While the technology sector has been used to drawing attention thanks to the performance of its poster-boy FAANGs (Facebook, Apple, Amazon, Netflix & Alphabet’s Google) stocks over the past few years, recent scrutiny has been less favourable.
Talk of greater regulation and intervention from tax authorities in the sector has shaken investor confidence but for James Thomson, manager of the Rathbone Global Opportunities Fund - a Select 50 fund, not only are these fears overblown, they are perhaps the wrong fears to have.
For Thomson, a more likely source of backlash in the sector will be from the product users themselves. He explains, “Regulation and tax are risks in the background but the biggest one is to work out if the customer propositions of these companies are sustainable. We really need to stay laser-focused on identifying where people are unhappy with the quality of service or are not getting what they signed up for.”
However, despite the recent share price pullback among the sector’s big names, the manager is happy to keep 25% of the fund exposed to tech companies, making clear that all were not born equal.
Thomson explains: “Technology is a broad church. We have semiconductor companies, chip businesses, software companies, hardware and the internet, for example. The drivers of those businesses are different so you can’t lump them into one area and think that the whole sector will be under pressure.
“You also have to remember that tech is mission critical for some businesses and this perhaps is what has changed over the last decade. Being at the leading edge of new technology and staying relevant for the next wave of customers really is a top priority for every corporate CEO.”
This sustainability in customer proposition that Thomson looks for in the sector is no accident - it is very much a part of his rigorous, considered approach to identifying good quality companies for the fund he has run for almost 15 years.
A recipe for success
Other ingredients in the manager’s ‘secret sauce’ include easy to understand businesses, companies growing quickly but sustainably, and prudent management teams with great vision for the future. He seeks out companies who are shaking up their industry but with positive long-term prospects rather than short-term fads.
Such a focus on high quality businesses often means paying a premium for their shares, which Thomson is ready to do. He explains, “When you invest in a growth fund that’s probably one of the realities; growth rarely comes cheap. So, we have to balance the valuation of the business with the growth prospects. We don’t want to throw money into just anything, we have to believe the valuation is reasonable for the growth prospects but we are willing to pay up if we’re getting good quality sustainable growth.”
These strict criteria mean Thomson tends to end up filtering out entire sectors and countries. He says: “I don’t have any direct exposure to emerging markets, and very little exposure to Japan and South East Asia. I prefer the consumer and technology sectors over over low growth or no growth areas like telecoms, utilities or mining because I don’t like businesses whose main driver of success is outside of their control.”
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.