Much talk surrounds the S&P 500 reaching historical highs. It's up 101% over the trailing five years. But there is little mention about technology just about matching that performance. The MSCI World Information Technology Index registered a 97.5% return over the same period, FE data shows.
Technology has been a good bet, but a few points to note about investing in the sector. The definition of technology is flexible. Some consider it traditional hardware and software such as Intel and Adobe. Others believe social media or ecommerce platforms such as Facebook or Amazon, which derive revenues from advertising and retail sales rather than specific tech products, should be included.
The tradtional tech tends to be more mature with stable growth while the online services are expanding and often pioneering into new businesses, meaning potentially high growth but also higher risk.
In addition, the fortunes of a tech company can change fast as new ideas are introduced or as R&D bears fruit. Nimble startups can appear quickly with a disruptive product. Volatility is therefore higher in the sector.
Over the trailing three years, the global equities sector had the lower cumulative volatility over the last three years (11.17) compared to the technology sector (13.29), according to FE data.
Against this backdrop, the Fidelity Global Technology Fund is compared to the Janus Global Technology Fund, with an analysis by Luke Ng, senior vice president of research at FE Analytics.
Fidelity Global Technology and Janus Global Technology are domiciled in Luxembourg and Ireland, respectively. Both funds use the MSCI ACWI Information Technology Index as a benchmark.
The Fidelity product is managed by Hyun Ho Sohn, who seeks to outperform the benchmark by buying stocks in three categories: growth, cyclical and special situation, Ng said.
About half the holdings are categorised as growth stocks, which are believed to be the long-term winners in the tech industry.
Cyclical stocks, on the other hand, are selected because the team considers that the companies have a strong market position and are due for a turnaround depending on market cycles. Special companies are those with cheap valuations that have the potential for a recovery in the share price, Ng explained.
The fund holds around 60 stocks, with approximately 70% of geographic exposure in the US.
“The portfolio tends to strike a balance between value and growth stocks for large cap stocks. For small- and mid-caps, the tendency is to bias toward growth,” Ng said.
“Sohn continues to find opportunities in the software and services sub-sector by playing themes that include cloud computing, internet and communications.
Due to active stock selection, the portfolio can be different from its benchmark. For example, the fund does not hold software giants such as Microsoft, Facebook and leading hardware players such as Cisco Systems.
The Janus Global Technology product, by comparison, is co-managed by Brad Slingerlend, Brinton John and Denny Fish, who assumed manager responsibility in 2011, 2014 and 2016, respectively.
Currently, the fund is holding a portfolio of around 80 stocks and has a slightly stronger position in the US than that of Fidelity. The Janus fund tends to have the stronger focus of the two products on growth stocks, with holdings that are driving innovation or benefiting from advances in technology, Ng said.
“The team favours resilient companies in the industry, and at the same time they hold smaller positions in the fund that offer larger upside potential under different market scenarios. The team sees more opportunities in software and services over technology hardware and equipment.”
The top ten holdings of the two funds shows Fidelity has a bit of a bias toward more traditional semiconductor and equipment and software companies than Janus, which is more niclusive of social media platforms:
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Both funds have been doing well relative to peers. The Fidelity fund has been in the top quartile of cumulative performance for the sector over one, three and five years and the Janus fund has been in the top quartile for one and five year periods, according to FE data.
The Fidelity fund gets a five crown rating from FE and the Janus fund receives a two crown rating. This indicates that that the Fidelity fund delivered a better three-year risk adjusted performance in terms of alpha, volatility and consistency than the Janus fund.
Ng pointed out that in absolute terms, the Fidelity fund delivered returns close to that of its benchmark over the last three-years (as of July 2016) and outperformed the Janus fund over the period.