Launched in 1999, the £243m FF Global Technology fund has been managed by HyunHo Sohn since March 2013, but the aim and investment process have remained consistent.
The manager explains: “It is quite simple. I aim to achieve long-term capital growth by investing in technology companies. It is quite broad, so the technology space includes hardware, software, the internet, IT services and even payment technology.”
Mr Sohn explains there are effectively three key steps to his investment process: generating investment ideas, validating those ideas, and then portfolio construction.
The manager makes use of Fidelity’s in-house research capability, as he notes there are approximately 25 analysts covering the TMT (technology, media and telecoms) space globally.
For the second stage, he explains: “I take a big-picture view: I am aware of what the technology trends are and where innovation is happening.
“I also have certain investment criteria. First of all, I like growth technology stocks, so small companies that are very unique and with innovative technologies have the potential to become much larger companies in the longer term.”
In addition, the manager occasionally invests in cyclical stocks with mean reversion characteristics, as well as companies that fall into a special situations and value category. These are stocks that are “misunderstood” by the market and tend to trade on very cheap multiples.
“With the ideas from these three different buckets I construct a very concentrated portfolio of roughly 50 names, with the various characteristics of growth, cyclical and special situations,” he says. “One of the merits of this approach is the diversification benefit.” This relatively concentrated portfolio could help explain why the risk/reward indicator on the fund’s Kiid is towards the higher end of the risk spectrum at a level 6, while the ongoing charge for the A-share class is 1.92 per cent.
For the five years to June 26 2014 the fund has lagged its sector peers with a return of 102.04 per cent, compared with the IMA Technology & Telecoms sector average of 113.42 per cent, according to FE Analytics.
However, the fund has outperformed the sector since Mr Sohn took it over on March 31 2013, with a return of 16.47 per cent to June 26 2014, against a sector average of 13.7 per cent.
One of the drivers of the outperformance since the start of the year has been the overweight position in semi-conductor stocks, following the combination of an improved business cycle and a number of merger and acquisition deals in the sector.
Although in recent months, Mr Sohn notes, he has started to reduce his exposure to semi-conductors.
He explains: “Smartphone growth has been a key driver for semi-conductor demand, which is slowing, and currently semi-conductor capacity is pretty tight but companies are adding capacity. So the supply and demand balance will ease over time, therefore it is a good time to take profit.”
The manager notes that Samsung, one of the portfolio’s top holdings, has dragged on performance, again over concerns about the slowing smartphone industry. However, Mr Sohn argues the company is more than just a handset manufacturer, as it is also a leading component maker.
Other changes to the portfolio include an increased weighting towards internet retailers such as eBay and Amazon, following a recent sell-off of growth stocks. “I think these internet retailers are long-term winners, so after the stocks de-rated I added into these names,” he says.
Looking ahead the manager acknowledges the technology sector is facing both headwinds and tailwinds, with the positives including further innovation and increasing IT spend, while the downside includes a declining smartphone market, with increasing competition and less differentiation.
“I am broadly positive on the sector as a whole, as there are always interesting opportunities and valuations are still reasonably attractive.”
Expert view
Jon Beckett, UK research lead, Association of Professional Fund Investors:
This is one of the most expensive funds in the IMA Technology sector. At nearly 2 per cent it has to deliver a lot just to sit down and justify its price tag. Notable aspects to this medium-sized fund are a punchy weighting in Samsung and a portfolio of roughly 50 names. In terms of sector this is the least diversified with approximately 90 per cent in TMT and three-quarters in the US. This fund had lost assets steadily since 2011. Understanding why the fund underperformed then will help to understand how Mr Sohn is positioned against the market now. Whatever the reason, it has begun to outperform the IMA sector in 2014, but it is too soon to gauge how persistent that performance will prove or whether it can justify the price.
