Dynamic global manager looks to the Far East for tech stocks

Online retailing is another growth area in China, says Noah Blackstein.

Diana Cawfield 14 September, 2017 | 5:00PM

Noah Blackstein is a high-conviction growth manager, building concentrated portfolios and paying no heed to index weightings. So it's not surprising that the $1.2-billion Dynamic Power Global Growth Class that he manages is more than 60% in technology stocks. What really stands out, however, is his hefty 40% weighting in China.


Any geographic or sector concentration, or lack of concentration," Blackstein explains, "is a byproduct of the bottom-up process. I try to find 20 or 30 of the fastest-growing companies, with the biggest potential in front of them anywhere they might be in the world," says the vice-president and portfolio manager with 1832 Asset Management LP in Toronto, which manages the Dynamic family of funds.


Blackstein has been investing in China for more than a dozen years. "Back then, I was one of the few people that had exposure to Chinese technology companies," he says." Over the past six or seven years, the investment opportunities have evolved from the early online-gaming companies in China to other businesses.


Blackstein still sees ongoing growth potential in the gaming industry. Among his top 10 holdings is Tencent Holdings Ltd. TCTZF, an internet-service company. Newer areas of technology in which he has invested include companies like online and mobile commerce company  Alibaba Group Holding Ltd BABA , "the  Amazon.com Inc. AMZN " of China. Another top holding is  Weibo Corp. WB, an internet- content company, "a sort of U.S.-based  Twitter Inc. TWTR of China." 

 

TAL Education Group TAL, the top holding in the fund, is a classic example of an after-school tutoring service product in China, geared towards children up to the age of 12.

 

The demand for TAL's services is driven by computer innovation, by continuing demographics, and by continuing competition for students to get into the top universities. According to Blackstein, resources of public education for schools in China are extremely poor. "This is a very large population in terms of an after-school education market that is going to grow 20% plus in China." 

 

Another technology-driven sector in China where Blackstein has found growth opportunities is online retailing. He says China's online retail sales are close to 85% of that of the United States, but still has a lot of room to grow. In terms of advertising dollars, China's market is only about a third of the size of the U.S., says Blackstein, who sees growth potential there as well.


Overall, "I think the Chinese companies have begun an evolution that in certain areas may take the lead globally," says Blackstein. These areas include artificial intelligence, logistics and delivery, and self-driving autonomous vehicles.


Financial-technology companies in China are another robust source of growth. Whether it's being able to do a payment system through things like "WeChat," a social media online application software, a Tencent product, or through a similar Alibaba product," says Blackstein, "these are pretty serious (businesses.) "The willingness of the Chinese to use online payment systems to purchase everything is extraordinary." 


Other trends include the move towards cloud computing. Blackstein thinks that Chinese companies are beginning their rollout. "It might be a domestic product," he says, "but it is still an enormous opportunity to make what Amazon and others have built in the cloud in the United States." 


Blackstein's investment process begins with a quantitative screening of global companies that are growing by high-teens in revenue and earnings or better. The research typically focuses on mid-to-large cap companies, with $5 billion or more in capitalization, to narrow down the vast universe.


Once that list is determined, the research process follows fundamental due diligence and qualitative analysis. Blackstein favours companies with sustainability of growth and future growth potential. "I don't look at benchmarks and I don't look at indices," he says. When it comes to his investment style, "I'm probably far outside the boxes in terms of growth."


Though Blackstein assesses companies from a five-year perspective, he's not a buy-and-hold investor. If gains in the stock occur and all the "blue sky is priced into it," he says, "or if I was totally wrong, it's time to exit the position." 


Blackstein says there needs to be a better delineation of what is really defined as technology. "It all gets thrown into one basket," he says, "but most people today will be buying airline tickets online, so is that a technology company or is that a consumer discretionary company?"


The technology space is much more diverse than it ever was before. Yet it is individual, stock-specific opportunities, such as trying to find the world's next  Facebook Inc. FB, that Blackstein focuses on.


Dynamic Power Global Growth Class, which has a 4-star Morningstar Rating, has performed well historically under Blackstein's tenure. But he reminds investors that markets are prone to volatility and downswings.


"If you're in equities, you need a long-term view of 10 years and you need to look at volatility over 10 years," he says. "And if there's 3% or 5% down moves and it's something that you can't handle, I'm not even talking about my fund, you shouldn't be in the stock market at all."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alibaba Group Holding Ltd ADR201.89 USD0.94
Amazon.com Inc1,751.60 USD0.64
Facebook Inc A201.05 USD0.85
TAL Education Group ADR46.11 USD1.63
Tencent Holdings Ltd42.78 USD1.36
Twitter Inc30.19 USD0.50
Weibo Corp ADR Class A44.17 USD0.71

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.