2003 was a very strong year for technology stocks, after the cost-cutting and strategy changes of the previous year
The TMT Global sector has undergone an explosively volatile period. Those funds that managed to do well focused on large, blue chip, stable companies.
The Close Finsbury Technology Fund came in second over five years. The fund is being sub-advised by technology specialist portfolio managers Reabourne Technology Investment Management.
Jeremy Gleeson, senior portfolio manager at Close Finsbury, says: "We look for companies that have good control over financials, as technology is an area that constantly needs capital invested in it to develop new research ideas."
blue chip companies
According to Gleeson, the portfolio performed well because of its long-term positions in companies such as Cisco and Nortel. The fund was positioned in these stocks because they were blue chip companies and had good management teams. This decision paid off for the fund, as the stocks hardest hit when the TMT bubble burst were the dot.coms.
The Close Finsbury Technology Fund had improved performance in the last half of 2000, then, after the 11 September 2001, the portfolio did drop back but bounced back in the fourth quarter. However, the portfolio did suffer through most of 2002.
Gleeson says: "The global TMT sector as a whole was impacted by a number of external factors such as fears of further terrorist attacks, accounting scandals such as Enron and lack of confidence by US investors. During this period technology companies were laying off staff to help cut costs."
By the end of 2002 companies were starting to meet their expectations, although during the first part of 2003 the TMT sector was hit again by the threat of Sars and the Iraq war. Once investors realised these were only going to be short-term events, the overall sector started to pick up again. This was reflected in the Close Finsbury Technology Fund.
At the end of 2002, the Close Finsbury Technology Fund had a change of strategy and started to invest more in the European market.
The previous years the main focus of the portfolio was in the US as Gleeson felt the European market suffered from liquidity problems. However, a lot of European companies had been able to raise cash and had good cash flow. For example, Gleeson began investing in UK-based component provider for handsets, Filtronic. For the most part of 2003, the portfolio performed very well.
The Henderson HF GI Technology portfolio was ranked fifth in the TMT Global sector over the past five years. To keep on top of the market, the portfolio has undergone strategy changes.
The portfolio performed well in 1999 and 2000 and invested in small- to mid-cap companies such as I2 Technologies. But, as the fund started to become larger, it became more difficult to run as a small cap. Performance of the portfolio was being hurt because of this.
Stuart O"Gorman, director of technology at Henderson, says: "The fund was originally small- to mid-cap since its launch. However, following the bursting of the technology bubble, performance of the fund went down significantly and we thought it was necessary to change the portfolio strategy."
In addition, the fund had too much invested in Europe between 2000-2001 and liquidity in these companies dried up. Investors in Europe were not prepared for a volatile ride and pulled out the market. The fund began to restructure into a more generalist portfolio from September 2001.
Throughout 2002 the weighting in Europe went down and the main weightings in the portfolio was in the US and Asia. The portfolio benefited from positions in Samsung in Asia, and also the semiconductor industry held up in the US. The portfolio began to improve significantly in late 2002.
In 2003, O"Gorman decided to get back into Europe and invested in companies such as network telecommunications equipment provider Adva Optical. Furthermore, in Asia O"Gorman invested in companies involved in component making for handsets and digital cameras, as there was a rally in this area.
However, the portfolio missed the rally in semiconductors and communications and sold out of this area too early. Although there was some improvement in the second quarter of 2003, it fell back in the previous quarters.
The Clariden Technology Equity Fund has produced strong relative performance over the last five years. The fund is managed by Wellington Management Company, an investment firm headquartered in Boston. Wellington Management places a lot of importance on fundamental investment research and the Clariden Technology Equity Fund directly benefits from that focus.
Six research analysts manage the fund, each responsible for a subset of the sector at the global level. The diversified approach has helped the portfolio weather downturns in the past. In spite of the diversification at the sector level, this is a fairly concentrated portfolio of 40-60 stocks built purely using a bottom-up stock selection approach.
The diversified approach, which has been a constant strategy for the fund, helped during the aftermath of the TMT bubble.
As the fund was not heavily invested in internet stocks but rather held large, stable companies such as Microsoft - a long-time favourite for the fund - it lost substantially less than the overall technology market in 2000.
Last year was a very strong year for technology stocks and the Clariden Technology Equity Fund outperformed the MSCI Technology World index. It benefited fully from the strong rebound in semiconductors as the investment team had overweighted this industry since March.
The strength of the semiconductor industry last year was mainly due to the robust consumer and strong demand for a wide range of consumer electronic devices. Business spending in IT, which has so far been lagging, is finally coming back and the fund is well positioned to benefit from this positive trend.
One fund that was in the bottom five was the CA Funds Global Multimedia. Manuel Chaves de Oliveira has been managing the portfolio since July 2002.
Since then the portfolio has undergone a period of restructuring, before de Oliveira took over the fund it had a technology bias focused towards the US. He reduced these positions and made the fund more internationally balanced, and larger positions were made in Europe and Asia as well as in media and telecoms.
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