Inverted pyramid of glasses underpins Shariah tech fund strategy

Fresh from partnering Dubai-based investment manager ASB Capital to relaunch its Shariah compliant technology-focused fund, UK firm BlueBox Asset Management is confident that its inverted pyramid of glasses strategy for this fund will deliver handsome returns.

Co-Founder and Lead Portfolio Manager William de Gale told IFN Investor that ASB Capital has invested another US$5 million into this tech fund, raising the total NAV to over US$16 million, and keeping the fund’s investment focus on firms that make the machines, chips and infrastructure.

“The nature of our investment, even though we are in the tech sector, is pretty boring. We buy companies and then we watch them grow for the next 15 years. That’s how you make money, by looking to lasting value that collects at the base.”

This investment strategy, underpinning the original conventional tech fund, has generated around 17-18% annualized net returns over 15 years, with portfolio companies compounding profits at roughly 20% annually. A Shariah version of this tech fund was launched last year.

William acknowledged this investment approach is in stark contrast to today’s trading culture, where the hype is often highest among the start-ups and disruptors – with valuations that far exceed any revenues generated.

“I think there’s a blurring of the line between investment and entertainment, and to be honest, gambling as well. The gamification of investment has caught people’s attention. People are doing it to entertain themselves rather than to make money, though overall, I suspect they probably don’t make as much as they think they do.”

Inverted glass tower approach

The BlueBox tech fund investment approach offers a steady trust in the resilience of the glasses tower base, with attention on provider firms rather than the frothy attention-seeking bubbles at the top. “It shows where enduring returns in technology are really found.”

The problem, William explained, is that “almost every glass in that top layer is broken.” Few disruptors ever turn a profit, and even those that do retain only modest margins. Capital poured into them simply leaks down the glasses tower to the more resilient layers below.

As an example, William pointed to Alphabet. “You pour revenue in and lots of it stays behind because Google is extremely profitable. But even with Google, most of the revenue that comes in flows down the inverted pyramid.”

These top layer firms, or whichever disruptor gets the money, all use technology – resulting in downward money flows into the semiconductor layers and eventually to the base where the critical components are produced by four companies at the bottom. “We just sit at the bottom of the pyramid and we wait for the money flow to come to us.”

This foundation is made up of Lam Research, Applied Materials, Tokyo Electron and ASML – firms that make the machines to produce computer chips. Above them sit chipmakers such as Intel, Samsung and TSMC, then designers like NVIDIA, AMD and MediaTek. Higher up are hardware, networking, services and software firms.

As such, the BlueBox tech fund completely avoids what William describes as the “fragile disruptor layer” as “picking the right ones is very difficult indeed, and a bit pointless, as very few of them will ever make a profit”.

To emphasize the perspective, William cited an example of when car producer Tesla placing a US$16 billion order for AI chips from Samsung made headlines, markets celebrated the automaker’s innovation.

“But the real winners, from this perspective, were the companies supplying the machines behind those chips like ASML, Applied Materials, Lam Research and KLA, which together contributed about 40bps, double the notional benefit of a Samsung position.”

William said ASB Capital’s confidence in this investment strategy has led the Dubai firm to completely take on the sales and marketing activities for this tech fund, including regulatory compliance in various jurisdictions, while BlueBox will maintain its focus on asset management.

*Disclaimer:  The opinions and viewpoints expressed in the Fund Profile do not constitute as a recommendation for any funds highlighted. The information presented is not investment advice and should not be treated as such.