Why Software Stocks Are the Best Place for Your Money

“Stick with software.” ~ Jim Hamel, Portfolio manager, Artisan Global Opportunities Fund

The current environment highlights the importance of a disciplined process aimed at finding compelling, high-quality franchises no matter the macro backdrop.

One secular trend we believe remains intact is the development and use of modern software tools to facilitate a more collaborative, efficient, mobile and secure work environment. Companies exposed to this trend are transforming how we work—in part by helping companies better benefit from the exponential growth in data over the past several years.

Although many of these are (unsurprisingly) software companies, they have a variety of exposure to a range of industries—with notable examples focused on applications in life sciences and health care, financials, accounting, travel and others.

We find these companies particularly attractive given their business models.

Many cloud-based SaaS (software-as-a-service) companies, because they are subscription-oriented, generate high levels of reliable, recurring revenue. As customers collectively identify a “winning” software provider, those winners typically have a significant opportunity to create a near-monopoly. That develops from their industry expertise and sticky applications, which often become heavily embedded in customer workflows and business processes.

The combination of these features gives us conviction that many of these high-quality franchises still have a meaningful runway ahead of them—regardless of the turn the macro direction takes in the near term.

Way to play it with ETFs: Balchunas suggests taking a look at the SPDR S&P Software & Services ETF (XSW). It weights stocks equally, which adds some volatility, but also expands the reach for investors looking to get into smaller nooks and crannies of the sector. The ETF’s fee is 0.35 percent. It’s not very liquid, so buying with a limit order is a good idea.

Full story at Bloomberg