We have often discussed the theme of technology and whether we should have an allocation to a specialist fund to provide this exposure. Analysis of our preferred fund list several years ago suggested that some of the funds we use had a high weighting in the sector, the largest being 20%. We concluded that we probably had an indirect exposure to the sector of around 10% through the majority of our preferred funds, meaning we had sufficient exposure from a sector asset allocation perspective.
It is becoming more apparent to us that technological advancement, especially within the tangible day-to-day products we all use, is increasing. We each use mobile technology or the internet more so than we ever have and we are acutely aware of the growing middle classes around the world who are only at a relatively young point of use in these areas.
The range of new products, services and solutions borne out of this sector is vast and it is probably safe to assume that our indirect exposure through our current fund managers is only providing us with the tip of the iceberg.
The golden age
Our change in interest in this sector is perhaps best summarised by some words from head of global equities at Baillie Gifford, James Anderson, who has recently written an extensive research paper, Technology for a Golden Age, covering the growing importance of technology and why investors should try and understand the intrinsic value of many of the companies in this space.
Some of his concluding thoughts are: “Reflection has amended my views on the sustainability and attractiveness of the outstanding technology companies of our era. In aggregate, I think that they are more sustainable, more compelling and even more interesting than I had perceived…We are fortunate enough to invest at a time when there are great companies with imposing competitive advantages, radical growth opportunities, unprecedented economics and superb management. It is a golden age.”
A tough choice
In January, I conducted a lengthy review of the available funds in this sector, and for the first time in my career I have been unable to come to a conclusion as to which is my preferred fund. The reason for my hesitation and the need to discuss the review with our investment committee before making a final decision is because the funds in our shortlist each have positive attributes and deciding which are more important is made more difficult as we do not have an idealistic fund in mind.
Starting the review, we only used open-ended funds and looked at onshore and offshore universes giving us 147 funds to filter through. We also had specific criteria to find only one preferred fund:
- A relationship with us, to provide updates and support;
- Active management;
- A minimum five-year track record;
- An experienced and stable investment team – not a single manager – so we are comfortable making a long-term allocation to the fund;
- A global focus – we want a broad allocation, not region specific;
- Access to the institutional share class,to keep client costs down;
- Manager availability so we can speak to them regularly, preferably in person.
Working through these filters brought the list of funds down to five – Franklin Templeton Technology, Henderson Global Technology (onshore and offshore vehicles), Pictet Digital Communication, and Polar Capital Global Technology.
Finding a clear leader proved more difficult than expected, as over the very long-term (11.5 years to end of Jan 2013) there was only 6% between the five funds (cumulative returns ranged from 60% to 66%). Over a three-year period there was only 7% between the funds (32% to 39%), although over one year there seemed to be a greater divergence between the funds – in absolute numbers the difference was again around 7.5% (3% to 11.5%). We therefore asked ourselves: “If actual performance is so similar, does it really matter which fund we choose? What are the non-performance related attributes that we prefer?”.
The big question
In summary, the main attributes and questions we discussed in detail were, do we prefer a large team (Franklin), Silicon-valley-based (Franklin) or UK-based managers (Henderson, Polar); a team running smaller assets (Pictet/Franklin); a mega/large-cap focus (Henderson who runs $3.5bn) or mid-cap bias (Franklin/Polar); low volatility (not Polar); institutional share class and lowest TER (Franklin); thematic (Henderson/Polar) or bottom-up (Franklin) approach; a more unique mandate (Pictet)?
I leant towards Franklin or Polar, but our investment committee want to give us time to individually think about what our favourite attributes are.
With markets buoyant, we are not rushing our decision just yet, as our final selection will be a very long-term allocation across the majority of our clients’ portfolios.
