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UniSuper cites valuation concerns after its tech strategy paid off in FY23–24

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By Rhea Nath
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5 minute read

The fund’s CIO believes that having a “nice weighting” in tech benefited them in the last financial year, but he cautions that the high valuation of tech stocks today makes the fund hesitant to increase these holdings.

While UniSuper's overweight positions in technology contributed to strong returns in the year ending June 2024, chief investment officer John Pearce stated that technology stocks are currently too overpriced for the fund to continue pursuing them.

Speaking to InvestorDaily, Pearce noted that technology was one of the three key drivers behind the fund’s latest annual return. However, a relatively overweight position in Australian markets, particularly in resources, proved underwhelming.

“We had a nice weighting to tech, an overweight to tech, overweight to Japan and overweight to India, so they’re the three things that worked in our favour,” he said.

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“What worked against us is, we actually had an overweight, relative to our peers, in Australia, and within Australia, we actually had an overweight to resources. That’s really been quite a drag.”

Looking at the technology sector, which has seen seven major stocks push the S&P 500 up by 25 per cent over the last 12 months, Pearce admitted that it now "looks expensive."

As such, the fund is opting to maintain its current portfolio exposure to tech rather than grow it.

“No one could say that tech looks cheap under any metric. The question is, what do you do? If you have an overweight position in tech, now all the metrics are saying you should take profit and re-enter,” he said.

Still, amid all the buzz surrounding the Magnificent Seven, he admitted these are “seriously profitable” companies with strong fundamentals for future growth.

“What we find is, over time, they grow into their valuations,” Pearce said.

“If you look at Apple, when [it] hit a trillion dollars, everyone was saying how expensive it is. Then it hit $2 trillion, and everyone was saying how ridiculously expensive it was, and now it’s $3 trillion.

“So, you can sell Apple when it looks expensive, but have you got the foresight to get back in? Otherwise, you’re going to miss the next leg.”

He observed that technology, as a thematic, is unlikely to go away any time soon.

“Roll the clock forward, three years’ time, every company, every government, every individual is going to be using more tech, rather than less tech, and it’s going to be using more artificial intelligence (AI), rather than less AI, so the thematic is there,” he said.

“We’re not chopping up at these levels, but we’re also not selling.”

Pearce elaborated that it is "no surprise" UniSuper’s internally-skewed options—Global Companies in Asia and International Shares—each with around a 25 per cent exposure to the thematic, emerged as the fund’s top performers, returning 17.73 per cent and 16.85 per cent, respectively.

UniSuper’s ESG options, which mandate screening out sectors like energy and resources that underperformed last year, instead favour overweight positions in technology. This strategy resulted in the Sustainable Balanced option delivering a double-digit return of 11.22 per cent, while the Sustainable High Growth option achieved 14.39 per cent.

Outlook for AI

Regarding AI, UniSuper’s Pearce noted that “everything connected to AI has been priced”, citing Nvidia as the “most obvious” example. In May, the stock surged to record highs after it beat earnings and revenue forecasts for the first fiscal quarter and has grown almost 200 per cent in the last 12 months.

Meanwhile, other technology stocks in the Magnificent Seven, have also grown, albeit more modestly, in the corresponding period. Apple stocks are up around 19 per cent, while Meta and Alphabet are up 85 per cent and 59 per cent, respectively, as at 8 July 2024.

“It’s almost like, in terms of AI, the only company that, at the moment, is making serious money directly from AI, is Nvidia,” Pearce said.

“Then you have the second derivative, the companies with the big databases and the large language models, you know, the Metas, the Amazons, and the Alphabets. They’re actually not making money from it, but they’re being priced on the basis that they will convert the databases and they will make money from it, so that’s already been priced.”

In terms of the third derivative, namely companies using AI to increase productivity, the investment executive believes this is going to be more challenging to predict.

“That’s going to be a much harder game to play and a much longer-term game to play.

“We know it will happen, but you can’t be betting with certainty now on any specific companies on the basis they are going to be the big winners out of AI in terms of their supply chains. I think that’s a much longer-term thing.”