Last updated: Mar-18-2019

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, July 18, 2017

The sector equity category is a bit of an oddball, but a high-performance oddball. Consisting primarily of science/technology and health-related funds, this 19-member group has generated the best 3-, 5- and 10-year average annual compounded returns through the end of May (17.2%, 20.0%, and 9.4% respectively) of any fund category. And of course, some sector funds fared much better. The Fidelity Global Technology Fund is a case in point.

The fund has delivered consistently high returns, with its 3-, 5- and 10-year average compounded rates of return of 27.2%, 26.3%, and 11.7% respectively to the end of May, not to mention its whopping 40.1% return for the 12 months ending in May. And one of the keys to its success, according to Hyun Ho Sohn, London, England-based portfolio manager with Fidelity International, is his strategy of looking beyond short-term trends and buying long-term industry leaders. “One result is that the portfolio has a slight anti-momentum bias,” he admits.

We look for long-term industry leaders, and focus on the market’s short-term horizon by focusing on mispriced opportunities , rather than chasing performance in hot subsectors,” says Hyun Ho. “These are stocks where the longer-term outlook is significantly better than is reflected in the market price.”

The style is consistently bottom-up with disciplined valuations; Hyun Ho professes a preference for companies with robust balance sheets, high levels of free cash flow, and good earnings visibility. While he does not allocate on the basis of geography, regional and thematic exposure is monitored, and allocations are made among growth stocks (typically 50%-60% of the portfolio), cyclicals (under 30%) and special situations (also under 30%).

“At the moment, the portfolio favors mid- and small-caps, which have greater expansion potential than large- and mega-cap names,” says Hyun Ho. “Given the winner-take-all dynamic that often applies in technology, with second- and third-place firms in a given area taking much smaller market shares than the winner, we look for companies that have clear competitive advantages. They may be volatile in the short term, but over a longer investment horizon – three-plus years – their qualities should be reflected in their valuations.”

Hyun Ho cites San Francisco, CA-based Inc. (NYSE: CRM) as an example of the desired growth profile. “It is a clear leader in the software-as-a-service (SaaS) industry,” he says. “It is exposed to structural growth in cloud computing, and is using its lead position in the automation of sales-related business tasks to enter adjacent markets, such as marketing, customer service management, and business analytics. The company is also registering patents in the emerging field of artificial intelligence (AI).”

Among cyclicals, Hyun Ho points to Neubiberg, Germany-based Infineon Technologies AG. “Thanks to its leading position in power semiconductors and radar sensors – it manufactures components for smart cars and electric vehicles – it’s poised to gain from the smart-car revolution. It has a 17% market share versus 7% for its biggest competitor. The process of developing fully autonomous cars will take a long time, but it has started and demand is growing, and that will underpin revenue and margin expansion from around 15% up to 20%.

“The technology sector is becoming far more global in nature, and less-U.S. centric,” Hyun Ho adds. “It is becoming more diversified in terms of the types of investable technology. It is also a far less cyclical investment proposition than was the case 10 or 20 years ago, with software and associated services – which benefit from steady, recurring revenue streams – taking an ever-greater share of the market relative to more cyclical hardware and equipment companies.”

Hyun Ho says U.S. Internet names look expensive at the moment, but there’s good value in Asia. “We are continuing to see structural global growth in internet usage and e-commerce, along with a significant increase in mobile internet traffic and rising demand for digital content across multiple platforms,” says Hyun Ho. “All of this, together with the development of future technologies like smart cars, AI, virtual and augmented reality and 3D printing, makes for a very promising long-term investment backdrop.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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