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Jan. 11, 2021, 10:19 a.m. EST

This fund manager says Amazon and other large-cap tech companies will make lots of money for investors for years to come

By Philip van Doorn

Scott Berg’s T. Rowe Price Global Growth Stock Fund last year more than doubled the return of the S&P 500 Index and did even better against its benchmark by betting on large-cap technology companies and next-generation disruptors.

In an interview, Berg, who joined T. Rowe Price as an analyst in 2002, explained his investment philosophy and why some stocks that have been called “too expensive” by investors over the years have actually been reasonably priced. Massive gains are sustainable, he said, because of double-digit increases in revenue.

Some of the $1.3 billion mutual fund’s top holdings are Amazon.com Inc. (NAS:AMZN) , Google holding company Alphabet Inc. (NAS:GOOG) and Facebook Inc. (NAS:FB) . He also owns newer entrants, including cloud-services companies Okta Inc. (NAS:OKTA) and Datadog Inc. (NAS:DDOG) .

Large-cap tech produced outsized gains last year, as a cash cushion and global reach kept revenue riding high even amid the devastating pandemic.

Berg quoted Vladimir Lenin, saying, “There are decades where nothing happens; and there are weeks where decades happen.”

“I changed it,” he said. “In markets there are years when relatively little happens, and months or quarters when years happen.”

Berg added: “Last year was, in many ways, a perfect storm for someone who invests the way I did.”

Berg has been the sole manager of the T. Rowe Price Global Growth Stock Fund (NAS:RPGEX) since it was established in October 2008. The fund is rated five stars (the highest) by research firm Morningstar.

Here’s a comparison of the T. Rowe Price Global Growth Stock Fund’s performance (after expenses) to that of its benchmark, the MSCI All Countries World Index (MSCI:XX:892400) , in U.S. dollars, and the S&P 500 (S&P:SPX) , through Dec. 31, 2020.

The total returns for the fund and the S&P 500 were supplied by FactSet, while MSCI provided the gross and net returns for the MSCI All Countries World Index. The net return for that index reflects the minimum amount of dividend withholding tax (DWT) that an investor would incur when investing in that index. 

Before discussing 2020, Berg explained that his investment philosophy rests on four principles:

Getting back to outperformance in 2020, Berg said: “When you get real uncertainty like we did with COVID, people de-risk or freeze and do nothing — but in hindsight, there were amazing opportunities to buy different things.”

And this didn’t mean you had to catch a stock right at the bottom in March. For example, Berg’s fund didn’t hold shares of Etsy Inc. (NAS:ETSY) coming into the COVID-19 pandemic. The stock hit its 2020 low of $29.95 on March 23, the same day the S&P 500 bottomed. It shot back up and hit record highs before Berg bought shares at around $80. Look at the chart from the end of 2019 through Jan. 6:

Berg continues to hold shares of Etsy. “A year and a half ago, people would question if this was a niche-y craft website. When people looked for other sources of income, it bounced.”

Etsy offers an online marketplace for small businesses and buyers, with products and services sorted into categories. The company’s third-quarter sales were up 128% from a year earlier, while its revenue for the first nine months of 2020 doubled from the year-earlier period. For all of 2019, sales had increased by 36%.

Etsy’s rise pointed to a trend that was obviously stoked in 2020 — the movement of retail sales to online providers and away from brick-and-mortar stores. Berg cited numbers for retail e-commerce penetration in the U.S., which increased to 16% in 2019 from 6% in 2008. But in 2020, this penetration increased to 26%, according to Jefferies Research. So that goes back to the initial quote from Lenin — here we had a decade of market penetration compressed into one year.

Peloton Interactive Inc. (NAS:PTON) is another stock that Berg purchased after it had shot up, and then profited from. He said he had trimmed his position in Peloton, but had not cut his holdings of Etsy.

Tesla Inc. (NAS:TSLA) was just about the biggest winner of 2020 by any measure. Berg said he has been holding the stock for three years, but is now “in trim and sell mode,” because “there is no question the market now is putting a very good amount of value” on the company’s electric-vehicle business.

He remains enthusiastic about Tesla’s prospects. He also said Tesla emphasizes how important it is not to sell a winner too early: “I made four times my money, then I started to trim and it went up another 100% from there.”

The largest holding of the T. Rowe Price Global Growth Fund is Amazon, which made up 3.1% of the portfolio as of Nov. 30. It is the only stock the fund has held every day since it was established in October 2008. Amazon’s shares surged 76% in 2020.

At any time over the past two decades, you might have been told that Amazon’s stock was too expensive because it traded at a high multiple to earnings. It still does — the price-to-earnings ratio, based on consensus estimates for the next 12 months among analysts polled by FactSet, is 70.8, compared with a forward P/E of 22.5 for the S&P 500.

But consider this: If we look at Amazon’s revenue growth over the past 10 reported years through 2019, the pace ranged from 20% (in 2019) to 41% (in 2011). Analysts estimate Amazon’s sales for all of 2020 increased by 35% from 2019.

Earnings haven’t been the driver for Amazon. Berg said the company has been able to fund the build-out of its distribution network, including warehouses and its very profitable Amazon Web Services, with internally generated cash.

So he expects Amazon to continue to show average annual share-price gains of 20% in coming years if it can continue increasing its revenue by 20% or more.

He pointed to another new business for Amazon: “Only two and a half years ago, Amazon didn’t sell ads on its website.”

Since then, Amazon has allowed vendors to bid to have their products show up higher in search results. “So for very little cost, they turned this algorithm on, and what it did was grow into $10 billion in revenue per year, with a 75% to 80% profit margin,” Berg said.

Going back to his original decision to purchase Amazon for the fund in October 2008, Berg said the company was already well-established. He bought it at about $60 a share and watched it fall to $40 within the first six months. That is an alarming drop.

The stock closed at $3,138 on Jan. 6. — 52 times Berg’s original cost. “Unless I had experienced it, I would not have believed you would make 50 times your money in a really well-known, high-profile, expensive stock in just over a decade,” Berg said.

A list of the largest holdings of the T. Rowe Price Global Growth Fund is below. When asked about which of these names he remains excited about, Berg said the best way to address that question, without giving away active buying or selling decisions, was to summarize how he places technology stocks into four categories:

Berg described these as “not crazy expensive,” but he is concerned about regulatory headwinds. He said he is slightly underweight the benchmark in these companies, but you can see below that Alphabet and Facebook are among the fund’s top holdings.

Alphabet is expected by analysts to increase sales by 10% for all of 2020, compared with sales growth of 18% in 2019. Facebook is expected to show 19% sales growth for 2020, down from 27% in 2019.

Looking ahead, Berg believes “the biggest thing happening in the world right now is the race to AI [artificial intelligence] superiority,” which will be between the U.S. and China.

The government of China has made it clear that this is a priority and that it expects the country’s largest tech players to invest accordingly. For the U.S., the competition will come from Amazon, Alphabet, Facebook and other large players.

As far as a regulatory crackdown within the U.S. goes, Berg believes “you will hear a lot of rhetoric from politicians,” but there will be “not a lot of teeth to the regulation” to avoid hindering the U.S. giants’ efforts to compete with foreign companies.

These include Salesforce.com Inc. (NYS:CRM) , Workday Inc. (NAS:WDAY) , Zoom Video Communications Inc. (NAS:ZM) , Intuit Inc. (NAS:INTU) and ServiceNow Inc. (NYS:NOW) .

“They are big companies growing much faster than other companies. But now they are competing with each other and approaching market limits,” Berg said.

These include companies such as Okta and Datadog, both of which provide cloud-based network services. “These are expensive, but they are growing tremendously. We may be inflating a tech bubble, but we may also be early,” Berg said.

Another next-generation winner he is positive about is Sea Ltd. (NYS:SE) , which he described as ” the e-commerce leader and mobile-gaming leader in Southeast Asia,” outside of China. “Think of everything Amazon does, plus epic games and Tencent (HKG:HK:700) in China, and do that in the rest of the vibrant southeast Asian economy,” he said.

These include International Business Machines Corp. (NYS:IBM) , Cisco Systems Inc. (NAS:CSCO) and Intel Corp. (NAS:INTC) . “This isn’t my bucket to play in,” Berg said, “but I play in the first three buckets.”

The T. Rowe Price Global Growth Fund now holds shares of Apple, but Berg explained that he sold the shares when it appeared the company’s “growth profile had slowed,” before starting a new position in the stock more recently.

“What we got wrong” when selling his entire position in Apple five or six years ago, was that he and colleagues didn’t realize the pricing power of new iPhone models, Berg said. “Unlike when flat-screen TV prices went down, for the iPhone prices went up to $1,000,” he said.

So now he is bullish on Apple, but because of the stock’s strength (it rose 81% in 2020) he hasn’t been able to build as large a position as he wanted.

With so much discussion of technology stocks, you may be surprised that a sector where Berg was adding stock during 2020 was financial services. He said many excellent companies that were making the best use of technology to innovate were “thrown out with the bathwater,” leading to excellent opportunities during the March 2020 doldrums. These included Goldman Sachs Group Inc. (NYS:GS) , Morgan Stanley (NYS:MS) , Charles Schwab Corp. (NYS:SCHW) and KKR & Co. (NYS:KKR) .

He said Morgan Stanley had pretty much completed its transformation to being “a big private wealth and asset manager, much more than it is a bank, with a fast, steady earnings stream.” He also said that Goldman has been transforming into “a disruptive fintech with scale, in addition to having a real franchise and brand.”

The T. Rowe Price Global Growth Stock Fund is about 52% invested in U.S. stocks, compared with 56% for the MSCI All Countries World Index.

Here are the top 10 holdings as of Nov. 30:

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