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BlueBox Islamic Global Technology Fund

Why we created a Sariah-compliant fund

“ I’ve wanted to create an Islamic global technology fund for 10 years! ” - William de Gale

 

The BlueBox Islamic Global Technology Fund is a Shariah-compliant version of the successful BlueBox Global Technology Fund, bringing one of the longest and strongest track records in Global Technology to the world of Islamic investing. Shariah constraints favor the Technology sector, and tech looks set to outgrow the rest of the market for many more years, so there is an obvious gap in the market for a top-class global technology fund that is also Shariah-compliant. Having run BlackRock’s Global Islamic funds for 12 years, and with an industry-leading Global Technology track record, William de Gale now combines these two areas of expertise to create the BlueBox Islamic Global Technology Fund.

BlueBox Investment Strategy

Direct Connection

We are a technology fund, but we’re not obsessed with technology; we’re obsessed with technology companies. Technology companies that are profitable and create value for their shareholders.

We aren’t chasing the companies that produce the latest exciting device, or disrupt the current market, as these disruptors swing between success and obscurity, and their value follows accordingly. More fail than succeed and we’re not interested in betting on the result.

The companies that we like are those behind every disruptor’s success: the cutting-edge suppliers of semiconductors, hardware, software and services; well run, dependable companies that enable the disruption and take a share of every successful disruptor’s profits; companies whose value keeps climbing, as our fund’s performance will attest.

"We are investing not in technology, but in technology businesses, and these businesses must create value for their outside investors."

- William de Gale

The Shariah Process

The Shariah-compliant version of our technology strategy uses the Dow Jones Islamic Markets World Index and the S&P Frontier BMI Shariah Index for Shariah screening. New purchases must be included in either of these indices, while stocks deleted from the indices must be sold.  An exception can be made to participate in initial public offerings, but these stocks must be included promptly in one of the two indices for them to be held long-term. When back-testing this process, we identified an 89% commonality with the existing BlueBox fund over time: modelling the impact of Shariah-compliance on the fund’s historic performance made little difference.
The above-mentioned indices determine the percentage of income to be purified for each stock based on which the portfolio purification data is calculated on an annual basis. The BlueBox Islamic Global Technology Fund appoints its own Shariah Supervisory Board (Shariyah Review Bureau, Bahrain), and it will undertake regular Islamic audits.

Shariyah Review Bureau W.L.L. (SRB) has been appointed by the Fund Manager as the Shari’a Advisor to advise on the Fund’s with respect to its interpretation and compliance with the Shari’a principles. Shariyah Review Bureau W.L.L. is a Middle East-based firm with an international scholarly platform of 35 reputable Shari’a scholars covering the major global Shari’a compliant markets, including Malaysia, Kingdom of Saudi Arabia, Algeria, Egypt, Qatar, UAE, Sudan and Kingdom of Bahrain. Licensed by the Central Bank of Bahrain it provides Ancillary services covering Shari’a review, structuring, compliance certificates (fatwa), and Shari’a supervisory audit services. The Shari’a Supervisory Board appointed to review and certify the Fund’s documentation and activities is Sheikh Muhammad Ahmad and Dr. Salah Al Shalhoob. SRB will also assign the Shari’a audit team to confirm its operations and investments align with the Shari’a principles and report that to the Shari’a Supervisory Board and the Fund Board.

For more information on index methodology, please click here

The Fund

We normally hold around 30 positions, with a maximum weight of 10%, targeting mainly companies between USD 10bn and USD 300bn market cap. The fund is not benchmark oriented, turnover is low and cash is generally at a minimum and always below 10%. The fund operates under BlueBox Funds SPC as a regulated mutual fund under the Mutual Funds Act of the Cayman Islands.

Overview

Over the past 15 years, there has been a fundamental shift in the way that computing has interacted with the world. Computers have come out to meet the real world and to change it directly. This is the Direct Connection, and it will provide a secular tailwind for the Technology sector for decades. The fund invests primarily in companies that will contribute and benefit from such connection.

Portfolio

We invest in companies that create value for our investors from the multi-decade tailwinds in the Technology sector provided by the Direct Connection of computers to the real world. On top of this, all our investments are Shariah-compliant, i.e. these companies make no more than 5% of their revenue from non-Shariah-compliant activities and none of the following may exceed 33% of any company’s 24-month average market capitalisation: total debt, cash plus interest-bearing securities and accounts receivable.

Strategy

We are investing not in technology, but in technology businesses, and these businesses must create value for their outside investors. We look for four characteristics in our investments: (1) A strong underlying technology trend – principally Direct Connection, (2) a company’s ability to create value as a result of that trend, (3) strong barriers to entry and (4) a reasonable division between generated value between outside shareholder and other stakeholders. In addition, we only invest on Shariah-compliant companies.

Q&A with William de Gale

What is Direct Connection?

Direct Connection is the fundamental change in computing from the 20th to 21st century. In the 20th century, computers existed in a purely digital world, and humans acted as the input and output devices, translating the analog world into digital and feeding it to the computer, and then taking its digital output and interpreting it to act on the real, analog world. In the past 15 years, computers have begun to sense and interact directly with the analog world, without relying on humans for input and output, accelerating processes by millions of times. This has made thousands of times more applications viable, leading to the accelerating invasion of our personal and business lives by technology.

What is an example of Direct Connection?

Autonomous vehicles. Imagine a car fitted with superb artificial intelligence, but where a human has to sit in the driving seat typing onto a keyboard what is visible ahead, while also reading instructions from a screen as to how to steer, accelerate and brake. The car would never leave the drive. It is not until the computer is connected to sensors and to the vehicle’s control systems that AVs become potentially viable and it is worth developing the AI to direct them.

What is the impact of Direct Connection on other sectors?

Information Technology is being transformed from an industry vertical (like Healthcare, Banking, Retail, etc.) into an economic horizontal. In every other sector, increasingly the winners are those that behave like tech companies, investing as much as they can in technology to get ahead. This is sucking the growth out of other sectors, and concentrating it in IT.

How do you pick winners outside technology?

We don’t need to. As an example, “fintech” companies are all investing as much as they can in technology in order to give themselves an edge in the Financial sector. Given this massive over-investment, it is unlikely that any of them are creating much shareholder value, but their huge spend is undoubtedly benefiting the tech sector, and we hold companies that are creating value for their investors as a result.

How do you look for the next trend?

Again, we don’t need to. Even before a new theme emerges, the businesses involved will have been spending heavily on connecting computers directly to the real world, benefiting our Direct Connection stocks.

How long will this massive tailwind last?

Technology has been outperforming the broader market for 10 years, and Direct Connection is such a huge change that it will go on doing so for at least as long again.

What do you look for in an investment?

We look for four things: 1. A strong underlying trend that benefits the company, often Direct Connection 2. The ability of the company to create value from that trend 3. Barriers to entry 4. A reasonable distribution of that created value between stakeholders. Unlike other sectors, most technology investors focus entirely on 1 and 3, and ignore 2 and 4. This is a big mistake, as over a period of years 2 and 4 make an enormous difference to how stocks perform. It is therefore vital to look at value creation and distribution, and not just how fast a company is growing and how competitive are its products.

What is an example of investors not getting a fair share of created value?

Software-as-a-service or cloud software companies: they grow very fast, as the customers get huge value from the cloud business model; but all the value that is left goes to the employees, because the market for talented engineers is so competitive. This is normally in the form of stock options (as investors seem to attach no value to them), and these constantly dilute investors’ ownership. The scale of this dilution is extraordinary: multiple years of free cash flow would be required to reverse a single year’s stock dilution; and the closer to San Francisco a company is based, the worse this dilution is – the correlation is quite striking!

How would you summarise your investment approach?

We are looking for a strong underlying trend that a company can create value from, and a fair distribution of that created value between the various stakeholders including outside shareholders who are our investors. Any company that qualifies would additionally need to be Shariah-compliant as per our investment process.

What do you think of very high growth tech companies?

They are generally extremely expensive and often have very fragile business models. They tend not to create much value for external shareholders, and they are very dependent on continuous improvement in newsflow. If the news doesn’t go on getting ever better, they have a long way to fall. They are trades on short-term newsflow, not long-term investments.

What sort of stocks do you own?

Other technology investors would think our portfolio contained mostly rather boring names, as it includes very few exciting “disrupters”. But we are looking for the excellent businesses that are enabling all that disruption, where the value they create is growing and the barriers to entry very high. These stocks will generally be quite expensive, but not expensive enough, as you can hold them year after year, with earnings growth driving sustained outperformance without increasing their valuation metrics. We like to find stocks that we can buy and hold for 3-5 years, or even longer. Interestingly, most of these companies are Shariah-compliant, allowing us to manage this strategy almost identically to the original version.

Why do you believe Shariah constraints favor the Technology Sector?

Very few Information Technology companies have significant exposure to the activities prohibited in Shariah portfolios, such as alcohol, tobacco or pork products, and they have comparatively little debt or cash relative to their market capitalisations, so they do not fall foul of the provisions against borrowing or lending for interest. As a result, we expect the BlueBox Islamic portfolio to have about 90% commonality with our mainstream fund, and very similar performance over time.

What do you think of technology megacaps?

We are generally fairly sceptical: companies with a market cap of more than $100bn have had an amazing 10 years; in other sectors that might be a good indicator that they will lead the field for another 10 years, but in technology that is not the case, as it is unusual for a tech company to stay at the top of the market for 20 years in a row. If you buy a basket of the megacaps, you own last years’ disrupters and collectively they will be losing out to next year’s disrupters. We therefore start with no megacaps when building a portfolio, and then pick the 3 or 4 that I have high conviction will do EVEN BETTER in the next 5 years than in the last 10 – and that is a very high bar indeed. So we tend to be significantly underweight the largest companies, and focus instead on stocks with a market cap of $1bn to $100bn, where the scope for upside is much greater if you get it right.

BlueBox Global Technology Fund

Meet the Investment Team

William de Gale, FCA, CFA

Lead Portfolio Manager

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William spent 20 years at BlackRock and its predecessors Mercury & Merrill Lynch, covering the technology sector. Portfolio manager since 2000, from 2008 to 2017 he was the sole portfolio manager for BlackRock’s offshore global technology fund, achieving top decile performance. Prior to BlackRock, William served in the British Army. He had already started his career in finance by previously qualifying as a Chartered Accountant with Coopers & Lybrand. This is key to his success as a tech investor: his deep understanding of accounting and the financial measures of value creation enable him to focus on finding business models that create long-term investor value from technology and innovation.

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Rupert de Borchgrave, CFA

Portfolio Manager

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Rupert has been investing in global public equities since 2011, as co-manager of the LGM Frontier Fund, as Portfolio Manager at Rokos Family Office, and since 2019 as co-manager of the BlueBox Global Technology Fund. Prior to his investing career, Rupert worked for 2 years at McKinsey & Co, followed by 5 years as a consultant with Sophron Partners (now CACI-UK), 3 years as a sell-side analyst at Afrinvest/UBA Capital, and 1 year as Special Advisor to the Governor of the Central Bank of Nigeria.
Rupert holds a DPhil in Neuroscience from Oxford, an MSc in Economics from London and has been a CFA charter holder since 2008.

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team

William de Gale, FCA, CFA

William spent 20 years at BlackRock and its predecessors Mercury & Merrill Lynch, covering the technology sector. Portfolio manager since 2000, from 2008 to 2017 he was the sole portfolio manager for BlackRock’s offshore global technology fund, achieving top decile performance. Prior to BlackRock, William served in the British Army. He had already started his career in finance by previously qualifying as a Chartered Accountant with Coopers & Lybrand. This is key to his success as a tech investor: his deep understanding of accounting and the financial measures of value creation enable him to focus on finding business models that create long-term investor value from technology and innovation.

linkedin
team

Rupert de Borchgrave, CFA

Rupert has been investing in global public equities since 2011, as co-manager of the LGM Frontier Fund, as Portfolio Manager at Rokos Family Office, and since 2019 as co-manager of the BlueBox Global Technology Fund. Prior to his investing career, Rupert worked for 2 years at McKinsey & Co, followed by 5 years as a consultant with Sophron Partners (now CACI-UK), 3 years as a sell-side analyst at Afrinvest/UBA Capital, and 1 year as Special Advisor to the Governor of the Central Bank of Nigeria.
Rupert holds a DPhil in Neuroscience from Oxford, an MSc in Economics from London and has been a CFA charter holder since 2008.

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