter, which the New Horizons fund bought in 2009, according to fund documents, expects its IPO to value the shares at $17 to $20 apiece, according to a regulatory filing. Mr. Ellenbogen declined to discuss his existing investment in Twitter and what he plans to do in the IPO.

Investors have been “really focused on which companies are on the right side of change, with what’s going on in mobile and tablets,” Mr. Ellenbogen said.

Conversely, companies using data science to improve the health-care sector—long an area of interest for Mr. Ellenbogen because of recent years’ improvements in information technology and the health-care industry’s size—are just starting to gain investor attention, he said.

Mr. Ellenbogen’s investments include medical records and billing software maker Athenahealth Inc., which has gained 88% this year, and privately held Castlight Health, a medical-service pricing and quality-information provider for employers and health plans.

Soaring health-care costs, consumers’ difficulty finding information about providers and the computerization of medical records have presented big opportunities for upstarts, Mr. Ellenbogen said.

“You’re basically seeing that opportunity matched with some examples of success,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: