The £65.4m Rathbone Technology Fund was launched 11 months ago and is run by Hugh Priestley. Rathbon...
The £65.4m Rathbone Technology Fund was launched 11 months ago and is run by Hugh Priestley. Rathbones (formerly Laurence Keen) launched the fund in response to strong client demand but Priestly believes that his portfolio varies considerably from most technology funds as it aims for lower-than-average risk within a high risk sector.
The fund consists of a diversified portfolio, a broad geographical spread and focuses on mid and small caps rather than the traditional giants of technology. Over three months, it is ranked 29 out of 36 funds in the Global Specialist sector. Priestly talks to Jenne Mannion about the fund's investments and his background in fund management.
Why did Rathbones launch the technology fund?
The technology fund was launched in May 1999, not because we thought we were brilliant at technology but because our clients wanted to have more of their money in the technology sector. However, we were not sure about investing in individual stocks.
Because of our experience in technology through the Smaller Companies Fund and in Rathbone Esk, a semi-private unit trust which invests in global growth companies, we believed we had the in-house expertise to launch such a fund.
What are the main differences between your technology fund and those of your peer group?
At a stock level we are more widely spread than our peers with 120 holdings and we are also more geographically spread with less money invested in the US relative to the competition. Our fund is also skewed more toward small and mid cap stocks rather than large caps, which tends to be the case with most technology portfolios.
Why do you have such a diverse portfolio of holdings and what is the biggest single allocation toward one stock?
The fund started with 60 but has since built up to 120, in order to reduce risk.
We try not to exceed 120 holdings, so if we are looking at something new, then we will look to see what should be sold.
On average, a single holding consists of less than 1% of the fund; even our biggest holding is only 2.2%. This portfolio is a lot less concentrated than other technology funds where holdings are in the 60 to 80 range.
What advantage is there to a more georgraphically spread protfolio?
Our peers generally have around 55% to 65% of their portfolio in the US. The Rathbone Technology Fund has 45% in the US, 20% in the UK, 10% in Japan, 12% in Europe and 6% in the Far East.
In reaching this position we look for stocks first. It is logical to have most of the investment in the US, based on the number of good companies there. However, this market has already rallied strongly and we expect there are much stronger catch-up opportunities elsewhere, particularly in Japan.
While Nasdaq has performed well, other exciting areas are the Far East and the Near East - for example, India, where we do not currently have any investment but will be watching closely.
How much of the fund is invested in small and mid cap holdings?
The fund is skewed towards medium companies rather than large. I would guess that around 15% to 20% is invested in large caps, 10% in small caps and 65% to 70% in mid caps.
For example, we have 29 holdings in the UK, of which only nine are in the FTSE 100, and of 51 holdings in the US, only nine are listed on the New York Stock Exchange, while the remainder are Nasdaq listed.
Anyone starting a technology fund five years ago would not have focused on IBM so much as Cisco and Oracle and companies of that nature. Those companies are now large caps. We are looking to add value by identifying the next generation of Ciscos or Oracles.
This greater emphasis on smaller and medium-sized companies means we outperform in a rising market but are likely to underperform on the way down, hence the importance of a wide spread of holdings and successful stock selection.
How diverse is the sector allocation within the portfolio?
We have quite a spread among industries. Around 30% is invested in the internet, predominantly business-to-business and problem-solving companies.
A further 20% is invested in communications, predominantly mobile telephony, and 15% is invested in software. Electronics accounts for 13% and IT services for 7%, while 5% is invested in biotech companies and 5% in hardware.
With internet companies we are very selective. We did not go for Lastminute.com and would not have got a reasonable allocation in it anyway.
We are cautious on a number of different areas. For example, we have avoided investing in online stockbrokers because we feel margins are too small and we have avoided online auction firms because of strong competition. Instead we are focusing on the business-to-business area.
How do you conduct your company research?
Rathbones has a small team so we rely mainly on a concentrated number of outside brokers. We do visit the companies in which we invest but on the whole wait for them to come to London.
Roger Whiteoak, who runs Smaller Companies and Carl Stick, who runs Rathbone Esk, help especially with UK ideas. There is a degree of commonality between stocks in the technology fund and with stocks in the Smaller Companies and Esk portfolios.
Do you have any disciplines on the price you will pay for stocks?
I have always used the basis that if you are confident in a stock, to pay up and get it rather than miss it and see the price run away from you. We do not have particular price disciplines, the main discipline is to make sure an individual holding does not get over 2.5%.
By and large, our methodology is to run with the winners and cut the losers but equally, because of our risk-averse style, we do not want to have too much of the fund invested in one stock. This has not been a problem, because when the market was running we had new money coming into the portfolio
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