The secret of a best performing fund that gave Apple, Google and Microsoft a miss! - The 5 Minute WrapUp by Equitymaster
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The secret of a best performing fund that gave Apple, Google and Microsoft a miss!

Mar 11, 2015

In this issue:
» Why a Fed rate hike will not spell doom for Indian stocks...
» India's 'private plane drain' syndrome
» Restructured loans provision to change post April
» ...and more!


At the outset, we are not big fans of sector specific approach to investing. Not just for stocks but that view extends to sector specific funds too! And that is the reason why we tend to ignore instances of sector specific funds outperforming benchmark indices over temporary periods of boom. However, we recently came across this article in Business Insider that talks about a Fidelity Tech Fund. The reason we are talking about this fund is because it is best performing tech fund since the peak of dotcom boom in March 2000. As we know an entire generation of tech stocks and tech funds got wiped out after the tech bubble burst. What is unique about this fund is that its returns are more than double that of any other technology fund. The US$ 941 million Fidelity Select IT Services fund has returned an average of 10.9% per annum since March 10, 2000. But what is truly shocking is that the fund achieved this feat even while giving stocks like Apple, Google and Microsoft a miss!

Now, as per the chief fund manager, the fund invests in a wholly different subset of technology than most investors are familiar with. The fund invests at least 80% of its assets in firms that provide day-to-day services such as payment processing and web hosting. Thus it is cautious about IT companies betting high on innovation and looking for spurts of very high growth rate. The fund has largely kept the same investment approach since its inception.

Instead of Apple, Google, Microsoft and other big household names of the Nasdaq, the fund owns large positions in companies few investors have heard of. One of these is Vantiv Inc, a payments processing company. It also holds stakes in companies like IBM and data analytics company Cognizant Technology. Given that its top holdings are Visa Inc and Mastercard, the company has certainly bet big on the payments space, which has paid off very well.

So one thing that is very clear about the investment philosophy of this fund is the predictability and visibility in revenue growth and profits. And this is what makes it very similar to Buffett's style of investing! In fact you would recall that the only reason why Buffett shed his inhibitions about betting on tech stocks while investing in IBM is the revenue growth visibility.

Now, according to us even Google and Microsoft have over the years developed impregnable moats. And therefore we wonder why the fund did not want to consider these. Plus, unlike in the past, when payment processing companies enjoyed oligopoly status, the intensifying competition in the space may hurt profitability.

So for investors, the key takeaway from the secret and success of this fund is that new age and innovative companies and sectors should not be ignored. However, it is only wise to invest in companies that are fundamentally solid and offer sufficient visibility over a prolonged period. So before you jump on to the next big IPO or possible issues of e-commerce companies, do keep this in mind.

What are the factors that you keep in mind while investing in new age sectors / companies? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
'Brain drain' as described on Wikipedia is referred to as "the emigration of intelligent, well-educated individuals to somewhere for better pay or conditions, causing the place they came from to lose those skilled people, or "brains"." This is a phenomenon that India has been suffering from for a while now.

However, we came across another term known as the 'private plane drain' which refers to the very rich citizens (those who could possibly afford private planes) of the country leaving to settle elsewhere. And as you may have guessed it, India ranks very high on this list - second to be specific, as per the latest report released by Knight Frank.

It is believed that about 43,000 Indian millionaires left the country to settle elsewhere over the past decade. India ranked second after China, which saw about 76,200 people leave the country during the same period.

India ranks 2nd on the private plane drain syndrome

After these two emerging market nations - which have the world's largest populations - countries such as France, Italy and Russia followed suit in the private plane drain ranking.

So where have the rich been taking off to? Well... it turns out that the favoured destinations are the UK, Singapore, the US and Australia.

Whether it is more of business opportunities or tax benefits that have led people to flock aboard is not known. However, the data points above have been collected over a ten year period. Given that the centre of economic gravity has moved away from the Western world to relatively fast growing emerging markets such as India it would be interesting to see whether this trend has made any changes in recent times.

The biggest fear in global markets currently is the possible spike in US Fed rates. For this would not just such up some amount of global liquidity but also lead to a possible correction in stock markets. The conventional wisdom is that if the Fed raises short-term interest rates, then long-term interest rates would follow them higher. However, as pointed out recently by Stansberry Research, historical data shows that just because the Fed raises short-term interest rates, it does not mean that long-term interest rates should follow suit! So, the last time the Federal Reserve raised short-term interest rates (in 2006), long-term interest rates stayed roughly the same, between 4% and 5%.

Now when it comes to Indian stock markets, which is dominated by FIIs, the fear of Fed rate hike is certainly valid. For even if for a temporary period, the may be a huge flight of FII money back to home country. As explained unless and until the long term interest rates catch up with the returns offered by stocks, the investors are unlikely to stay put in US bank deposits. Therefore the flight to safety may be just temporary. And that is why we believe that while a correction in Indian stocks' valuations is imminent, the long term story remains intact.

Picture this. A bank gives out a loan to two customers. Both go bad. For the first, the bank would be required to make a provision for this "bad asset". But the other goes in for restructuring, thereby being allowed to extend its credit term. As for the bank, it is allowed to show a lower provisioning as compared to what it had to do for the other customer. And in the process show higher earnings. A win-win situation for both...

However, all this is about to change next month onwards. As reported by the Economic Times, banks will have to set aside 15% of the restricted loan as provision as compared to 5% currently.

The plague of restructured loan in India is one that is has been worsening over time. As reported by the business daily, between March 2002 and 2013, banks' loan book grew by 779% while the portfolio of restructured loans grew by 3,087%.

It was only recently we had covered a story as to how the stressed assets continue to rise in the Indian banking system. It is believed that about a fourth of the restructured loans have turned bad, and the trend is expected to continue. What will all this mean for banks? Well... sharp volatility in earnings trend is expected. While this may be a factor that would be worrying banks, it seems that investors are not sharing the same sentiments given how banking index has been making new highs.

In the meanwhile, the Indian markets were quite choppy today with the Sensex hovering around the dotted line for most part of the day. At the time of writing however, the index was up by about 0.4% or 110 points; Banking and telecom stocks were amongst the most preferred stocks today. Asian stocks closed the day on a weak note today, while Europe was largely trading firm.

 Today's investing mantra
"It does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee and Devanshu Sampat.

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1 Responses to "The secret of a best performing fund that gave Apple, Google and Microsoft a miss!"


Mar 12, 2015

By the definition of the fund, it is an Information Technology SERVICES fund. This precludes it from owning non SERVICES tech companies. Apple, Google and Microsoft are essentially non-SERVICE companies. They are pure tech companies. Small components of cloud services from Google and Microsoft don't make them service companies. The Select Computers fund owns Apple - and its performance trails IT Services, as does Select Technology fund. Quite contrary to your assertion isn't it?

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