SG Technology fund returns 49.4% over the three years to 25 July with a mix of top-down and bottom-up investing
Alan Torry has one of the longest track records in UK retail management for the technology equities arena, having managed Prolific Technology, known now as the Aberdeen Technology, since its launch in 1982.
In 1998 he was invited to join Peter Seabrook and Nicola Horlick at SG Asset Management to run US equities.
Torry agreed to join on the condition that he was allowed to launch a technology fund to keep that record alive.
In May 1998, the S&P AA-rated SocGen Technology fund was launched, breaking the set pattern of fund launches at SG. The group's usual style is to launch funds first in an institutional setting and later, once a track record has been established, they are introduced into the retail market.
That fits very well with SG's investment brand, known for an institutional style investment philosophy, which has produced strong performance and has won admirers in the retail space.
It wasn't until June this year that Torry's retail American Growth fund was launched on the back of the group's institutional version. A US smaller companies fund could follow, but Torry said he remains focused on the mandates he now has and would need to build his team out further before such a launch was possible.
SocGen Technology is ranked first out of the seven funds in the telecommunications and technology sector with an offer to bid return over the three years to 25 July of 49.4% compared to a sector average of 19.5%.
Over the 12 months to that date the fund is ranked 8 out of 24 funds with a return of -59.5% compared to a sector average return of -62.4%.
How has technology investing changed since you entered the field back in 1982?
It is a bit wilder now because there are more people focusing on technology as an asset class. There are greater waves of enthusiasm and despair so you get the sort of swings that we have seen. It was a classic sign when you saw almost everyone wanting to launch a technology fund in 1999 and early 2000 that we were close to the top of the market.
It was not dissimilar to what we had back in 1987. At that time, there were about 15 technology funds. The one I managed at Prolific was one of the oldest continuing unit trust technology funds. That number got down to just three by the early 1990s. (Aberdeen Tech, Aegon Technology and Henderson Global Technology.)
I expect before long a lot of the funds that were launched over the past two years will disappear. That in itself could be a sign that we have got through to a new stage of technology investment.
Have you ever seen anything like the technology bubble of 1999-2000 before in your career?
Yes, in 1983 in terms of valuations there was an enormous bubble but at that time technology didn't represent more than 5% of the US equities market. This recent bubble represented 35% of the US market so it brought in far more investors and was far more powerful.
What were you able to bring to that from your longer track record that perhaps your peers weren't able?
What we have done at SG is to build a technology team under me. There is Hugh Grieves and Andy Jackson. What I hope I personally bring to the team is an understanding of some of the longer term cycles and it did help us back in the middle of last year when it was clear that semiconductors were going into a major downturn. We moved very quickly out of them. There was an enormous rally in the first half of 2000 and people began to say that this was a new growth industry and that it wasn't a cyclical industry anymore. Every downturn in the semiconductor industry is not because demand is weak but because they invest too much in capacity and they were doing exactly that in the middle half of last year.
How would you define your philosophy and approach to technology investing?
It is a mixture of top down and bottom up. The top down is looking at the major themes and cycles within technology and making sure that the portfolio is playing those themes effectively. Trends come in and out of favour, so it is important to keep the portfolio fresh and focused on what the end user is getting out of technology.
The top-down view can also be useful in identifying what is a technology stock. For instance, we don't believe that the personal computer industry today is any more a part of technology than the washing machine industry.
What is the key to technology returns going forwards?
The key thing at the moment is not the US economy. That is because what technology is doing is different from what the rest of the economy is doing even though it is a large part of the US economy.
We are looking for a return of buying from corporations and businesses. A lot of the corporate budgets have been frozen. We want to see them unlocked. Until then there will be a very weak demand environment.
When is the bottom of the technology market going to come?
The bottom could have come already. We think that it was probably on 4 April, although there I am quoting US rather than European tech stocks.
Considering the pressure of research on technology stocks now that they make up such a large part of the US market, are you able to get into ideas before managers of competing funds?
I don't now that we can get there before other people on the basis that the market is often trying to be far too far ahead of where it should be. For example, People have called the bottom of the semiconductor market without realising how bad the position is. What we have tried to do is move into areas where there haven't been such inflows of capital. Areas beset by this problem are semiconductors and telecommunications, especially optical telecommunications. These areas also have an enormous inventory problem. There is one area, however, where that doesn't happen ' software. You can't build an inventory in software.
Software in our view has the greatest potential to grow. It is almost always more significant in the final equation than hardware.
It is also probably marginally easier to secure your product once it has achieved market leadership because very few companies want to have different software systems.
Is there any role for benchmarking in a technology fund?
Benchmarking is dangerous for two reasons. First of all the index is likely to be out of date very quickly. It is very hard for somebody managing an index to keep it up to date because things change so rapidly in technology. Benchmarking would also steer us into one or two older technologies than we are currently exposed to.
Not following a benchmark also gives us the freedom to follow our best ideas. That can be seen in our software holding. We have about 33% in software and software services right now.
Are there any other positions in the portfolio that might cause investors to raise an eyebrow?
We have around 12% in medical equipment and biotechnology which some people would not call technology at all. We hold Teva Pharmaceuticals which has an interesting multiple sclerosis drug at a relatively early stage and is gaining market share. It is also the US' largest generic pharmaceutical company and they are in a very good position at the moment with a large number of drugs coming off patent. As we become more aggressive we will reduce this holding.
What is your cash position currently?
We are currently 10% in cash. It has gone up simply because we have been taking profits in Peoplesoft, our largest holding. It was larger than we like an individual holding to be. It is not a tactical cash holding, but has been very stock specific. Also we are still getting modest cash flow.
At this level we think that we are fairly close to the bottom. We built up a bit of cash in mid June ahead of the reporting season, but there weren't as many poor results as we had expected so we put that cash back to work.
How many stocks do you like to hold?
We generally hold between 80 and 85 with the top 10 funds representing around 26% to 27% of the portfolio.
Are there a great many opportunities in European technology stocks?
There have been more in the last six months because European stocks were grossly overvalued due to their scarcity. Plus there is the problem in the continental European stocks. As a group they are heavily bent towards the telecommunications sector. Some, such as Nokia, are the best in the world. Many are not.
Will volatility continue in the way we have seen recently?
I think that we will eventually see an end to the wild swings. Until October 1999, the technology market was going along at a nice fairly standard technology growth rate of about 20% to 25% a year. Then it accelerated when the US private investor piled in. That was followed naturally by several legs down.
I think the truth is that technology needs to become a bit boring to move forward. It helps that the US private investor has gone. What I would like to see is the typical broad-based professional investor hold technology at a more or less market weighting and get profits from elsewhere by moving in and out of other sectors. That could form the base from which technology can move forward.
Now that you have launched the American Growth fund, will a US smaller companies fund follow?
It is something that I really want to do in due course because I ran the American Opportunities fund at Aberdeen and thoroughly enjoyed it and had some good performance. It is really a matter of having the team to do all these things. At the moment both the technology and US large cap funds are keeping me very busy, but I have built up the team on the US side with San Mercer Nairne and Takouhi Tchertchian.
Tell me about the creation of the American Growth fund?
It is designed to do 1.5% over the S&P 500 after charges and is largely the portfolio we are running in the US institutional fund. All the technology holdings in the US funds will be held in the technology portfolio unless there is an overriding benchmark consideration in the American fund. For example, we will never have no Microsoft as it be too much of a bet against the index.
We are running a portfolio of around 60 stocks in American Growth. Because the risks are lower it does not have to have as many stocks as in the technology fund. We are trying to run a fund with modest sector and stock bets to keep the risk against the benchmark down, which is an institutional approach to investment.
How is the American Growth fund run?
There is a strong sector approach with a value and contrarian drive. I tend to take the view that sectors come in and out of favour on an 18 month to two year basis and it is better to be early into sectors than late. That can mean going into a sector at a time when there is no obvious catalyst other than valuations. This makes up the top down growth driver for the fund.
The bottom up approach is very much more growth-oriented once we have our sector views in order.
Are we seeing the start of a US recession?
I don't think that there is a risk of recession in this cycle for the simple reason that Greenspan has the capability of lowering interest rates at the time that Bush has the capability of reducing the fiscal burden. That is a rare situation. Many people see an upturn in growth in the fourth quarter, but I think it will be the first quarter of next year.
Also the consumer is holding up very well. They are reacting to the good housing market which is reacting to lower interest rates. They will also be getting their $300 tax handback from Bush over the next two to three months.
FUND MANAGER: Alan Torry
• Joined Provincial Insurance from university as a UK fund manager.
• In 1975 he became a US fund manager.
• In 1982 he set up the Prolific Technology unit trust, a fund that still exists as the Aberdeen Technology fund.
• In 1998 he joined SG Asset Management to head up US and technology investing. SG Technology fund is launched in May.
• June 2001 SG American Growth fund is launched.
To promote 'long-term investment'
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