One of the most successful tech fund managers explains why he stays away from tech companies with explosive growth

Ali Khan. Khan is the fund manager of Fidelity's Software and IT Services Portfolio.

  • Fidelity fund manager Ali Khan runs the firm’s Software and IT Services Portfolio, which has been one of the best performing tech funds over the last five years.
  • In a conversation with Business Insider, Khan discussed his strategy for running the fund.
  • One key piece of his strategy is to focus not on the fastest growing companies, but on those that have the potential to grow significantly and steadily for years on end.
  • Salesforce and Adobe, both of which have posted 20% annual revenue growth rates for years, epitomize his ideal companies.
  • Visit Business Insider’s homepage for more stories.

When picking growth stocks, Ali Khan has a somewhat counterintuitive mindset — strong and steady beats spectacular.

Khan manages Fidelity’s Software and IT Services Portfolio — one of the top tech funds over the last five years. Part of his winning strategy has been to focus on companies that have the ability to grow steadily for years to come, rather than on those that are posting amazing growth rates in the near term. Companies like Salesforce and Adobe, which have each consistently posted revenue growth above 20% for years on end, epitomize his ideal stocks — and what he looks for in younger tech companies.

“That to me is where I try spend my time,” Khan told Business Insider in an interview Monday.

Part of the reason he prefers such companies over the spectacular growers has to do with valuation. Tech companies often command premium prices from investors, because of their growth rates. But Khan strives to pay reasonable prices for the tech companies in his portfolio.

Investors often overvalue today’s fast-growing companies

That often means zigging when the market is zagging — and not paying top dollar for the hot stock of the day.

“I think broadly the investors in the market tend to overvalue current growth and potentially undervalue the durability of said growth,” he said. “Often times,” he continued, “you find companies that are growing 100% trade at much higher valuations than companies … that grow at 30%.”

The other reason Khan tends to shun those companies with superfast growth rates is that they often don’t have the potential to sustain strong growth into the future. The market they play in just isn’t big enough, or their competitive advantage isn’t sufficient enough to defend them against potential competitors. So as they sign up a big swath of their potential customers, or as their competitive distinction dwindles, their growth rates hit a wall.

“The companies that are growing at 100%, it’s harder for them to be sustainable, because they’re just growing so fast,” he said.

As of the end of the first quarter, the top five holdings of Khan’s fund were Microsoft, Adobe, Visa, Salesforce, and PayPal. The Software and IT Services Portfolio has grown at a 21.8% average annualized rate over the last five years, including management fees, according to Morningstar Direct, making it the sixth-best performing tech fund over that time period.

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