Emerging market funds top tech sector on Facebook scandal

Emerging market-focused funds have topped the tech sector since news of Facebook’s privacy blunder broke last month, according to FE Analytics.

Emerging market funds top tech sector on Facebook scandal

The Luxcullence Polunin Emerging Markets Technology fund has been the top performing technology fund since news of Facebook’s privacy data breach scandal broke. The fund has returned 2.35% for the month of March, up 5.75% from its return in February.

The Luxembourg-domiciled fund has its highest weightings in China, Taiwan, South Korea, and India companies. Its highest sector weightings were towards information technology and financials.

Fideuram New Economy Cap fund was the other top performer with a 1.34% return but it did not provide FE Analytics with any information on its weighting breakdown.

The GAM Star Technology fund was the third-best performing fund in March at -0.27%, while FundPartner Solutions’ Protea Swiftsure Technology fund delivered -1.04%.

Returns by the bottom funds for March ranged from -7.47% to -6.82% for a month in which all of the funds were down at least 8% from February level when most had positive returns.

Technology has been a popular overweight in Global Emerging Market funds, where it is already the largest sector weight in the MSCI Emerging Markets index.

Carmignac Portfolio Emergents, Pictet Emerging Market Sustainable Equities and Baring Global Emerging Markets are the GEM funds with the largest allocations to tech in the Investment Association sector. In total, 39 out of 99 funds hold more than the MSCI Emerging Market index’s 27.8% allocation to the tech sector.

The €226.35m Carmignac fund has its largest allocation to Argentine e-commerce company Mercadolibre, with a 6.1% allocation. Internet conglomerate Tencent, Taiwan Semiconductor and Chinese online retailer 58.com are also top-five holdings.

Sentiment swings

Technology funds’ poor returns should not be surprising as investment strategists have been weighing up whether to reduce allocations to so-called Faang companies and global tech stocks of late, on concerns increasing regulation could hit earnings potential.

Bank of America Merrill Lynch’s (BoAML’s) latest investment strategy report listed a string of reasons to reduce tech allocations, including: excess returns and fancy valuations, bubbly prices, fat market caps, earnings pride, politics, wage disruption, tech being a cash-rich, tax-lite sector, tech being the most lightly regulated sector, and waves of regulation leading to investment underperformance.

Blackrock’s global chief investment strategist, Richard Turnill, agreed and said: “Worries that trade tensions and regulatory scrutiny could dent profitability have shaken confidence. We believe recent weakness reflects rising risks but is not a tech wreck in the making”.

“Enthusiasm for the sector is now facing a test. Trade tensions between the US and China centre on key issues for the tech sector: intellectual property, technology transfers, market access, and investment restrictions,” he said.

“A series of unrelated, high-profile scandals from data breaches to self-driving car accidents has raised the spectre of more stringent regulatory scrutiny.”

Portfolio Adviser reported on Wednesday Rathbones has removed their entire Facebook holdings in its Global Opportunities fund.

In the long term

Turnill did note that that strong fundamentals still underpinned his firm’s preference for the tech sector.

Looking at FE Analytics data, the top fund for the three years to 31 March 2018 was Polar Capital’s Global Technology fund that returned 57.4%. It was also the top fund for past five years at 161%.

The fund’s top holdings come from Microsoft, Apple, Facebook, and Alphabet, and 67.7% of its holdings came from North American stocks.

UBS’ Equity Global Multi Tech fund followed at 49.82% for the three years to 31 March 2018, Fidelity Global Technology and Blackrock Global Funds World Technology A2 fund both at 49.56%, and Janus Henderson Global Technology A Accumulation at 46.86%.

All of these funds had their highest weightings towards North American tech stocks.

The funds analysed were found using FE Analytics FCA Recognised and Offshore Mutual universes that were domiciled in either Luxembourg or Ireland.

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