Interview with Takis Sparaggis, President
and CIO, and Alex Tahsili, Managing
Director, of Alkeon Capital Management
Eurekahedge
March 2006
The Alkeon team spun off from CIBC Oppenheimer
on 1 January 2002 (the oldest client Alkeon
is advisor for was launched in January of
1998). The team is headed by Panayotis "Takis"
Sparaggis, who is the controlling person of
Alkeon and who coordinates all investment,
trading and arbitrage activities. Alkeon's
team consists of:
CIO
6 analysts
2 traders (one with analyst responsibilities
as well)
Risk Manager, CFO
COO/Chief Compliance Officer
Business Development
Associate
Takis has been managing investment portfolios
since 1993, initially at Credit Suisse First
Boston and subsequently at Oppenheimer,
starting a global long/short growth TMT
strategy as a proprietary account in 1996.
Prior to founding Alkeon, Takis served
as a managing director and portfolio manager
of technology-focused investment portfolios
for CIBC Oppenheimer Asset Management. Prior
to joining CIBC Oppenheimer, he spent two
years with Credit Suisse First Boston Asset
Management and was responsible for security
analysis and portfolio management for domestic
investments, including proprietary trading
on long/short equities and convertible arbitrage.
Takis received a PhD in electrical and computer
engineering and an MBA from the University
of Massachusetts, both in 1993. He received
an IBM Fellowship in physical sciences in
1992 and 1993.
Alkeon manages approximately US$750 million
in its flagship "TMT" strategy.
Could you elaborate on how the
vertical focus of your investment process
helps analyse complex technology segments?
Alkeon's research process is a 100%
bottom-up, fundamentally-driven, research-intensive
approach to investing. We define the
universe of our flagship Technology,
Media, Telecom ("TMT") strategy
in the very broadest of scope. Each
analyst focuses on a few industries
in which they have vertical expertise.
Their job is to constantly develop and
broaden Alkeon's network of industry
experts. Of course during this process,
much of the information on industry
may play an influential role in shaping
our fundamental views of another industry.
The vertical focus of each of the analyst
is complementary to this process.
Do you manage pari passu those
client accounts that employ the TMT strategy?
Under the flagship TMT strategy all
client accounts are run pari passu.
Our strategy has maintained a net long
bias since inception, aiming to completely
avoid timing the direction of the market.
We believe our alpha generation is based
on our stock picking, not a top-down
industry or macro directional bet.
It is stated that Alkeon employs
a bottom-up, fundamentally-driven approach
to investing in growth and technology
companies. What is the typical investment
horizon of Alkeon's trades? Why?
Alkeon's investment process is aiming
to capitalise on both innovation and
obsolescence cycles in the technology
sectors with a 12 to 24-month time horizon.
This is not a trading oriented strategy.
However, due to the velocity of both
fundamental and stock-price changes,
many of our investments may hit their
price targets much quicker than our
12 to 24-month investment horizon.
Most of Alkeon's investments
focus on the US. Does the mandate cover
growth trends in other markets, emerging
or otherwise, such as say, the boom
in Business Process Outsourcing in countries
like the Philippines and India?
Yes, in fact much of our investment
activity and research these days is
focused in Asia. As far as portfolio
composition, generally 20-30% can be
outside US and this percentage may increase
going forward. However, when one further
dissects the revenue geographic characterisation
of TMT companies, it becomes apparent
that technology companies in general
receive a very significant percentage
of their revenues from countries outside
the US, with the majority of their growth
coming from areas like Asia, Eastern
Europe, Middle East and Africa. For
example, in the last few years Asia
has transformed from a manufacturing
story to an innovation story.
Could you discuss your risk mitigation
systems?
Our risk management remains consistent
since inception. We have an in-house
risk manager who constantly examines
a defined set of risk parameters namely,
diversification among individual securities
and sectors, liquidity and overall fund
exposures. We also cover shorts with
mechanical stop-losses, unless part
of a long/short pair of aggregate position.
Can you discuss Alkeon's traditional
exposure to large-, mid- and small-cap
investments?
The strategy is flexible and the exposures
vary depending on the opportunity. Historically
most of the return attribution points
to significant alpha generation in the
mid-cap sector, which we regard as our
sweet spot. Currently, we find significant
investment opportunity among mid-cap
innovators that participate in strong
secular cycles driven by digital convergence
and mobility.
How do the strategic relationships
Alkeon has with brokerage and insurance
houses translate into an edge for the
company?
Our edge is mainly informational. We
have an elaborate network of industry
contacts, which we utilise on a daily
basis. We constantly talk to private
companies, VARs, design engineers, suppliers,
costumers, CIOs, consultants and other
contacts outside Wall Street. One of
our goals is to identify product trends
before they become apparent to Wall
Street.
What is your outlook for your
targeted sectors and regions?
Our investment activities continue
to emphasise segments of growth and
innovation on the long side, as well
as segments where dislocations due to
rapid technological shifts and cycles
of obsolescence on the short side. Actively
shorting stocks has been a core element
of our investment strategy since its
inception, and in past years the aggregate
profits on short positions have comprised
a significant portion of total equity
returns for our strategy.
Emergence of Wireless Broadband
Our team expects the pace of innovation
to accelerate in the next few years
as broadband mobility becomes ubiquitous.
Currently innovation is rapidly enabling
the world to become all digital, all
small form-factor and all mobile. For
example, there are a number of new 3G
networks that are expected to ramp in
the next couple of years, including
two networks in the US, 2-3 HSDPA networks
in China and three new HSDPA networks
in Japan. We also expect India and Indonesia
to ramp their 3G build-out efforts.
With wireless broadband entering the
sweet spot of its adoption curve in
the next few years, strong adoption
of a wide array of enabled applications
and services is likely to follow, including
mobile TV and DVR capabilities, mobile
computing and search, as well as mobile
gaming. Early this year we saw an impressive
HSDPA demonstration of up to 3.6 Mbps
by one of the leading Korean technology
product manufacturers at the annual
Consumer Electronic Show (CES). We also
saw the design of handsets targeting
the emerging DVBH and Media FLO mobile
broadcasting standards. Digital video,
in general, is a prominent theme for
wireless broadband applications, with
a number of Home Digital Media Center
and Personal (Mobile) Media Center devices
- the latter at very small form factors
- being showcased. Overall, digital
mobility not only remains at the core
of this emerging innovation wave, but
also remains early on its adoption curve.
Focus on Innovation
We believe that innovation is currently
fuelling one of the most exciting product
cycles for technology companies in decades.
Having put the technological blocks
in place to not only enable digital
convergence and broadband mobility,
but, after many years of hype, also
make it pervasive, we believe the technology
sector is hitting the inflection point
of the first significantly transforming
cycle of innovation since the Internet/Telecom
wave ten years ago. Innovation is currently
fuelling a number of strong emerging
product cycles, with key end growth
markets just starting to ramp, offering
a multi-year potential for earnings
growth and corresponding capital appreciation.
Such markets include Corporate Wireless
LAN, Bluetooth, VoIP, Next-generation
Gaming as well as Mobile Gaming, Rich
Media and Video Search, Fiber-to-the-Home/Node,
WiFi on handsets, virtualisation of
blade servers and storage aggregation,
RFID and 3G Wireless Broadband as well
as HSDPA. As Morgan Stanley's global
technology research team recently stated,
"the first ten years (1995-2005)
of commercial Internet were a warm-up
act for what is about to happen".
Moreover, current aggregate valuations
for fast-growing technology innovators
are attractive relative to the rest
of the market in our opinion, particularly
from a free cash flow generation standpoint,
leaving room for multiple expansion
and also mitigating downside risks.
This is unlike the last wave of innovation
- almost ten years ago - in which many
innovators had little or no earnings
for several years.
Growth in Technology is Global
Our investment team remains globally
focused in its investment activities.
Not only do we see a lot of innovation
taking place outside of the US and Europe,
user growth remains robust in places
like China, India, Russia, Eastern Europe,
Asia-Pacific ex-Japan, the Middle East
and, increasingly, Africa. Part of it
is population growth, particularly for
younger demographics. China, for instance,
has 350 million people below the age
of 18 and leads the world in number
of Internet users below the age of 30
at 70 million. It also has the world's
number one mobile phone user base, more
than double the entire estimated North
American mobile phone population in
2005. The other part of the growth story
is increased penetration rates in places
like India, which, as an example, is
expected to account for half the growth
in mobile users globally during the
next couple of years.
Overall, we are encouraged by the accelerating
pace of technological innovation but
we are also monitoring associated risks
vigorously and, in many instances, attempt
to profit from those. We enter 2006
with a strong research team and remain
upbeat on Alkeon's long-term prospects.
