Portfolio Manager Q&A:
Information Technology Sector
Derek Rollingson, ICON Portfolio Manager
November 20, 2017
With technology becoming ubiquitous in everyday life, what role do you see it playing in an investor’s portfolio?
The Information Technology sector comprised just over 16.5% of the S&P 1500 Index at the end of 2007. As of September 2017, the Information Technology sector grew to comprise over 22% of the Index and became the largest sector by market cap weight. Arguably, this increase is a result of the proliferation of technology in people’s day-to-day lives. Outside of daily communication and entertainment, everything from your car to your appliances incorporates some form of digital technology. With market trends like the race to develop self-driving cars and utilize big data for corporate R&D, the prolific spike in technology use probably won’t decline anytime soon. In light of these trends, an allocation to the Information Technology sector may make sense for investors focused on long-term growth.
Give us some perspective on the “F.A.N.G.” equities. Does ICON currently find any of these stocks attractive?
The “F.A.N.G.” stocks are clear examples of high-impact, tech-based companies. The F.A.N.G. acronym stands for Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google, now known as Alphabet Inc. (GOOG) – companies that represent everything from how we purchase goods to how we keep in touch with our friends and family. It is, however, important to note that only two of these companies are actually in the Information Technology sector: Facebook and Alphabet Inc. Of these two companies, Facebook looks more attractive to us based on our valuations as of 11/6/2017 and is currently held in the ICON Information Technology Fund.
While each F.A.N.G. company uses technology to gain some form of competitive advantage, one could argue every company in the S&P 1500 is utilizing technology to gain efficiencies. Both Amazon and Netflix are in the Consumer Discretionary sector, even if many think of these companies as innovative and technology-driven. The F.A.N.G. companies had a strong year in 2017, but that doesn’t mean they are part of a larger market theme. Market themes involve sector and industry groups that have similar economic drivers and are likely to perform similarly in the future. The F.A.N.G. stocks, representing different sectors and disparate industries, do not meet this criteria.
Why should an investor consider an actively managed technology fund as opposed to a passive investment, like a sector ETF?
Passive index investing, for the most part, is based on market-cap weighted indices, where the largest stocks make up a larger weighting in the index. As a result, the largest-cap stocks inevitably have a larger impact on the index’s performance. Here’s an example: if you invested at the end of 2007 based on the S&P 1500 Information Technology Index weightings, then 11.85% of your portfolio would have been in Microsoft Corp. (MSFT) and 7.14% in Apple Inc. (AAPL). From December 2007 through September 2017, Microsoft gained 167% while Apple returned 504%. Over that same time period, the overall S&P 1500 Information Technology Index returned 181%. An active investment approach attempts to identify and own stocks poised to out perform the market, rather than relying on a single factor, market size, to determine portfolio weight. We believe ICON’s active, valuation-based, industry-rotation methodology helps us find and invest in these future market leaders.
How much investment experience does ICON have in the Information Technology space? Based on your experience in the sector, how is Information Technology different now than during the Tech Bubble of the late 90s/early 2000s?
ICON has seen a lot of change in the Information Technology sector since we first began managing the Information Technology Fund in 1997. Because the S&P 1500 Information Technology sector has gained over 57% between 9/30/15 and 9/30/17, it is difficult not to reflect on the 2000 Tech bubble. However, two clear differences should be noted between these market run-ups. First, despite the recent run-up in the sector, as of September 30, 2017, Information Technology still shows a value-to-price ratio (V/P) of 1.07. According to ICON Advisers’ valuation methodology, a 1.07 V/P suggests this sector’s fair value is approximately 7% above where it is priced or trading. In contrast, the S&P 1500 Information Technology sector went into 2000 trading above our estimate of the sector’s fair value. Second, while many tech companies had yet to show positive earnings in 2000, the current environment shows strong growth in forward looking earnings. For an illustration of the strong growth in this sector, look to Facebook. At the end of September 2016, Facebook’s 2017 earnings estimates average stood at $4.13/share By September 2017, analysts estimated Facebook’s 2017 earnings to be $5.34/share, or 29% higher.
What do you foresee in the next 6-12 months in the Information Technology sector? How have you positioned ICON’s Information Technology Fund to take advantage of your current views?
As noted above, the Information Technology sector had a V/P ratio of 1.07 as of September 30, 2017. While this implies some upside for the sector overall under our methodology, we see greater potential (and a higher V/P) in specific Information Technology industries, including both the semiconductor and semiconductor equipment industries. Accordingly, as of October 1, 2017 the ICON Information Technology Fund is overweight in those two industries relative to the benchmark.
What does the ICON Information Technology Fund do differently from other technology funds?
Unlike an Information Technology ETF whose holdings are tied to a benchmark, the ICON Information Technology Fund is market cap and benchmark agnostic. We can buy our best ideas in the sector regardless of whether or not they’re held in the benchmark. Using our valuation-based, industry-rotation methodology we seek out and invest in the industries we believe will lead the overall sector. We are an actively managed, multi-cap fund, so we have the freedom to invest where we see the most value.
Past performance does not guarantee future results. Investing in securities involves inherent risks, including the risk that you can lose the value of your investment. There is no assurance that the investment process will consistently lead to successful results. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment. There are risks associated with small- and mid-cap investing such as less liquidity, limited product lines, and small market share. An actively managed investment product does not guarantee better returns or performance than any other kind of investment.
Opinions and forecasts regarding sectors, industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector.
ICON’s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates, in an effort to determine whether securities are over- or underpriced relative to ICON’s estimates of their intrinsic value. ICON’s value approach involves forward-looking statements and assumptions based on judgments and projections that are not guarantees of future results. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies.
ICON’s value-to-price ratio is a ratio of the intrinsic value, as calculated using ICON’s proprietary valuation methodology, of a broad range of domestic and international securities within ICON’s system as compared to the current market price of those securities. To analyze intrinsic value, the ICON valuation methodology relies on the integrity of publicly released financial statements.
The unmanaged Standard & Poor’s Composite 1500 (S&P 1500) Index is a broad-based capitalization-weighted index comprising 1,500 stocks of Large-cap, Mid- cap, and Small-cap U.S. companies. The Standard and Poor’s (S&P) 1500 Information Technology Index is an unmanaged capitalization-weighted index comprising companies in the Information Technology sector as determined by S&P.
As of 10/31/17, ICON owned a total of:
82,450 shares of Facebook, Inc. in the following funds and accounts: in the following funds and accounts: 1,000 in the ICON Risk-Managed Balanced Fund, 1,000 in the ICON Risk-Managed Equity Fund, 6,100 in the ICON Fund, 30,700 in the ICON Information Technology Fund, 44,650 in subadvised and separately managed accounts.
0 shares of Amazon.com, Inc.
0 shares of Netflix, Inc.
5,477 shares of Alphabet, Inc. Class C in the following funds and accounts: 201 in the ICON Risk-Managed Balanced Fund, and 5,276 in separately managed accounts.
0 shares of Microsoft, Inc.
88,310 shares of Apple, Inc.in the following funds and accounts: 1,700 in the ICON Risk-Managed Balanced Fund, 11,400 in the ICON Equity Income Fund, 36,300 in the ICON Information Technology Fund, and 36,300 in separately managed accounts.
Consider the investment objectives, risks, charges, expenses, and share classes of each ICON Fund carefully before investing. The prospectus, summary prospectus, and the statement of additional information contain this and other information about the Funds and are available by visiting www. InvestwithICON.com or calling 1-800-828-4881. Please read the prospectus, summary prospectus, and the statement of additional information carefully before investing. ICON DistributorsSM, distributor
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Investing in securities involves inherent risks, including the risk that you can lose the value of your investment. There is no assurance that the investment process will consistently lead to successful results.
Consider the investment objectives, risks, charges, expenses, and share classes of each ICON Fund carefully before investing. The prospectus, summary prospectus and the statement of additional information contain this and other information about the Funds; please read the prospectus, summary prospectus and the statement of additional information carefully before investing. ICON DistributorsSM, distributor.
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