By James Phillipps Jackie Bowie took the helm of Aegon's technology fund on 5 March this year...
By James Phillipps
Jackie Bowie took the helm of Aegon's technology fund on 5 March this year, joining from Murray Johnstone and replacing managers Stuart O'Gorman and Paul Kleiser who joined Hendersons in December.
Aegon Technology, previously known as Scottish Equitable Technology, is one of the oldest in the sector having launched in the mid-1980s. It has maintained top quartile performance over three, five and 10 years, and holds a single A ranking from Standard & Poor's.
Over the past year, amid market volatility, the fund's performance has slipped to fourth quartile, along with most technology funds, although the last few weeks have seen an improvement.
Over the three months to 16 April, the fund is down 33.2% compared to other technology fund returns which varied between 39.3%, posted by Rathbones Technology, and 27.9%, posted by Jupiter Global Technology. The fund invests globally, although 70% of the holdings are in the US and the remainder are split between Europe and Japan, with minor holdings in the UK and Asia.
How does your investment style compare to that of your predecessors?
It's probably not that different actually. The difference is that the environment for technology investment has changed, not so much that my style is different from theirs. Investing in technology last year to investing in technology this year has changed dramatically and your style has to adapt to take that into account.
We still look for good growth areas, decent valuations and emerging technology.
No, not at all. It has got a fantastic long-term track record, so it's just the challenge of maintaining that, especially as the competition is extremely tough.
It's been reduced quite a bit. When I took over there were about 105 stocks, which was far too big. At that size you end up with a core list of stocks and a huge tail of small holdings that don't really add any value. What you tend to find is that those stocks that are 0.5% of the fund disproportionately take up your time because they may require more research effort.
The stock list was reduced and is now about 85 stocks. Between 85-90 would be my upper end and 65-70 is where we would be in a normal situation. But you don't want to be too concentrated in a volatile market, so for now it will probably stay at around 85 holdings.
I've been asked this question before. Yes, ours is a technology fund and it will always be invested predominantly in technology stocks.
The few stocks in there that don't fall strictly into tech are in the medical technology area, which I still class as technology. They are more like special situations companies which are developing leading edge technology in medical devices but I still consider that technology and we look at them along the same lines as more mainstream tech companies. Currently, there is only one and it is 2% of the fund.
The portfolio is at the moment and again it is a reflection of the market that it has a predominantly large-cap bias. There would always be a core of the larger index names just because that is the way the market is.
We would also be looking for the next leaders within certain areas, but at the moment it is becoming extremely hard to identify them because the visibility is so bad.
When visibility is bad you gravitate towards larger cap names because they can give you a better read on what is happening in their market.
It really depends on the sub-sector. Some of the telecommunications companies in Japan, like those involved in fibre optics components, are a lot cheaper than the US names. But you could also argue that their market potential is not as big as those in the US.
A lot of the hardware names are better priced in the US.
I think technology prices have hit the bottom in terms of the major index, the Nasdaq. We said we thought the Nasdaq would trade in a range of 1,600-2,400 throughout the year. The low was 1,638 on 4 April, so we're sticking to that. We've gone from 1,638 to 2,163 in the space of two weeks. I think it's moved too fast short-term but I don't think we are going to go back to falling back below 1,600.
Some of the sub-sectors will start to pull back. The move in the semiconductor index in recent weeks is simply not justified by the fundamentals. Once the market settles down and absorbs the rate cuts and the first quarter earnings, you'll probably see a bit of a filter out in terms of stocks that have moved, in terms of good fundamentals, and the lesser ones will start to come back.
I think on a very short-term view, like two days, because people say "they've cut rates, let's buy the market." Again, once things have filtered out a bit in the next few weeks or so, people are more confident that the rate cuts are big enough to take effect quite soon.
The rate cut earlier this month just helped turn sentiment and showed that the Fed is prepared to move very severely and very quickly if required. The sentiment really needs to turn for the market to have any sustainable uplift.
We have moved overweight hardware stocks like Dell, Compaq, Intel and Apple, which have been the best performing sector in the first quarter, and it has been underweight in communications names, which in the first quarter did very badly.
Dell has been the best performing stock in the Nasdaq 100 this year and we have also been overweight Microsoft and Apple, so if you have decent positions in those stocks, it's enough to hold your performance up.
From the beginning to the end of March we were overweight cash when the market was falling.
This was reduced on 17 April and we dripped some of the cash back in to Microsoft, so we are sitting with about 5% or 6% cash at the moment.
Being overweight cash in March helped and then putting it back to work just as the market turned around has obviously helped as well.
Tech has moved too quickly too soon so we have started taking profit.
Recently, we took profits from Dell and Hewlett Packard. Hewlett Packard is not an exciting technology stock. It doesn't really go down when the market goes down, but it also doesn't really go up when the market goes up.
We had been playing defensive stocks because the market was weak. We started to turn more positive short-term and wanted to start reducing our exposure to these sorts of stocks because they tend to be better when the market is weak. We put the money to work in more high beta software companies which, when the market moves up, will outperform.
It is difficult to generalise in software because each software company has a totally different offering and they are addressing a very different marketplace. Overall, I think software has got a decent future both short-term and long-term, but you want to play companies who are leaders in their own space, with dominant market share.
Software companies tend to be expensive and the quality software names trade at premiums to all others. Software really is all about quality.
Technology companies involved in gaming have done extremely well in the last 12 months and one of the reasons people are getting excited about Microsoft again is because they have the new gaming console coming out this year. They have been introduced into the games market before.
Although we do have some stocks like Nintendo, it is a pretty specialist area. We try to play more general such as big software companies that are selling to large enterprises, like Siebel, which produces customer relationship management software.
Cisco is one of the few communications companies we still hold but it is a relatively underweight position. We look at a few different indices but the FTSE Globaltech is the main one I look at. Cisco makes up about 9.5% of that index, so my position in it is very underweight but it falls into my top 10 holdings because it is such a big stock. It is a bellweather for the industry and to be out of it completely is just far too big a risk for the tech fund. The EMC position has actually been trimmed as well Ã it was a huge stock in the portfolio when I took over.
I still like it longer term and don't want to be out of it completely but I was worried about the numbers in terms of the growth rate coming down.
Long-term, Nokia is still an out and out winner and that is on a global basis. Motorola has reported numbers and they are really struggling and so are Ericsson. The only winner that is left in the mobile market is Nokia.
We started taking some profits in Nokia after they reported their numbers on 20 April. The stock has picked up quite a bit so we decided to take some profits with the aim of possibly getting back into it in a few weeks when the market settles down a bit.
Because the visibility was so bad for Nortel, Lucent, JDS Uniphase and everything in that space. We think the fundamentals are still deteriorating and it is one sector where there is quite a large cloud hanging over it, in terms of knowing how bad the inventory position is.
There is still a question mark over what the end demand is going to be. People like AT&T and Worldcom, the largest communications carriers, have not announced what their spending plans are going to be this year so we don't know how much companies like Nortel are going to sell. It's going to be more towards the fourth quarter when we know what these companies are going to report in terms of revenues and profitability next year.
We are currently still working that out. One of the reasons we haven't completed that is because the fund looked at the MSCI Information technology index before, which was the best they had at the time.
Now FTSE has launched a GlobalTech index which is much more accurate, in terms of its make up, and we are now adopting it and looking at what risk controls we can put in place to keep the risk profile of the fund low but still give me enough flexibility, as a fund manager, to add value.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till