Wed, Mar 11, 2015 - Page 15 News List

ANALYSIS: Fidelity tech fund trounces rivals without Apple Inc

Reuters, NEW YORK

The best performing technology fund since the peak of the dotcom boom did it all without owning Apple Inc, whose soaring stock price has pushed the NASDAQ near a new record high.

The US$941 million Fidelity Select IT Services fund has returned an average of 10.9 percent a year since March 10, 2000, when the NASDAQ Composite hit its record high, according to Lipper data. That is more than double any other technology fund tracked by Lipper, and trounces the 0.1 percent a year generated over the same period by the PowerShares QQQ ETF , the most popular exchange-traded fund tracking the NASDAQ.

“This is a fund that does not have Google, does not have Microsoft. This is a wholly different subset of technology than most investors are familiar with,” SP Capital IQ mutual fund research director Todd Rosenbluth said.

The fund invests at least 80 percent of its assets in firms that provide day-to-day services, such as payment processing and Web-hosting, rather than looking for those with zooming growth, said Kyle Weaver, 38, who has been lead portfolio manager of the fund since 2009.

The fund has largely kept the same investment approach since its inception, he added.

“We are looking for companies that have a high degree of recurring revenue that are not very glamorous and operate in the background of our lives instead of front and center,” he said.

Instead of Apple and other big household names of the NASDAQ, Weaver owns large positions in companies that few lay investors have heard of, such as Vantiv Inc, a payments processing company, and data analytics company Cognizant Technology Solutions Corp.

Still, the size of the bets the fund takes on companies may give investors pause, Rosenbluth said.

“This is a very concentrated fund and while it has companies like IBM that people have heard of, it has a mixture of small and mid-cap companies that will fly below the radar for most investors,” he said.

The fund charges US$0.83 per US$100 invested, a level that Morningstar considers below average.

Its top holdings are Visa Inc and Mastercard, both of which are up more than 220 percent over the past five years. Together, the companies make up about 26 percent of the fund’s assets.

Neither is the top holding in any other technology fund, according to Morningstar data.

These names investors do not always link with technology have “been on a tear over the past three years,” Lipper head of Americas Research Jeff Tjornehoj said.

Outside of its bets on Visa and Mastercard, the fund has profited more from its positions in medium and small companies than from the large companies it holds.

IBM, for instance, is up just 27 percent since the fund purchased it in early 2010, compared with a 130 percent rally in the broad NASDAQ Composite over the same time.

Weaver splits his portfolio about evenly between large and small companies. He recently added to positions in Vantiv Inc , a US$7 billion market cap payment processing company, as well as Alliance Data Systems Corp, a US$17 billion market cap company that operates customer loyalty programs and branded credit cards.

These companies that operate in the background tend to have more profitable niches and trade at less expensive valuations than average, Weaver said.

“Apple is the biggest stock in the NASDAQ and everyone knows why, but I bet very few people know if ADP or Paychex cut their last paycheck,” Weaver said.

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