Next time you run a Google search or look something up on Wikipedia, think of all the endless trudges through library stacks that you're not doing. It's those kinds of time-saving productivity gains that have made the computer revolution so great for business and the economy. How will new software continue to produce such benefits? Allison Thacker, coportfolio manager of the RS Information Age fund in San Francisco, says that a sea change may be coming in the way software revolutionizes business.
"The stuff that people have been buying over the last few years is really more about saving costs than driving revenues," Thacker says. But that will change, she predicts: "One of the emerging trends in software is this idea of predictive analytics—software that can tell you what to do in your business next month, what goods to carry, and how to price them."
That kind of view about the future paths of technology drives her work at the fund, where she's been since 2003. And her location sure helps in forecasting trends and generating investment ideas. She gets her information mainly from hitting the bricks in Silicon Valley. "There are a fair amount of funds with people sitting in an office rather than going out in Silicon Valley," she says. But according to Thacker, about 70 percent of the fund's process for choosing stocks comes from headquarters visits, interviews with midlevel management team members, and other fundamental research.
RS Information Age, which holds $175 million in assets, has had a particularly strong year. It's up 31.6 percent to date, compared with only 8.2 percent in 2006. It's also beating the S&P by 14.7 percent this year, after trailing it by 7.6 percent last year. Thacker explains this turnaround by noting that 2006 wasn't the best year for the tech sector. The fund did outperform its category average that year by 1.1 percent, according to Morningstar.
Although an interest in software is reflected in its consumer services holdings, the fund's biggest sector of investment is in computer hardware. Its biggest holding is O2Micro, which makes chips for power management of laptops and other small electronic devices. O2Micro's prominence reflects the fund's strategy to avoid cycles of growth and decline in the tech sector. "We focus on companies that can grow regardless of growth in the tech sector," says Thacker.
RS Information Age's portfolio in general carries a bias toward small-cap and mid-cap stocks. "We view that innovation comes from smaller companies. It's easier to find a company with an exciting product growing very quickly when they don't have a lot of legacy businesses that are slow-growth." That explains her interest in software companies that do predictive analysis. Two holdings in that area that she highlights are PROS Holdings, which makes software to help transportation and manufacturing firms price their inventories, and DemandTec, which focuses on helping retail companies like Wal-Mart and Target price their goods. "Pricing has a much bigger impact on bottom line than cost savings," she believes.
RS Information Age does have some significant large-cap holdings, however. Google is its second-largest, a company RS Information Age has been with since the IPO. The fund was an early believer in the power of the online search. Now, Thacker hopes she can be on the early end of future software trends like predictive analysis by catching what conventional analysts miss. "We're usually looking for something that's more 'growthy' in an undiscovered area, and often that will come about through fundamental contacts that we make. We find that Wall Street is generally covering less companies these days in techs and other sectors due to cutbacks on research staff, which creates more opportunities."