Following the tech megatrends
Anthony Ginsberg, CEO of GINSGLOBAL Index Funds, talks tech megatrends in this podcast detailing the rise and the potential future for this all powerful sector.
This episode was made in partnership with HANetf and GINSGLOBAL Index Funds.
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Beverly Chandler
Hello and welcome to our latest edition of the Off the Record podcast from ETF Express. My name is Beverly Chandler and I’m managing editor of ETF Express. I’m here with Anthony Ginsberg, CEO of GINSGLOBAL Index Funds. Anthony, welcome to our podcast and tell me a little bit about GINSGLOBAL Index Funds.
Anthony Ginsberg
Thank you very much, Beverly. We’ve been around twenty five years. We’re primarily a global index tracking firm. We work with large insurance groups, private banks. We also are in the ETF business with HANetf in Europe and across certain forces in Europe. But we offer a range of about almost twenty different index related products from particular themes and sectors such as tech and megatrend, which I know we’re going to talk about, all the way through to Japanese indexes, USA indices, other sectors. And we also provide downside protection products or guaranteed buffer type of products to insurance groups primarily here in the United States.
Beverly Chandler
Thank you. Thanks for that introduction. And yes, we are here to talk about tech megatrends. I’m going to ask some nonsense questions because I don’t think there’s a person left in the world who doesn’t know that that’s quite a useful and extraordinary sector to have been in over the past few months, years. What am I saying, years? So let’s start with talking about that and the investment case that you came up with. When did you launch your tech megatrend index?
Anthony Ginsberg
It’s very timely because it’s almost exactly eight years. It was October of 2018 that we actually launched the UCITS ETF version with the HANetf colleagues, essentially in partnership with them. We’ve actually been running that strategy here in the United States for some years with institutional clients who felt already overexposed, frankly, to the FAANGs back in those days, or now we call many of them the Mag 7. And the idea of tech megatrends, Beverly, was to really offer a broad-based exposure, a deeper dive across the tech ecosystem, covering a multiple range of up to ten different sub-themes. So everything from AI, but also many of these other areas where there is convergence, but often they’re not represented well in other tech indices or by the active tech fund industry, which typically focuses on very large cap players. And also it’s primarily US based. We saw that this is actually a global phenomenon and the idea was to actually have global holdings. So we have certain emerging market holdings. We have some Chinese holdings in here as well. America actually only represents just slightly over 60%. So the strategy itself has been around almost ten years.
Beverly Chandler
Have a little look at some of these sectors within the megatrends that you cover. So I’m going to pick out a couple. Robotics, for instance. Talk to me about that.
Anthony Ginsberg
Yes, well, actually this year alone, robotics, along with AI, have actually been amongst our best performers. But interestingly, robotics, a number of the holdings in our fund, what we’ve done is it’s equally weighted across ten sub-themes, including robotics, quantum, cybersecurity, cloud, AI, etc. But the key thing is that robotics is a good example, Beverly, because a number of the holdings in the robotics category are either South Korean or Japanese who are amongst the leaders. So we take the top fifteen leaders, essentially, it is rules-based. We use a firm called Solactive indexing, who are leaders in thematics. Essentially what they’ve done for us is to find the fifteen top leaders in each of these categories. When it comes specifically to robotics, almost half of the categorization are non-US because historically, if you look at Japan and Korea, they’ve been far more automated in their factories than the Americans. America’s slightly slow at this and they’ve been catching up. But the reality is most of the leading robotics players, and it’s actually true with these onshoring of American manufacturing, a lot of it is being powered by imported robotics players. So that’s why we didn’t think it was fair just to have a US-centric product. And this ETF has essentially been consistently around almost I say 40% non-American at the present time. Asia represents 20% or thereabouts of our fund. And robotics is a sizable reason why, because each one of these sub-themes is around 10%. And if you think that robotics itself is more than half non-American, it’s a good example. But there are other cases as well, including cybersecurity and cloud, where we have sizable non-American holdings too.
Beverly Chandler
Talk to me more about cybersecurity.
Anthony Ginsberg
Yeah. Well, cybersecurity has actually had a good rebound of late. In fact, it’s been one of the best performers in the last few months. It just shows you, when you look at this industry and the conversion, it’s so difficult to time particular sub-themes. And obviously there are firms out that have individual sub-themes, but just like the Premier Football League, it chops and changes. It’s like sort of the pop charts. Last year, cybersecurity wasn’t going anywhere. It was completely outplayed by the likes of AI and robotics. This year, cybersecurity is one of the top performers. We’ve seen it also true with things like digital entertainment. Specifically on cybersecurity, there’s been more acquisitions in the cybersecurity space across cloud players and even AI players. So we see a lot more corporate activity in cybersecurity. Those peak evaluations were far lower than the Mag 7 or AI. In fact, if you look at something like the NASDAQ, very few of the cybersecurity players make up the NASDAQ 100. So it’s an underrepresented category. And most of our clients, including in Europe, already have exposure to the biggest Mag 7 and maybe one or two cybersecurity players such as Palo Alto Networks. But many of the other players like Zscaler and Okta, there are some other very other good names that have really performed well in the last month or two. They’re not actually held by many of the funds that just really focus on the megacap. So what we try to do is to really dig deeper into mid-caps. and a few small caps, primarily large caps, but the megacaps in our case, Beverly, only make up about less than 10% of our holdings. Our top ten, by comparison with many funds, our top ten, because we’re equally weighted and we have 150 almost holdings across each of these ten sub-themes, we have fifteen, as I say, leaders per sub-theme. Our top ten is just over about eleven, twelve percent weighting and we rebalance every six months so that we do take profits if one particular sub-theme such as AI runs, then we do actually, it’s quite a cautious approach. We rebalance every six months. We just rebalanced, in fact, last month.
Beverly Chandler
You just mentioned digital entertainment. Talk to me about that one, and then we’ll move on. But it’s fun to look at these sub-themes.
Anthony Ginsberg
Yes, it’s well, digital entertainment is another one where that might be slightly more American dominated. Obviously, we have the likes of Netflix and some of the other parent companies that are involved, such as HBO. But besides just the online streaming of videos – a lot of people think it’s just related to the movies – it’s actually been a conglomeration also of gaming. So we’ve actually seen the likes of Microsoft, for example, some years ago buying one of the largest gaming companies in the world that bought Activision. So there is this correlation, I would say, or convergence across even social media, where you’ve got social media companies getting into digital entertainment. And that’s partly why we thought owning a range of these sub-themes across, in our case, ten of them has made a lot more sense because digital entertainment is actually doing much better at the moment. But some years ago, it also had its ups and downs. So timing these individual silos of sub-themes is incredibly difficult. We actually think in this world of not just conversions, but when you actually see more corporate activity. Ever since the new American administration here, there’s been a lot more M&A activity. Part of it’s catching up from the previous administration where they really limited IPOs and corporate mergers in the tech sector. So there’s an increasing appetite for, for example, digital entertainment companies being bought by social media firms or even cloud firms coming into the space. We even now see AI companies talking about getting into the live streaming space, including music and gaming. So it’s not just all about movies, but I guess the best example probably would be Netflix. But there are some international players as well. So it’s not all just purely an American story.
Beverly Chandler
And we have to talk about AI. I think today there was an announcement or a statement from the Bank of England talking about the AI bubble and we have heard people talking about the dot com bubble. Talk to me about whether you feel that we’re going through that at the moment.
Anthony Ginsberg
Yes, obviously there’s going to be winners and losers. And I did see the BoE commentary on this. In our case, we don’t actually see a tech bubble per se. Actually, our price to earnings ratio for the tech megatrend is hovering between nineteen and twenty times earnings. So when you actually use an equally weighted approach, it really does significantly bring down the valuations. I mean, the earnings have been obviously very, very impressive. That’s actually meant that the sitting at times price earnings ratio on average for tech firms a year and a half ago, almost two years ago, has subsided. We had record earnings in the second quarter and even for the third quarter. And this is not primarily AI companies. So obviously we’re waiting for these IPOs from Anthropic and maybe OpenAI over the next three to six months. But if you actually just look at the hyperscalers, these are the cloud companies, they’ve actually been driving significant growth, growing on average, earnings 30% plus. In fact, the third quarter earnings for tech are expected over the next few weeks. There’s also a gain show around a 30% plus gain. So we don’t see this as the likes of the internet bubble from 2000 for those who’ve got a bit of grey hair and have been around for a while. The tech valuations back then were fifty to sixty times on the price to earnings ratio. Certainly north of fifty on average. At the moment, the average price to earnings ratio is just a little over twenty times. And in our particular fund, because we are equally weighted across over 150 holdings, each holdings is under 1%, that really brings our PE way down. There is some concern about, yes, having some sort of guardrails on AI, and we understand that is at the moment talk of self-regulation, but there may be other standards that are brought in to protect consumers. So we share the Bank of England’s concerns, but at the moment, the drivers of the earnings growth have primarily been, we call them hyperscalers or the cloud companies. They’re the ones actually buying Nvidia chips and really growing dramatically. They’ve got very strong balance sheets. So this is why it’s so different to 2000. The balance sheets of the tech firms whether it’s cybersecurity or the cloud players, they’ve got significant cash balances that are subscription-based models, which are monthly models, sometimes yearly, that can be upgraded or downgraded. It’s very unlike the pets.com scenario of twenty five years ago, where they were blowing a lot of money on advertisements at the Super Bowl or the FA Cup and didn’t really have an ongoing revenue stream. So for an accountant formerly like myself, the cash flow statements, the balance sheets, income statements are far more robust. And yes, there is this worry that there’s been some circular financing in the AI space. But the reality is that they’re funding this out of sizable cash reserves and even the loans that have been created are quite small relative to the cash balances. If you look at Meta, which has had a very, very good run right now, they are actually being rewarded by launching AI agents. So Meta just launched Muse two weeks, maybe three weeks ago, and now it’s become one of the hottest selling apps across the globe. So we do see more guardrails being placed on AI, Beverly. So we think that for the moment, it’s not overblown. And on the valuation specifically, as you were asking earlier on, we’re very far removed from the internet bubble levels. We actually see price to earnings ratios at the moment around twenty times, showing almost no premium to the broader market. So tech actually is not expensive relative to the broader market.
Beverly Chandler
Interesting. And let me put you on the spot and say, looking forward, do you feel that any of your sub sectors here, your sub themes is going to dominate? And are there any more new ones that are going to appear that we don’t even know about yet? Son of AI.
Anthony Ginsberg
In fact, when we first launched, we didn’t have ten sub-themes because Quantum hadn’t really shown itself to be a long trend that was actually investable. There weren’t very many companies that were listed. We obviously were only buying publicly listed in exchange companies. So Quantum’s done rather well. Last year, it was obviously a standout for us. We also created about three and a half to four years ago, digital entertainment was an additional sub-theme that was added. So we try to look for sustainable sub-themes. Blockchain was added some years ago as well. So out-of-the-box, we launched with seven, and today we have ten. We don’t expect to add additional sub-themes at the moment, but we’ve actually been quite excited to see for example, cybersecurity that’s been with us for a number of years, really getting a lift because of the AI concerns and because of perhaps the lack of certain regulations or guardrails in that space that you touched on earlier. So cybersecurity is one of the winners at the moment, interestingly enough, because of AI. The other big winner in our view has been cloud that has really become sort of the linchpin with these data centers. Without the cloud providers, AI, frankly, wouldn’t be practical. It wouldn’t be able to be run on folks’ home computers. It just takes too much compute, that’s why you need more data centers to be built out. But we do see this as a global phenomenon. That’s why we do own even Chinese companies. For example, the leader in cloud in China would be somebody like Alibaba. But we also own Tencent and Baidu there because they have virtual monopolies in related areas such as social media. So for us, it’s a global phenomena. I will just say, interestingly, in Asia, the per capita usage of AI and cloud is actually ahead of much of the developed world that we think of in Europe and the US. So they’ve got up to 6G speeds there in places like South Korea and Singapore. So that’s why we’ve really tried to have a deeper reach in terms of our 150 holdings globally.
Beverly Chandler
I was going to ask you about that actually, whether there was geographically any new areas you think might come into these themes?
Anthony Ginsberg
Yes, India looks like an area that should become of greater import. That’s quite likely to happen. I’m trying to think of a few other areas that you may be, may be curious to hear about. So we’ve obviously got South Korea and Japan. We have some exposure in places like Australia, Israel, Canada. At the moment, the US weighting is just over 60%. But Asia currently is approaching almost 24%. So it’s been quite a sizable boon for us, particularly when the US tech has been out of favour. It’s helped as a stabilizer. And honestly, the guys focusing on our product often will already have sizable exposure to those Meg 7 players and even maybe one or two of the other AI orientated players. And they’re looking for broader tech diversification. I think that’s really part of the mantra that we offer.
Beverly Chandler
So you’re offering a geographical diversification as well as across a number of themes.
Anthony Ginsberg
Yes, and that’s expected to grow as the adoption rate globally builds up. We’ve actually seen more and more leapfrogging in places like Africa and elsewhere where you see fintech providers. Often these are mobile phone companies that are helping in the banking space in places like Kenya and elsewhere. In the developing world, they’re not always held back, I would say, by existing technologies that can literally leapfrog. So South America is another very interesting area where e-commerce is growing in leaps and bounds as well as in the Middle East. We wouldn’t be surprised if we see, for example, digital entertainment plays being added from some of these developing regions.
Beverly Chandler
The world is your megatrends oyster.
Anthony Ginsberg
Well, can I just say that because the timing of these megatrends is so difficult, what we’ve really tried to focus investors’ attention on is how they overlap. And the old days where you could sort of leave these individual sort of ten silos, I think that may be passe at this point because there’s so much interaction and convergence across these megatrends, that it’s actually quite difficult sometimes to just focus on one particular silo, as I was mentioning, because there increasingly are acquisitions across the space. I mean, there are robotics companies teaming up with AI, there are cloud companies teaming up with cybersecurity firms, even the quantum area and AI are getting closer and closer together. So I think the days of just trying to zone in on one particular sub-theme, it’s incredibly difficult to get that timing right.
Beverly Chandler
Interesting stuff. Thank you so much, Anthony. It’s been a really interesting conversation on something that everyone thinks they know something about and yet we don’t often get so much detail. So thank you for that. So I’m going to say thank you to Anthony Ginsberg of GINSGLOBAL Index Funds and to you for listening. Remember to subscribe and leave a review and feel free to contact us at podcast@chandlerpublishing.com. This has been an Off the Record podcast recording from ETF Express in partnership with GINSGLOBAL and HANetf.
Outro
Off the Record is brought to you by Chandler Publishing, production by Imogen Rostron, music by Otto Balfour, and hosted by me, Beverley Chandler. Thank you to our guests on this episode of Off the Record and to you for listening. We look forward to you joining us next time.