The global semiconductor shortage has created a pressure point for technology but has also raised questions about whether this sector is worth the current heightened valuations.
In a market commentary, which focused on supply-chain issues, the London-based investor said a global shortage in semiconductors had hurt industries ranging from car manufacturing to consumer electronics. However, he questioned whether the market was properly understood.
Hawtin said most tech investors and analysts have only ever seen the semiconductor in growth mode, which neglects the cyclical nature of the industry.
‘When the cycle turns, we expect revenues will decline, which will push down margins on the fixed cost infrastructure, which in turn will cut earnings.
‘We expect the size of that cut to be significant, resulting in the market not being willing to pay the extreme valuations being commanded today. The net effect of this negative compression could be circa 30-50% or more price falls in an economic downturn. These cycles and the resulting compressions have played out a number of times over the last 30 years and we believe there is no reason why this could not happen again.’
Hawtin previously said one of his funds would move away from ‘tired’ definitions of technology and that similar mistakes could be made with semiconductors. He said he does not view it as an independent sector but a smaller aspect of several other industries.
‘Our justification for not owning much of the sector directly is based on the valuation being expected for players in themes we think can be expressed more cheaply elsewhere. Our views are driven by our philosophy of investing thematically.
‘Within the global equity investible universe, there are so many drivers and moving parts depending on the area and theme, and in our view, identifying these is our strength. Traditionally, semiconductors could have been looked at as a homogenous group, but that is no longer the case.
‘We would argue one’s investing mentality needs to move away from looking at it as a vertical and rather towards its uses across industries – the horizontal approach we take to all our investing. It is about who uses the product, not who makes it.’
Hawtin has expressed this through exposure to Micron and Seagate, which are data storage companies, and account for 2.90% and 2.99%, respectively, of the $742m GAM Star Disruptive Growth fund at the end of April. This is while data-based infrastructure Marvell accounts for 2.00%.
Hawtin added that wafer manufacturers are also a secular way of capitalising on semiconductors, while price pressures in the wafer sector have led to monopolisation and leading names being able to grow considerably. He expresses this through a minor position in silicon wafer producer Siltronics.
The GAM Star Disruptive Growth fund returned 106.8% in US dollar terms over the three years to the end of May. This is while its benchmark, MSCI ACWI Growth NR USD, rose 67% over the same period.