“There’s so many companies coming [up] that didn’t exist four years ago that are earning hundreds of millions of dollars of revenue and growing very rapidly. And these companies are just in the beginning of the growth phase.

“These companies are materially bigger every year, whereas the vast majority of the economy, by nature, can only really grow at GDP.”

Mr Frazis argued that five years ago, investors were still only just becoming familiar with the recurring revenue, high-margin business models that are a feature of the technology leaders.

“People have realised that the businesses that actually have this, that have become essential, are worth a lot more than everyone thought. And so that’s definitely part of the rising multiples.”

A company that highlights this is Xero. With a March 31 financial year end, its full year results released in May featured operating revenue of $718.2 million but gross profit of $611.6 million, delivering a gross margin of 85.2 per cent.

By contrast, according to their most recent audited accounts—the half ended December 31—the gross margin for Woolworths was 29.6 per cent, Fortescue Metals Group was 35.1 per cent, and for Harvey Norman it was 32.6 per cent.

The advantage for software-as-a-service businesses is that the lower marginal cost of production results in more cash to invest in growth.

Restraint necessary

The focus on growth in technology is not without conditions, according to Australian Eagle Asset Management’s chief investment officer, Sean Sequeira. Australian Eagle took out second place among the long-short funds in Mercer’s survey, which Sequeira puts down to some well timed shorts in Flight Centre and Caltex, as well as holdings in Altium and Xero. It reported 25.4 per cent for the quarter and 9.4 per cent for the year.

“It’s not just that they’re growing, it’s where they’re growing—is it the areas that we expect them to be growing?” he said.

“For example, we had a larger position in Xero which we have reduced.” He wants to see if the growth is coming from the UK, and the US market. “They’re the areas that the market is looking towards to see that next leg of growth.”

Karara Capital delivered 25.3 per cent after fees in 2019-20 within its market neutral plus strategy, which utilises selective longs and pairs trades as sources of alpha without relying upon the market’s performance.

“You could argue very strongly the equity market is expensive at the moment,” investment manager Andrew Smith said, citing the US elections, trade war and COVID-19. It also pays to be vigilant about where the herd is hunting, as Afterpay bears found in March’s drawdown.

“A crowded consensus short can be very dangerous. Afterpay was a really popular short because people said, ‘these things are going to blow up’. People who didn’t cover those shorts have absolutely had their heads ripped off.

“We were able to generate these returns without things going up five, six times and we’ve made good money out of stocks like Altium, McMahon Holdings, Saracen.”

The forthcoming results season will be a good opportunity to reassess earnings and how stocks are performing relative to their sectors. This is especially critical in areas such as property, where industrial and retail are experiencing divergent returns.

“It’s a really interesting battle at the moment. The mall REITs are trading at 50 per cent below book value, they look like value, but does the consumer stop spending at the mall?”