Of the many causes of market inefficiency and investor misjudgement, there is perhaps no more important contributor than investors' tendency towards excessive extrapolation. This is borne - I believe - of investors' general overconfidence in their ability to predict the future (a theme I have discussed in many past blog entries).
In the short term, extrapolation is not wholly unjustified; after all, a company that is prospering, and is in the right place at the right time with great management and a favourable industry backdrop, will in all likelihood continue to experience continuing growth and profitability in line with market expectations in the short term (and vice versa for companies experiencing adversity). The issue however is not what happens in the short term; it is that the market invariably extrapolates current trends far further into the future than can be realistically foreseen at present.
Take a company like Technology One (TNE AU), for instance - a company I finally got around to spending an hour or so looking at this morning (I don't mean to pick on TNE; it's just I've been meaning to write an article on this topic for a while, and TNE for some reason prompted me to do so). It's a great company that is performing well, and has a good medium term growth and profitability outlook. The company sells ERP software which was initially sold as an on-prem solution, but is now well advanced in migrating its customer base to a cloud-based SaaS offering. The company is focused on niche verticals including local governments, and education and healthcare institutions, and has a 20 year track record of successful growth and execution, and is winning in the marketplace by focusing on a simple to use, integrated ERP suite focused on certain key niches.
The company has been winning business off incumbents such as SAP and Oracle, by offering a more cost effective solution for certain verticals, and has a robust presence in Australia and is now expanding into the UK (where it is still loss making, but is exhibiting decent traction, with sales building and losses declining). Notably, the company highlights that customers can be migrated onto its product suite in as little as two weeks (it is often argued that enterprise software is highly 'sticky' due to the complexity and cost of migration, but TNE seems to have bridged that gap for customers).
The company also continues to invest about 20% of its revenue into R&D (albeit starting from FY19, about 50% of that is now capitalised), underpinning the continuing roll-out of improved feature sets for customers, while also incrementing add-on products that it can up-sell to its existing customer base. Customer retention is some 99%, highlighting the current product-market fit and strong customer value proposition of the company's offering. In short, this is an archetypal SaaS play, with wonderful unit economics; recurring cash flows; a scalable business model; and ample opportunities for growth, both domestically and abroad. The company notes that historically it has doubled in size every five years, and it is guiding for a repeat in the next 5 years out until 2024.
Sounds like a great story right? It is, but here is the problem: the stock trades at 45x trailing earnings (even with 50% of R&D capitalised), and simple math demonstrates the tremendous degree to which current trends have been extrapolated well into the distant future - far further than can be realistically foreseen. Let's assume the company can in fact double its earnings over the next five years, and also pay out 100% of earnings along the way, reflecting its strong balance sheet and the cash-generative nature of its business (software companies are often argued to be 'capital light', but this assessment overlooks the cost of acquisitions, which are sometimes needed to ward off competitive threats and to sustain growth; in TNE's case, however, their growth has been largely organic in the past). What will have to happen for the stock to deliver merely a 10% compound annual return over the next 5 years?
As noted, I will assume earnings will increase from $58.5m in 2019 to $117.7m in 2024e. The dividend yield in year 1 will be 2.5%, which means the company's market capitalisation (currently $2.66bn) will need to rise by about 7.5% to deliver a 10% 1yr TSR, placing the stock on 42.6x earnings one year hence. If this process is iterated for the five year period to 2024, the stock's market capitalisation will need to increase to $3.75bn by 2024 (assuming no stock issuance/dilution), with the stock's P/E coming in at 31.9x 2024 earnings.
Sure, the outlook for the next five years is great, and in all probability the company will continue to grow nicely during this period, but that's already more than priced in. To deliver only a 10% return - not 20-30% - the stock will need to not only double earnings over the next five years, but also still trade on 32x earnings at the end of this period - about a 3% FCF yield. Furthermore, even though it is highly likely they will succeed in executing on their growth plan over the next five years, it is not guaranteed. The investor of today therefore has to take all the risk of any execution missteps or unexpected changes to the competitive landscape; macro environment; and all the other vicissitudes that can impact businesses over time for five full years, without any meaningful risk premium. In this respect, the strong visibility the market has on the company's next five year growth outlook is a negative, as those expectations have now already been baked into prices.
Furthermore, for the stock to trade at 32x in 2024, there will need to continue to be a very favourable growth outlook for the next five years after that. Indeed, if we extrapolate out the same 5yr math to 2029, and assume they double earnings again to $236.7m and continue to pay out 100% of earnings, the market cap will need to rise to $4.95bn by 2029 to deliver a total return of 10%, which would price the stock on 21x earnings in 2029. But to trade at 21x in 2029, there will still need to continue to be a favourable outlook for the five years after that - albeit with moderating growth of 5-10%.
The problem is, the future 10-15 years out cannot be realistically foreseen with this degree of certainty, and a lot can change in a decade. Even if this is the most likely outcome, other outcomes are possible, and the further one extrapolates out into the future, the more likely it is that investors' base case vision of the future will prove erroneous. As the company gets larger, it will increasingly saturate its core markets like Australia, and have to rely on riskier growth in newer markets where it is a later entrant, and where more well-established competitors are likely to already be in place by the time they get there. This introduces the risk they will have to do what many putatively 'capital light' SaaS businesses need to do to sustain growth - make expensive acquisitions to buy their way in to new markets (this works when your scrip is materially overvalued, as it has been for many SaaS companies in recent times; less so when more realistic valuations prevail).
Furthermore, the company competes not only with traditional incumbents like SAP and Oracle, but also other hypergrowth new-SaaS companies such as Workday, which with its core HCM vertical increasingly penetrated, is pushing into ERP fairly aggressively to sustain growth. It is not realistic to expect incumbents to not continue to invest heavily in expanding and improve their own cloud/SaaS product sets to compete with new entrants - particularly as those new entrants grow in size and so become more than a marginal nuisance. Other newer players like Workday will also very likely continue to aggressively expand their feature set and product scope, and continue to drive customer acquisition without regard to near term profitability.
As TNE grows, it will therefore likely increasingly bump into rising competition from other SaaS players and provoke an increasingly aggressive competitive response from incumbents, while as TNE's own ease and speed of platform migration highlights, switching costs are starting to decline. Furthermore, TNE has been winning new business partly because it has lower prices, and there is no assurance competitors do not respond with more aggressive pricing of their own in the future as well.
In other words, the world of SaaS is unlikely to prove immune from competitive/pricing threats in the long term, and while TNE is on the right side of these pricing/competitive dynamics at present, there is no assurance that 10-15 years from now that will still be the case, and investors will still be content to ignore the risks. With so much investment going into the software industry at present, we will continue to see more and better solutions to the various software needs of enterprises proliferate, with increased integration, ease of use, and ease of migration. Furthermore, we are in the steep section of the S-curve at present of enterprise cloud and SaaS-based software adoption, but trees do not grow to the sky, and as markets become increasingly saturated, the low-hanging growth fruit will start to disappear, and price competition for new work could easily heat up (while competition for renewal work could also accelerate as the level of 'white space' declines).
SaaS companies will also have to continue to invest aggressively to keep leveling-up their feature sets to ensure they are not surpassed by competitors. SaaS investors often back our R&D and software development spend, as well as customer acquisition costs, when valuing SaaS companies, arguing that those costs are relatively fixed and represent an investment in improved functionality that will drive higher revenue growth in the future, while the costs will shrink to comparative insignificance over time as revenue growth compounds. But keeping up with the competition in terms of feature sets will remain table stakes for all SaaS companies long term - particularly as the ease of platform migration rises (platform migration is itself a software problem that can be solved with software solutions). There will always be ambitious new start-ups trying to push their way in with better, cheaper solutions, much as TNE itself is doing to SAP and Oracle. It is notable how in the tech hardware business, companies like Samsung that spend a fortune on R&D are not given such credit by investors, even though that R&D drives future revenue growth, because investors have long recognized that if they don't spend this money, they won't keep up with the competition long term.
What happens if 5-10 years from now, TNE's growth is slowing down; their feature sets have been replicated by competitors; Workday is pushing very aggressively into their space, cutting prices to win new business; and retention rates are starting to slip from 99% to say 90%, requiring they up the level of spend on new feature development and marketing, and cut prices on some renewals to keep business? It would not take much for the narrative to change and multiples to fall to 15x or less as revenue growth stalled; cost growth accelerated; and competitive risks increased. That would wipe out a decade of returns from strong business performance. Think it can't happen? Microsoft, which traded at 80x earnings in 1999, traded at as little as 7x earnings a decade later. Investors systematically underestimated the capacity for major unexpected change to occur over long time horizons. (Growth bulls will try to point out that MSFT made a successful come-back, but that was a comeback from being a value stock not a growth stock; investors were at that point excessively extrapolating the company's near-term challenges and uncertainties too far forward).
In short, all the risks and asymmetry with stocks like TNE is to the downside. Everything has to go right for 10 years for the company to merely deliver a 10% return, even assuming a high period-end multiple above 20x (a less than 5% terminal FCF yield). This is the opposite of a margin of safety; a margin of safety allows a lot of things to go wrong, and one to still enjoy an ok outcome, with asymmetry of outcomes skewed to the upside rather than the downside. In the case of TNE, anything less than everything going right operationally for 10yrs+ will result in a poor outcome, and such surprise outcomes happen with much greater frequency than many investors are willing to believe.
We have seen similar things happen recently with Gentrack (GTK AU) for instance - what seemed like a bullet-proof software story to many has seen its share price decline 65% in the past six months, and the stock still trades at 25x adjusted earnings. Given enough time, something will often go wrong in the competitive or macro environment. What this means in practice is that the real return expectancy is usually substantially less than the hypothetical 10% we are talking about with TNE, because there is always a small probability of catastrophic and permanent losses with these types of companies, and there is no commensurate asymmetric upside risk.
Now, by way of contrast, let's look at a stock at the other end of the spectrum - a value stock suffering from excessive extrapolation of current negative trends far further than can be realistically foreseen - something like Affiliated Managers Group (AMG US). AMG is an agglomeration of interests in various active asset managers, spanning equities, fixed income, and to a lesser extent, alternatives. Their equities affiliates are engaged in a range of strategies, including quant and growth strategies, but they are generally overweight fundamental value, which has been struggling in recent times, as sexy SaaS stocks like TNE have galloped to higher than higher multiples.
AMG is also a 'capital light' business, but it trades on only 6x cash flow (down from 20x only a few years ago - highlighting how rapidly people's extrapolated appraisal of the future can change), because instead of steady net inflows, it has been experiencing run-rate FuM outflows of some 10% in recent times. The challenges active managers are facing from the rise of passive investing, as well as fee compression, are no secret, and have been contributing to AMG's FuM pressures, along with poor relative performance across some of their value and quant affiliates' strategies. Many now believe the entire active management industry to be in structural decline. Surely AMG is a value trap? It may look cheap, but earnings are likely to decline into perpetuity, right?
Firstly, it is important to realise that AMG earns its income to a large extent from top-line revenue sharing agreements with its various affiliates, which significantly limits the degree of operating leverage at the AMG level. In other words, all else held constant, a 10% decline in FuM and associated base fees will only reduce their EBIT by a little bit more than 10%. Secondly, not all of the company's FuM is created equal, and a disproportionate amount of their recent outflows have been coming from failed quant strategies at the likes of AQR, which was very low margin business.
However, thirdly and perhaps most importantly, stock markets are currently priced to deliver perhaps 5-7% returns over time, and with AMG on an earnings/cash flow yield of 16% (vs. TNI's 2%), this means that their earnings have to fall 6% a year into perpetuity order to generate a 10% cash flow return (while TNI's has to rise by 8% into perpetuity). If markets rise by say 6%, and say 5% net of base fees and other costs payable by the funds AMG's affiliates manage, AMG will therefore have to experience about 10% annual perpetual run-rate outflows to deliver a net 5% decline in FuM and earnings each year, and hence deliver less than a 10% return (assuming gross alpha is zero). Most of its earnings are also free cash flow, and are therefore available for use to buy back shares and pay dividends (or make selective acquisitions, which the company does from time to time; the company also has a modest amount of debt that it will also need to pay down).
Will that happen? In the short term, it very well could - indeed probably will. However, extrapolating this out over 10-20 years is quite another matter, as there are a lot of other potential outcomes. It was only a few years ago, after all, that FuM was still growing and the stock was trading at 20x! People couldn't predict the future then, and they can't predict the future now. For a start, value could come back into fashion at some point, in which case their underperforming value manager affiliates could make a meaningful comeback. Indexing, which made a lot of sense when it was only a small portion of the market, is becoming an increasingly large portion of the market, and that is starting to create inefficiencies certain active managers - particularly the entrepreneurial types that AMG likes to partner with - may be able to exploit. This includes most obviously the increasingly large gap between the price of stocks included in indices, and those excluded, but also the outsized share price moves that are now sometimes occurring for stocks being included/dropped from the indices.
This will make outperforming the index easier in the future, for managers not constrained to invest only in the largest index-constituent companies. And many allocators are likely to want to diversify their exposures across both index and active managers, due to the growing risk of crowding into the same index names poses. While fee compression and a migration to indexing will no doubt continue in the short run, there is a very good chance it does not continue into perpetuity. Furthermore, the company is also beefing up its alternatives and fixed income business, and some of its products and investor base segments are growing. If certain of its affiliates/segments do remain in structural decline, they will become of lesser significance to group earnings over time as other areas grow.
AMG is the opposite of TNE. The most likely base case outcome in the short to medium term is a continuation of current poor operational trends, but that is now not only priced in for the short term, but also extrapolated out over the long term as well, far further than can be realistically foreseen at the present time. There is a margin of safety because things have to not only remain bad for a long time, but get meaningfully worse than current trends in order to make less than 10%. Meanwhile, if conditions were to ever unexpectedly improve, the stock could dramatically re-rate. For instance, if outflows were to ever stabilise, or flip to even modest net inflows, the stock could easily swiftly rerate to 10-15x cash flow, which would be a double from current levels. This means that the asymmetry around base-case outcomes is skewed to the upside, rather than the downside.
This highlights an additional point worth mentioning - aside from issues of long term fundamental value, there are also technical advantages to investing where expectations are so low, and poor performance has been extrapolated so far into the future: because investors are extrapolating 10% run-rate outflows for AMG far into the future, they will likely only need one quarter of meaningfully reduced outflows for this assumption to be called sufficiently into question for the stock to sharply rally. For instance, if outflows slow to only 5%, suddenly the prospects would be for flat earnings before buybacks (as 5% outflows offset 5% market growth), rather than 5%+ declining earnings. 6x would seem too cheap, and the stock could quickly rally to 8-10x - a 50% move. Another stock I purchased in August of last year - Signet - has for instance recently near tripled off its lows after one to two quarters of slightly 'less worse' operating performance.
The same is true in reverse for the likes of TNE. Regardless of what actually happens over 10yrs+, if they merely have one half (TNE reports bi-annually) of slower than expected revenue growth or margin pressure, the stock could get bashed. Investors are now expecting a doubling in earnings every 5 years, so even one very temporary period that causes investors to doubt the surety of that outcome could cause the stock to drop 10-20% or more (incidentally, when stocks react violently to short term outcomes like this, commentators often ascribe it to excessive investor short termism, whereas in reality it usually reflects the excessive degree of extrapolation baked into prior prices; the pricing error was usually more in the prior valuation, which embedded an unrealistically high belief in the predictability of the future, rather than the new sharply revised valuation, which is often more realistic).
Why is excessive extrapolation so pervasive, and how does it contribute to growth bubbles?
Why is this tendency towards excessive extrapolation so widespread, and why do investors have a systematic tendency to overprice stocks with the best medium term outlooks, and underprice those with the worst (or perceived worst)? There are many contributing factors, and they also explain why markets seem to go through recurrent growth bubbles from time to time, where multiples expand over many years, only to subsequently recede. We are currently in the midst of one such growth bubble.
One reason is simply because buying/promoting stocks with good businesses and good outlooks is simply easier than getting involved in messy/complex situations like AMG, and investors' time horizons are also relatively short. One of the easiest things to do in markets is identify a great company with a great outlook that trades on a high valuation. Anyone can easily understand and elucidate the merits of a hot SaaS company like TNE, and pitch why they are such great companies with such a fabulous growth outlook. But pitching such stocks is the equivalent of identifying a 2% yielding AAA bond by explaining why the bond is so safe and reliable. Sure, of course its 'safe' and 'high quality', but that's obvious, and that's why the price is high and the return potential is low.
There is very little skill involved in identifying a good company to invest in trading at a high price; everybody can (and does) do that, which results in prices of great companies getting bid up to the point where future return potential is poor. The real skill in investing is identifying things that are not obviously good, where prices and expectations are too low, and the crowd is ignoring it, but which has overlooked potential.
So one reason people focus on high quality growth companies that are expensive, is simply that it is so easy. However, another important contributor to this long term overpricing dynamic is that the cash flow return expectancy math I highlighted for TNE (and for Amazon in a prior post) does not work in the short term if multiples do not decline, or continue to rise. If TNE for instance continues to trade at 45x, the stock will deliver a 17.5% return (15% earnings growth plus 2.5% dividend yield), while if the multiple goes to 50x over the next year, it will deliver a 30.5% return. High returns will continue so long as multiples continue to rise, and this can go on for many years. When investors' time horizons are relatively short, spanning only a few years at most, they are inclined to focus only on the medium term earnings growth outlook and expectations for changes in multiples, rather than full-cycle, cash flow based return expectancies, and also disregard the small risk of a major loss.
However, expecting high returns from such stocks is a 'time horizon fallacy of composition'. In the long run, returns must be driven by the level of cash distributed by companies relative to their prices, and because all growth in the long run must trend down towards sustainable levels (nominal GDP growth of 4%), high growth stocks must eventually see their growth slow and their multiples normalise. Only in the short run can returns be driven by cyclical multiple expansion, and the bubble aspect of such pricing dynamics derives from the fact that the high returns generated in the short term (say 30%) are being driven by future returns being repriced down from say 7% to 5%, whereas the 30% returns are invariably perceived as being driven by the operating fundamentals (earnings growth). By definition such a divergence cannot be sustained long term and at some stage must be corrected.
This also helps explain how markets can and do go through recurring 'growth bubbles'. While on average, over the long run, high multiple glamour/growth stocks have underperformed, they can still significantly outperform for periods while their multiples are expanding, and these phases can be elongated by several positively-reinforcing feedback loops that can sustain momentum for a long time. A growth bubble happened for instance in the the US in the 1960s-early 1970s with the so-called Nifty 50; again in the late 1990s with technology names and large cap, high quality blue chip compounders (GE and Coke traded at 40x); and has also happened in the 2010s.
What seems to happen is that you start from a point where growth companies are perhaps underpriced relative to their quality, or at least not overpriced. That was the case in 2010, as the 2000-07 period had been a fabulous decade for value, and the flywheel effect of inflows chasing styles that had worked well in the post-dot.com-bubble era had driven major inflows into value funds, resulting in substantial and excessive multiple convergence between high and low quality companies, and high and low growth companies. By 2010, GMO was discussing how very high quality companies in the US were remarkably cheap, and multiples did not reflect superior quality and duration.
As those superior companies grow, and their multiples eventually stop going down (a residue of the last growth bust), and perhaps also aided by an economic or industry-specific upswing, they start to deliver good returns, and great returns attract a steadily-growing amount of media, broker, and investor attention. Fund managers who don't own them start to lag the index. Brokers start picking up coverage and promoting them, and the media writes more stories about them. They start to attract more eyeballs, and a growing narrative vortex starts to monopolise investor attention, and draw it away from 'less interesting' areas of the market.
As prices rise and multiples expand, investor enthusiasm grows and is validated by the price action, and more and more extravagant views of the companies' future potential start being envisaged and priced into the stocks, while risk aversion dissipates, as the lessons of the prior growth cycle are slowly forgotten. People that buy the stocks derive comfort in the fact that prices quickly rise after their purchase. Endorphins are released, and endorphins are the chemicals in our brain that tell us to 'do more of that'. Positive reinforcement builds, and after a while, such stocks become viewed as reliable 'compounders', while the substantial contribution to returns coming from multiple expansion is generally overlooked or not given serious consideration. Those that decide not to buy (or sell 'too early') them kick themselves for 'missing' such stocks, and vow to buy them as soon as they experience any pull back, or eventually capitulate and buy them anyway at much higher prices.
Furthermore, cyclically rising multiples become self-reinforcing not just due to the psychological and crowding effects they engender, but also due to the second-order impact on liquidity. If you're long a bunch of growth companies with rising multiples, you'll deliver great reported returns in the short term. Great reported returns lead to more inflows, and as those inflows are put to work in the same stocks, they tend to drive multiples higher still. This becomes a liquidity flywheel that can drive a perpetuation in existing momentum for many years, and drive valuations to extreme levels. This is fundamentally where 'momentum' comes from, and as Soros says, the only time that betting against the current momentum works is at inflection points, which are comparatively rare occurrences in markets. Most of the time, the 'trend is your friend', and for this reason, most of the time it will pay (and feel more comfortable) to align yourself with current market momentum, even if over the long term, inflection/reversal points more than offset the gains from riding such momentum.
What you end up with is what Buffett said often happens in market cycles - what the wise do in the beginning the fools do at the end. People increasingly focus only on growth and growth potential, and rising 'compounding' share prices, and ignore the level of prosperity already baked in to prices. Valuation 'ceases to matter'. This dynamic can continue for an indefinitely long duration - essentially for as long as multiples continue to rise, which can be as long as a decade or more. But sooner or later, multiples stop going up, and then the whole movie gets played in reverse (on fast-forward).
The other problem is that cheap stocks such as AMG with the best risk/reward characteristics are also the ones that are invariably very obviously imperfect and have clear 'known unknown' risks attached to them (whereas in markets, the biggest risks are actually the 'unknown unknowns'; known unknowns are invariably already priced in). That means they come attached with greater than average 'reputation risk', because if money is subsequently lost on such stocks, it appears as though it was lost for reasons that should have been obvious at the time of purchase. This, in turn, raises questions about the judgement of the investment manager or financial adviser in the eyes of clients. Falling prices/multiples also amplify the narrative about the structural challenges such companies face, and result in poor short term returns that significantly understate underlying cash-flow based returns.
In addition, as I have discussed in past blog entries, the payoffs are lobsided and uncomfortable. If you buy a TNE, the most likely outcome in the near term is the company continues to do just fine and the stock goes up. However, if you buy a portfolio of TNEs, over time, a minority of those positions will disappoint and meaningfully de-rate (such as Gentracks' recent 65% de-rating). This is the general mechanism by which high multiple stocks underperform as a group, over time. However, in an environment of rapidly expanding multiples, this normal dynamic is neutered/offset by multiple expansion across the board.
When a growth bubble goes on long enough, investors learn the wrong lessons. After a decade of accelerating multiple expansion amongst growth companies, people are drawing the lesson that it is important to focus on growth and quality, and to own 'compounders', and that near term valuations are less important. However, and as soon as multiples stop going up and start going down, the music stops, and 30% returns suddenly become 0% or less, and can remain at zero or less for a long, long time. Cisco, for instance, grew EPS 6-fold in the 20 years post the dot.com bubble, but the stock is still one-third below its dot.com high as its multiple overhead was so substantial that even two decades of growth and a boom in global internet adoption/networking was not enough to offset it. There is nothing worse for long term compounding than sustaining major permanent losses on positions, or locking yourself in to very low returns over several decades, as many investors did in the late 1990s in hyped growth/technology sectors. Buying exciting growth companies on high multiples is not the best way to compound your capital in the long run.
If multiples start to decline, the liquidity flywheel can just as easily go into reverse, as high-multiple growth investors report poor returns, suffer outflows, and are then forced to liquidate positions to meet redemptions, driving further underperformance. Value managers then start to outperform, and start to attract more inflows, and multiple convergence then replaces multiple divergence. That happened during 2000-07, and will almost certainly happen again at some stage. When, I don't know, but multiple divergence is currently at record levels, and stocks like Tesla now have a larger market capitalisation than Volkswagen (who sells about 30x as many cars as Tesla).
Very few investors seem to be able to avoid being caught up in a long-running, fashionable growth vortex. I've noticed self-described 'value' managers of late that have their top 5 positions in software and other growth companies trading at 30-50x earnings. The question I would have is, why are you spending so much time looking at the most expensive, picked-over, and over-owned portion of the market when there are so many areas of neglect out there where promising opportunities reside? The likely answer is that like most investors, they can't help but be drawn in by the growing magnetism of rapid growth; rising share prices; and all the media attention and hype the software industry has attracted, or avoid the compulsion of FOMO.
Value investing requires one go against the crowd; ignoring popular and expensive stocks and sectors which are performing well; take a long term view; and be disciplined in only buying stocks trading at a low price relative to their likely future distributable cash flows, while insisting on a margin of safety. That seems to be very hard for most investors to do - particularly when so much money is being made so quickly in hot corners of the market.
SaaS stocks have performed very well for many years, as their merits and growth potential have become increasingly well known - nay, eulogized. A growth reversal is coming at some point. I don't know when, but valuations are now stretched. I would be wary of investing in funds that have very large software/tech exposure at present. There will be a time to own such companies, but it is not when they are as flavour of the month as they are today.