Fund Overview
This Fund seeks to achieve long-term capital appreciation primarily through investments in common stocks and related securities of US and non-US technology-related companies. We define technology-related companies as those companies that suggest rapid and sustainable growth potential from the development, advancement or use of technology to improve their business processes and applications. The Fund is managed by Ian Warmerdam. Stuart O'Gorman provides advice on the Fund to Mr. Warmerdam. The team evaluates companies and their potential investment returns based on theme, sector and stock specific characteristics that are driven by bottom up factors rather than on geographic regions.
Quarterly Commentary
Volatility for all risk assets remained high in the third quarter, driven by news flow from the Financials sector. Credit markets continue to be very tight, with inter-bank lending rates at historically high levels and the Treasury Bill (T-Bill) rate at one point dropping close to zero, reflecting banks' unwillingness to lend to each other. Authorities have sought to alleviate the credit crisis through liquidity injections, restrictions on short-selling and most recently, and most significantly, the US Treasury's proposed bail-out programme to purchase toxic assets from the nation's failing financial institutions.
Technology stocks (MSCI AC World IT) have outperformed the broad equity market (MSCI World) over the quarter. Sector bellwethers (and Fund holdings) such as IBM, Hewlett Packard, and Cisco produced good earnings between mid-July and late August allowing the sector to lead the equity market rally during this phase. September was a very poor month for global equities including technology stocks where specific concerns on the demand outlook arose.
Fund performance review
During the quarter our semiconductor stock holdings had a negative effect on performance with ON Semiconductor and Marvell Technology performing particularly poorly as personal computer demand began to weaken. Japanese console manufacturer Nintendo also disappointed on concerns over the impact of the slowing global economy on consumer demand. We believe that Nintendo is a strong secular growth story, thanks to its blockbuster Wii and DS consoles. The company continues to release innovative peripherals and software titles. We expect demand for the company's products to continue to be strong and have increased our position.
Our positions in Hewlett Packard and IBM continued to perform well from a relative perspective. In the software sector, strong contributions came from security software stocks McAfee and Check Point thanks to the defensive nature of their subscription revenues. UK software name Autonomy performed particularly well during the third quarter. The company is in the rather unusual position having potential to benefit from the fall-out of the credit crunch as its unstructured search software helps financial services firms adhere to increasingly stringent regulations.
Investments
Given the current uncertain macroeconomic environment, we are currently employing a 'barbell' strategy in the portfolio. On one side, we have sought to build up positions in a number of relatively defensive companies, such as Oracle, IBM and Automatic Data Processing which have visible, recurring revenue streams and as a result are comparatively well protected from a global slowdown. On the other side, we have invested in higher growth stocks, with strong secular growth stories. The current market environment has presented opportunities to buy such companies at what we deem to be attractive valuations. Examples include Chinese internet company Tencent and entertainment software name Activision. We also increased exposure to VistaPrint, the online supplier of customized printed products, as their Q2 results (7/31/08) displayed excellent sales growth and good margin trends.
Outlook
Over the last few months we have been consistently cautious on the prospects for technology stocks, based on the view that slowing economic growth in the US would extend to Europe and Asia. In addition, the recent strength in the US dollar creates a significant headwind for US technology companies, many of which have high non-US sales exposure. We remain cautious, as we believe that global growth prospects continue to weaken and that this will result in weaker spending by both consumers and enterprises on technology products. This could make current consensus earnings expectations for 2009 for technology companies subject to further downward revisions.