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By: Simon Danaher

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September 17th, 2015

Is this the fund you need to meet your investment goals?

Investment

Making the digital revolution a part of your future

Investment GoalsThe biggest worry for thousands of investors like you, is that they are not being aggressive enough when it comes to their money. And, if they aren’t worried, they should be. The majority of people do not save nearly enough when it comes to their pension and, of those that do, the majority do not take enough risk.

We don’t often recommend single-sector funds as they carry more risk than the type of low cost, broad market funds we generally endorse. However, if you are just beginning your investment journey and have already built a diversified portfolio, this could be a fund to add to your more aggressive equity section.

Star performer

The JP Morgan US Technology Fund has been one of the star performers of our White List of recommended funds, chalking up returns of more than 90% over the past five years and around 40% during the past three. 

It is also extremely attractive to those who know about technology – buying into a sector you understand can be exciting and a good way to begin learning a bit more about what can make a fund a success. 

Here, we talk to the fund’s co-portfolio manager Greg Tuorto about what is driving these spectacular returns and where the next phase of growth will come from. 

Greg, what is it that attracted you to technology as an investment sector to begin with, and what keeps you interested? 

The long story short was, when I started in this business right out of school – I was someone who volunteered for everything. In 1993-1994 I was the business unit rep when we added computers and email to all traders on my equity trading desk – so I had to explain to the folks who were building it and installing it exactly what we did and how we would use these machines, for things other than stock quotes.  The following year, I accepted a job in our buy side equity research – and as I was the only person who actually could describe what IBM or Cisco actually did, they steered me into tech.   

Over the years, I have used this organic spurt to further my endless intellectual curiosity on the space to embrace all sides of the sector, including users, spenders, vendors and the endless process of creative destruction.  

Being a growth investor during this 20+ year period has helped, as we have gotten to focus on opportunities and disruption, not legacy and market share. I truly believe that technology is the most innovation and transformational sector in the market.  Technology innovations have transformed people’s living and spending behaviour. Just consider how Apple repeatedly produces products that customer’s line up to buy 24-hours before the official launch despite tough economic times. It’s not just individual companies, but also the dynamic trends in the sector that get me excited. 

Can you explain what the aim of the fund is and where it invests? 

The investment objective of the fund is to provide long-term capital growth by investing primarily in technology, media and telecommunications related US companies. 

Both Greg Luttrell, my co-portfolio manager on this fund, as well as myself, have conviction that a growth-oriented approach to investing in technology should be rewarded over time.  From the bottom-up, we look for companies that are going after big markets, have disruptive business models, unique and sustainable competitive advantages, and proven management teams. We firmly believe that transformational technology is still in the early stages and is creating tremendous growth potential. We want to invest in companies that are aligned with the mega trends in technology, regardless of sector or capitalization.  

At the moment we are witnessing major secular growth trends within areas such as mobility, cloud, security and communications equipment which are leading to great investment opportunities.  Therefore a significant portion of the portfolio is invested in these areas.

Additionally, we believe that growth in the US technology sector will continue to stem from mid- and small- cap companies as well as large cap companies. Therefore we invest across the market cap spectrum. 

The fund is clearly a specialist fund, what sort of investors would you suggest it would be suitable for and how would you use it within a diversified investment portfolio? 

Yes, I agree. The fund is specialised as I would expect with any sector fund.   

The fund could be suitable for investors who want exposure to the technology segment of the US market.  

Additionally, investors in the search for “cheap beta,” or market exposure, through indexes and exchange-traded funds (ETFs), are increasingly complementing their passive strategies with more specialised approaches in a drive to add alpha while still being mindful of risk. The US Technology Fund seems to fit into this specialised framework as well for a lot of investors. 

Since the last tech bubble burst in 2000, the sector has enjoyed a fairly sustained bull run, only really dipping in line with other stocks during the 2007/2008 Global Financial Crisis. What have been the main driving factors behind this upwards momentum? 

From my perspective there have been a number of drivers to the success of the technology sector but the main one is clearly the deliverance of new and innovative devices/applications that was promised during the boom period in the late 1990’s. These innovations not only impacted enterprise spending but also consumer spending as well.  This has resulted in the technology sector delivering very strong growth rates over the period on very attractive valuations. 

One of the key drivers of the technology sector has historically been corporate IT spending.  For most of the last decade however, technology spending has been severely restrained. During this period of austerity, the mantra of the Fortune 500 Chief Information Officer was ‘do more with less’.  That favoured a move to cloud computing dynamics and an increased spend on “Data Center Re-architecture”. 

The companies in this segment are usually high growth entities in the next generation storage, networking or software as a service (SAAS) area. Lower capital outlays on these types of projects have a much bigger impact than in years past when multi-million dollar deals only led to multi-year rollouts and very low return on investment. For example, Cloud computing enables their workforces to drive sales growth, develop new products and services and improve the efficiency of the corporation. 

When the purse strings loosened in 2006-2007 and spending increased, the biggest spenders came from a broad range of industries including manufacturing, healthcare, media and pharmaceutical companies. These companies embraced the new tools and modalities that are being made available. 

For consumers, it’s been the increasing demand for mobility that has been the standout feature of the technology wave of the last decade. We have gone from mobile phones to smart phones, PCs to tablets.  The advanced technologies in many new smartphone models and tablets have led consumers to question the need to purchase PCs or Notebooks. 

Apple, the runaway leader in the smartphone and tablet market, sold more than 169m iPhones and 68m iPads in 2014.  This is unlike any other phenomenon we have seen in the technology space. These dynamics have had a major impact on media consumption, social networking, e-commerce, mobile payments and collaboration.  The mobility trend is proliferating at a faster pace than most can comprehend. There are new models that pop up daily to take advantage of rich feature sets and multimedia capabilities. 

Returns on the fund are consistently high over three, five and 10 years. What have been the biggest contributors to these returns? 

The portfolio is constructed from the bottom-up and we expect the majority of our relative performance to be driven by stock selection. Over the last five years, it is indeed strong stock selection that has benefited the fund’s performance the most. Stock selection was strong across a host of industries including data-communications & telecom, software and semiconductors.  

So far this year has been a good period for the majority of our holdings, as they continue to put up strong growth rates and good earnings, broadly speaking. Areas of strength include internet, security, software, and communication equipment. Areas of weakness include semiconductors and hardware. 

What changes have you made to the portfolio recently? Are there any particular stocks you are looking to purchase or positions you are adding to? Have you reduced any sector weightings or stock positions lately? 

Our sector allocations are driven by our bottom up stock selection process. Overall, the portfolio continues to be overweight in software, internet and data-com/telecom. While underweight exposures persist in the semiconductor, IT services and service providers. 

In terms of recent changes, we reduced slightly our exposure to software.  We continue to have conviction in the software space, which remains our largest allocation and largest overweight. However, we pared back some of our positions to manage the size of our exposure.  We added to our semiconductors and internet exposures. We see the conditions for growth in both sectors being favourable. 

How has recent volatility effected the portfolio? How have you used the volatility? Has it been beneficial to the fund? 

We firmly believe that volatility creates opportunities and we added two new names to the portfolio recently, whose valuations were too rich for us before the sell-off.  The fundamentals for these companies are very strong and the sharp sell-off in their share price was unwarranted in our view. 

Overall, we think the backdrop is very favourable for growth and for tech in 2015 and, besides the themes mentioned, we have many other areas and ideas that we are keenly interested in like semi cap, industrialization and big data.  

It’s been a while since we had a backlog of potential new ideas as full as we have today, where companies need to earn their way to stay in a concentrated portfolio.   We look forward to a very active year in terms of consolidation and new companies coming public to balance out a core group of exciting names. 

With the technology sector having had such a strong run for some time, are you concerned it may start to slip back? If so, what are you/can you do to make the portfolio more defensive? 

We believe that the tailwinds behind the technology sector are building and also that valuations in the technology sector remain attractive, particularly for companies with higher growth rates. 

Over the past 40 years, information technology has gone through waves of innovation, with each period building off the advancements of the previous one. In the 1980s, IBM dominated the mainframe computer wave. In the 1990s, Microsoft promised to put a computer in every home, giving rise to the personal computer (PC) wave. The prevalence of PCs subsequently provided the infrastructure for the third wave, the Internet, which spurred companies to develop websites and e-commerce businesses during the early 2000s.  

Going forward, new technologies are likely to evolve further into the “Internet of things” as an unprecedented number of devices connect to the Internet. That will, in turn, create new opportunities for the companies that have sustainable competitive advantages in those markets. We believe our experience and expertise in the technology sector means we are well positioned to identify these areas of growth before they are fully appreciated by the wider market. 

Overall, we believe the technology sector is entering a phase similar to the mid-1990s where innovation and aggressive strategies will be rewarded. We are confident in our investments today and are excited by the strong pipeline of opportunities still to come. 

Greg TuortoGreg Tuorto, managing director, is co-manager of the JPMorgan Funds – US Technology Fund and technology analyst in the US Equity Group. Greg was named co-portfolio manager on the Fund in November 2009. Before joining the firm in 2008, he was a senior analyst covering technology for the Small and Mid Cap Group at Jennison Associates. Prior to that, he was a technology analyst and small cap portfolio manager at The Guardian Park Avenue Funds. Greg was also a technology analyst, focused on small and mid cap equities at the Dreyfus Corporation and Tocqueville Asset Management. He holds a BA from Catholic University and an MBA from Monmouth University. 

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About Simon Danaher

Simon Danaher previously worked for AES International, in marketing and communications.