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Asset allocation: GAM stands firm as tech ‘comes back into vogue’

The technology sector offers promising long-term opportunities for investors despite the recent sell-off in tech stocks. That is the view of James McDaid, investment manager at GAM’s discretionary fund management service.

McDaid, who joined GAM from Quilter Cheviot in May 2012 to launch the DFM range, is running technology as a theme through his five model portfolios.

The GAM MPS Balanced port-folio has exposure to the sector through Loomis Sayles US Equity Leaders as well as the GAM Star Technology fund and the GAM Star North of South fund, which is managed by North of South Capital.

This year has so far been a challenging one for the tech sector, McDaid admits, following a “blanket sell-off” of biotech and internet stocks in April as investors rotated from growth to value.

However, McDaid stuck with his position in the sector during this period and even took the opportunity to add some exposure, arguing the current reporting season will see the sector “come back into vogue” as investors refocus on the strong fundamentals of some tech companies.

“This year has been tough for tech funds and stocks to say the least because of the rotation that has happened from growth to value and there has been this blanket sell-off in tech,” he says.

“But we are entering reporting season, which has got off to a really good start with Intel and we hope that, as more and more of the tech companies report, the fundamentals of what they’re doing will shine through and the sector should come back into vogue.

“Just look at Facebook. It fell sharply in May but has managed to climb back with a pretty substantial uplift in the last two months and is currently seeing 70 per cent growth in revenues. This is not to be sniffed at.”

The global tech space is a vast one, and the themes and sub-sectors McDaid currently favours include robotics, cloud computing and storage, and the “internet of things”. 

However, he warns of a possible bubble forming in other areas of the market. He points to Tesla Motors, a manufacturer at the forefront of premium electric vehicles, which has seen its multiples reach “jaw-dropping” levels. 

Meanwhile, the IPO market is also showing signs of becoming overheated.

McDaid says: “This is why it is important to target managers with the experience who have been there to see previous bubbles and therefore have a steady hand and know where there is value and where there is a bubble.”

The DFM range’s “substantial” underweight to fixed interest in favour of an overweight to absolute return funds was first established when the DFM service was launched  and is a theme that still runs through the portfolio today, according to McDaid.

“Our underweight to fixed income since launch is due simply to overvaluation specifically in US treasuries and gilts,” he says. “It has been a surprise this year that government bond yields have fallen, but even at the current levels they’re at, we still continue to see limited upside.

“On the flip side of that we have been overweight absolute return. We needed to find more esoteric strategies for fixed interest and we found more value there. We see absolute return basically as like a rudder on a ship, so it should steady a portfolio and bring down volatility, and so far it has done that well, I think.”

However, one particular area of fixed income McDaid has recently been drawn to is the Mexican bond market. This follows reforms initiated by Mexico’s new prime minister, Enrique Pena Nieto.

“Nieto has really shaken Mexico up for the better, and that can only play out to the advantage of Mexican bonds and the Mexican currency,”  he says.

“Mexico also borders on to the US so it will benefit from any uplift in the US economy as its biggest trading partner.”

The theme of Mexican bonds is played out in the portfolio through the £111m Standard Life Investments Emerging Market Debt and GAM Star Local EM rates and FX funds.

Within absolute return, the portfolio currently features strategies including Swiss & Global JB Multinational Absolute Return Bond, the Odey Odyssey fund, and equity absolute return funds Alken Absolute Return Europe and £268.2m RWC US Absolute Alpha

The portfolio also has exposure to the £3.7bn Ignis Absolute Government Bond fund but McDaid says the managers own “very little if any treasuries or gilts”.

Careful selection of absolute return managers is a priority for McDaid given the complexity of some of the strategies available.

“You do need to be quite choosy because not all of the absolute return strategies work all of the time,” he says. “A lot of them are extremely complex products and you need to know them inside out.

“All the managers we have in the portfolio are extremely experienced long/short managers, some of whom are veterans. There is nothing hidden in the products that should go wrong and we are confident the managers know exactly what they’re doing.

“They are also really good stockpickers and know only too well when stocks are overvalued.”

Asset2
Asset2

About GAM

The GAM discretionary fund management service was launched in March 2012 by former Quilter Cheviot colleagues James McDaid and Charles Hepworth. Investment manager McDaid says the investment process looks to target more ‘niche’ and lesser-known managers such as the Couplan Cardiff CC Japan Alpha fund. GAM also seeks out managers who do not have a Ucits vehicle and provides the infrastructure to launch their funds under the GAM Star brand.

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