Global, Income and Caution: three top themes this ISA season
It’s the new tax year. Not quite as exciting as a new calendar year, but a good time a make...
This week marks 34 years since the video game Tetris – one of the most widely-sold games in history – was published. Any 80s child will remember being glued to their Commodore 64s or Nintendos, furiously matching tiles as they fell thicker and faster from the top of the screen.
Fast forward to 2018 and this seems light-years apart from the latest gaming craze, Fortnite. For those not in the know, it’s a survival game which requires the players to jump out of the sky, hunt for supplies, complete missions and defend fortified positions, all the while trying to avoid the encroaching storm. It sounds exhausting.
The rapid advancement of technology over the years has been quite astounding, and it has certainly been a high-growth area of the market. Since 1998 (which is as far back as our data stretches, and importantly includes the dot-com boom and bust), the global technology index – the MSCI World Information Technology – has outperformed its general MSCI World counterpart by around 30%*. Over the past five years, it has comfortably doubled its return, having risen by 193%** compared with 87%.
With the rise of artificial intelligence and the sheer amount of technology used in our everyday lives, there is still much to play for.
We take a look at the Elite Rated funds which are making the most of technological advancement, and which pockets of the market area, in their view, have the best opportunities.
Manager James Thomson is a big fan of the gaming sector and holds US video game companies Electronic Arts (EA) and Activision Blizzard.
“Video games used to be uninvestable – their profits were volatile because they were at the mercy of new console launches. This has changed as they have significantly grown and diversified their titles. Margins have improved as games are usually downloaded directly rather purchased from a retail store,” he told me.
It isn’t just the video gaming sector that James is keen on, either. Rathbone Global Opportunities has a 25.58% weighting to the tech sector as a whole, which is a 10% overweight relative to its FTSE World benchmark***. Other large holdings in the fund include Chinese internet holding company Tencent (which also has exposure to games), US computer software company Adobe Systems, online payment system PayPal and, his largest holding, e-commerce giant Amazon.com.
Headed up by Douglas Brodie, this fund targets high levels of growth by looking further down the market cap spectrum – chiefly at smaller companies which are innovative and capable of changing the world one day.
As such, it’s no surprise that it has a hefty allocation to tech stocks at 27%. Some of its largest holdings are companies which capitalise on the rise of e-commerce, such as British online supermarket Ocado, online-only US home goods company Wayfair and mobile phone-ordering takeaway firm GrubHub.
While Douglas focuses on the fundamentals of individual companies, he keeps a keen eye on long-term themes which he believes will thrive in the future. A good example of this is his holding in Tesla, which is the leading electric vehicle manufacturer and should benefit from the rise in electric and driver-less cars.
This trust is run by James Anderson and Tom Slater, also Baillie Gifford employees, who seek companies which are disrupters in their own industry. They ignore established business and, in fact, are able to allocate up to 25% of the portfolio to unlisted companies. This means they have a natural bias towards technology stocks, as well as the tech-driven US stock market.
They don’t just invest in under-the-radar start-up companies, however. The management duo also hold US tech giants Amazon and Netflix as two of their 10 largest positions, as well as Chinese titans Alibaba and Tencent. For James and Tom, it’s not about having a bias towards a particular sector. Rather, they look for stocks based on each company’s fundamentals and how competitive it is in its respective market area.
Manager Jeremy Gleeson has been buying semiconductor companies recently. Semiconductors are used to produce something called a ‘transistor’ – a component which is the basis of every electronic device, from mobile phones to rockets. Today, millions of these transistors fit onto a single chip. Jeremy says the sector has been hit by fears that the smartphone market is running out of steam, but there are still plenty of opportunities so long as investors are looking in the right places.
Jeremy recently added to Japanese semiconductor Renesas, which supplies products used in car information systems. This means that demand for its product should increase as cars become more technologically advanced. The company also manufactures components needed for building automation (such as ventilation, heating and lighting), and healthcare equipment.
He also bought recent IPO (Initial Public Offering) nLight, which makes fibre lasers. Fibre lasers carry the data through fibre optic cables which, unlike normal copper wire, can send data over very long distances: we even have fibre optic cables running under the Atlantic ocean between the US and the UK. Fibre optic broadband has also become commonplace in many households over recent years.
*Source: FE Analytics. Total return in sterling terms. Correct from 31 December 1998 to 6 June 2018.
**Source: FE Analytics. Total return in sterling terms. Correct over five years to 6 June 2018.
***Source: FTSE World Index factsheet. As of 31 May 2018.