US investors are taking profits in outperforming sectors such as healthcare and revisiting technology names, viewing them as a dividend play for the first time.
At the start of the year, investors were disappointed when sector leader Apple posted results which missed expectations, sending its share price down from earlier highs.
Over the year to 6 August, the S&P North American Technology Sector index has underperformed the S&P 500, rising 16% versus nearly 20% from the main market.
In comparison, one of the sectors that experienced a strong rally is healthcare, with the S&P North American Health Care Sector index posting a return of 29% over the year to 6 August.
With this in mind, some investors have been taking profits from their healthcare exposure and reinvesting in technology companies, where they still see upside potential.
Nigel Cuming, CIO at Canaccord Genuity Wealth Management, has sold Polar Capital’s Healthcare Opportunities fund, which has risen 44% over 12 months to
6 August, and has invested the proceeds into the Polar Capital Technology trust and Henderson Global Technology fund.
“Healthcare has done so well that it seemed prudent to take profits there,” he said. “There is still a way to go for technology companies, which seem decent value in relation to healthcare.”
Russ Koesterich, BlackRock’s chief investment strategist, said large-cap tech firms in the US will benefit from a recovery in growth both in the US and elsewhere, due to their presence in the global market.
“If we do see improving growth from the rest of the world, large- and mega-cap US stocks, particularly those in the technology sector, would be poised to benefit, since these companies derive a significant portion of their revenues from overseas,” he said.
The technology sector has seen substantial growth in dividends recently, and investors see the potential for future payout increases.
This has been fuelled in part by Apple initiating a payout last year and increasing it this year. Earlier this month, billionaire investor Carl Icahn revealed he had taken a large stake in Apple and is pushing for higher payouts to shareholders, which caused the stock to rally more than 4%.
Around 60% of the tech companies in the S&P 500 are now paying a dividend. Tech giants such as Hewlett-Packard, IBM, and Microsoft have increased their payouts lately, while Cisco grew its dividend by as much as 75% last year.
Richard Gillham, head of product specialists at Legg Mason Global Asset Management, expects US dividends to grow across the board, even in sectors such as technology that have never been considered an income play before.
“Companies are still paying only a small amount of profits as dividends, as so far there has been a focus on buybacks, so there is a huge potential for dividend growth,” he said.
‘Deep value’ stocks
As the economy improves and valuations soar, managers and fund buyers are increasingly looking for unloved ‘deep value’ stocks that are set to appreciate as the rally continues.
Ben Willis, head of research at Whitechurch Securities, said: “Many investors are now looking at value-driven managers and unloved areas that are going to re-rate significantly. When things are tough, people are happy to pay a high price for earnings growth, but now areas that have been ignored or sold down are coming to the fore again.”
He likes the Legg Mason Capital Management Opportunity fund, run by Bill Miller, which has a deep value approach that aims to capitalise on price inefficiencies within the US equity market.
Some of the biggest themes in Miller’s portfolio are the ‘unloved’ financials, airlines, and technology sectors which are home to some of the cheapest stocks in the market. In the technology space he is focused on internet retailers such as Netflix, Amazon, Groupon, and online gaming stocks.
The Legg Mason fund is up over 40% for the year to 7 August, according to FE, double the year-to-date performance of the S&P
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