InvestmentsApr 10 2014

Newton’s global managers increase technology exposure

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Newton’s Nick Clay and James Harries have increased their £4bn Newton Global Higher Income fund’s weighting in technology companies to its highest level since the product was launched in 2005.

Deputy fund manager Mr Clay said income managers had “traditionally found it difficult” to invest in technology companies as the boards of these firms had been focused on acquisitions and capital expenditure.

But Mr Clay and Mr Harries have recently bought into US computer software giant Microsoft, to sit alongside positions in Taiwan Semiconductor and CA Technologies. The fund had 8.1 per cent invested in technology stocks at the end of February, according to its latest factsheet.

Mr Clay said: “The companies are now deciding what to do with their cash piles. Historically, they would have spent it – as Facebook, Twitter and Google are doing – as it was just about the land grab. History has shown that this doesn’t necessarily help the share price: most capital expenditure doesn’t add value over time. Now they are buying back shares.

“More cynically, senior management used to reward themselves through stock options and that used to drive a push for share price increases, but now they are paid in restricted stock and so benefit from a dividend, so payout ratios begin to rise.”

The manager highlighted that Microsoft’s provision of software for businesses was “very sticky”, giving “a lot more confidence” that cashflows and dividends are sustainable.

“For a chief technology officer, to decide to move all systems away from Microsoft is a very risky decision to make,” he added. “That business has a 40 per cent margin and is very predictable.”

Mr Clay said Apple, which has a large cash weighting on its balance sheet, was less convincing as an income investment.

“Apple makes similar margins but the debate is whether it makes it from hardware rather than software,” he said. “Is the success just because anything beginning with an ‘i’ is fashionable? It’s reasonable to assume it is not always going to be the case and margins will be eaten away over time, so paying a dividend might not be the best idea.”

Elsewhere in the portfolio, Mr Clay said healthcare innovation was a growing theme, with pharmaceutical companies developing “personalised” medications and bringing in new treatments based on the mapping of the human genome.

“It is a massive step forward and will lead to a whole new cycle in pharmaceuticals,” Mr Clay said. “Ultimately, the end market for some of the drugs will be smaller because they are treating particular cancers, but the cost of bringing drugs to market is less because they can see if it is working in less time.”

Since the bottom of the market in March 2009, the Newton Global Higher Income fund has gained 105.1 per cent, broadly in line with the IMA Global Equity Income sector’s average return but behind the FTSE World index’s 139.6 per cent gain.

Earlier this year, the Global Higher Income fund was revealed as one of two Newton products that form part of Skandia’s WealthSelect range of cut price funds used for its model portfolios, with a reduced annual management charge of 0.65 per cent.

Newton’s Clay and Harries’ top tech picks

CA Technologies

CA provides specialist software to firms using mainframes to store large amounts of data, for example banks. Newton Global Higher Income fund deputy Nick Clay said that while industry commentators had speculated on huge amounts of data moving to ‘cloud storage’, this was very unlikely.

“It costs an absolute fortune for banks to move from mainframes to the cloud,” he said. “It is not a decision these companies are going to make.”

CA’s share price has risen by roughly 29 per cent in the past 12 months, compared with 32 per cent for the Nasdaq Composite index.

Microsoft

Microsoft became a household name during the 1990s with its Windows operating system and has maintained a strong position in the tech sector, particularly through its software offerings. The company’s word processing, spreadsheet and database programs are market leaders.

“For a chief technology officer, to decide to move all systems away from Microsoft is a risky decision to make,” Mr Clay said.

In the 12 months to April 2 its share price has risen 43.9 per cent, driven by positive reaction to its latest version of Windows and its move into smartphones.

Taiwan Semiconductor

The Taiwanese technology company, founded by chief executive Arthur Wang in 1979, has grown exponentially in recent years, primarily because of its link to Apple’s iPhone. Taiwan Semiconductor manufactures specialist computer chips for a large number of other technology companies including Intel.

A popular holding in Asian equity funds, the company’s shares have risen 83 per cent in five years as its importance to the smartphone industry has grown. It has a gross dividend yield of 2.5 per cent according to Bloomberg data.