Different ways to allocate to technology
This article first appeared on portfolio-adviser.com on 21st September 2022 It’s been a tough year...
Once you’ve built a portfolio with some good core holdings which will see you through the ups and downs of financial markets, you might look to add a bit of extra spice in the form of some satellite holdings.
These investments can provide exposure to more niche asset classes – and hopefully give your returns a lift. But how do you choose a satellite fund? What are the qualities they need to possess for you to consider bringing them into the fold – and what do you need to consider?
A core-satellite strategy gives you the freedom to have some exposure to potentially interesting funds without putting your entire investment portfolio at risk. These additional positions help you access fast-growing areas of the world that are too volatile for you to commit substantial sums of money. And often these funds will be focused on overlooked smaller capitalisation companies, fast-growing sectors, or emerging parts of the world.
So, where do you start? The good news is there’s plenty of possible satellites, so here are five funds operating in interesting areas that are worth considering.
No list of satellite funds can ignore the emerging markets. These developing regions of the world are less well covered by analysts so there’s potential for companies to surprise on the upside. One contender in this area is Federated Hermes Global Emerging Markets SMID Equity, which invests in small and medium-sized companies in a variety of countries. Lead manager Kunjal Gala focuses on high-quality, efficient, and sustainable businesses that are likely to benefit from long-term trends.
According to the most recent fund factsheet, India has the largest country allocation at 20%, followed by the 18.23% in China, Taiwan’s 17.29%, and the 11.94% in Korea*. SINBON Electronics, a Taiwan-based company providing design and production services for electronic components, has the largest stock position in the fund of 4%*. Other names among the portfolio’s 10 largest holdings include KEC International, an Indian engineering, procurement, and construction company*.
This is a fund with an eye on the future. The portfolio invests in companies that are involved with artificial intelligence – everything from research, to the adoption of such services. As a result, the fund is a combination of global household names such as Microsoft and Tesla, as well as smaller companies that are unlikely to be on most investors’ radars*.
Interestingly, the fund uses a powerful AI system itself that scours financial statements for keywords indicating companies have incorporated AI into their future plans. The team then analyses the contenders to ensure revenues are derived from AI. According to the fund’s latest commentary, the team continues to see strong tailwinds as businesses “begin to understand the competitive advantages” that AI can provide. “In a less wasteful and more environmentally-conscious world, there are more and more circumstances in which AI can be deployed and make a tangible difference for the better,” it stated.
The idea of having exposure to precious metals is to help counter the effects of inflation, and political uncertainty, according to Jupiter Asset Management. Its Gold & Silver fund, which is run by Ned Naylor-Leyland, follows a flexible and dynamic strategy that allocates to gold and silver bullion, as well as mining equities.
According to the fund’s strategy document, holding some gold may help defend your portfolio when inflation rises meaningfully – as it is currently doing. “The gold price typically moves inversely to ‘real’ interest rates – the rate of interest paid on a bond after taking into account inflation,” it stated. These precious metals are also a potential benefit during times of political uncertainty. “Gold is apolitical money, in that it’s not issued by a central bank or government,” it added.
If you think industrial metals hold more appeal, BlackRock World Mining is a specialist trust offering exposure to mining and metals companies globally. In addition to investing in quoted securities, the trust may also invest in royalties derived from the production of metals and minerals, physical metals, and unquoted securities. It also offers an attractive dividend yield to investors.
Managed by one of the most experienced teams in the market, this trust is ideally positioned to tap into a number of global tailwinds set to benefit the mining sector, including what the managers call the “multi-decade period of strong demand for commodities”. This is because of the essential role commodities play in our lives now and how they will help us transition to a ‘net zero’ future.
This is a concentrated portfolio of fast-growing, innovative companies. It’s also very technology focused. In fact, seven out of the 10 largest stock positions in the portfolio are from this sector and 57% of the portfolio overall, according to the most recent factsheet*.
The most significant is NCC Group, a UK-based information assurance firm based in Manchester, which accounts for 5.5% of assets under management*.
The fund’s manager, Guy Feld, who took over and rebranded it just under two years ago, has plenty of experience and a very good track record in this area of the market. More than 80% of the fund is currently in either the UK or North America*. It then has more limited exposure to areas such as Asia and Japan*. While it boasts a spread of company sizes, 60% of the fund is focused on smaller or medium-sized companies*. Large and mega cap names, meanwhile, account for a combined 8.3%*.
*Source: fund factsheet, 31 July 2022