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Deep Dive: This tech fund manager has stellar returns — and says the sector’s valuations are fine

June 21, 2017
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In interviews with dozens of money managers, a consistent theme has been that during this bull market is it has been very difficult for any active strategy to beat a broad index.

The bull market, which began in March 2009, has been driven in great part by the unprecedented period of low interest rates and central-bank stimulus. And a world awash with cash lifts all boats, so most active strategies don’t give investors much of an advantage.

Rahul Narang has managed the Columbia Global Technology Growth Fund so well that its Class Z shares












CMTFX, +0.97%










have significantly outperformed its benchmark index. The Z shares’ average annual total return over five years through June 12 ranks fourth among 7,581 actively managed open-ended mutual funds, according to Morningstar.

Narang, who has been managing the fund since July 2012, has also has handily beaten the fund’s benchmark, the Bank of America Merrill Lynch Technology 100 Index












MLO, +1.07%

The technology sector has been sizzling, particularly over the past year; the S&P 500 information technology sector has returned 37% in that time. With the sector so hot, it’s understandable to worry over valuations, including the share price relative to expected earnings. But Narang is unconcerned. “Today’s tech-sector valuations are not unreasonable,” he said in a June 19 interview. The P/E for technology is 19 times for next year, vs. S&P at 17.7 times, and that is vs. 54 times in the March 2000 bubble.”

Don’t Miss: The No. 1 mutual fund, which made a killing off Amazon and Tesla, is now focused on these stocks

Here are the Columbia Global Technology Growth Fund’s 10 largest stock holdings (out of 106) as of May 31:

Company Ticker Industry % of portfolio Total return – 2017 through June 19 Total return – 3 years
Apple Inc. AAPL, +0.59% Computer and Telecom. Equipment 5.9% 27% 69%
Alphabet Inc. Class A GOOGL, +0.99% Internet Software/ Services 4.8% 23% 73%
Amazon.com Inc. AMZN, +0.97% Internet Retail 3.9% 33% 204%
Facebook Inc. Class A FB, +1.09% Internet Software/ Services 3.5% 33% 138%
Microsoft Corp. MSFT, +0.51% Software 3.0% 15% 85%
Broadcom Ltd. AVGO, +2.14% Semiconductors 3.0% 38% 255%
Lam Research Corp. LRCX, +0.54% Electronic Production Equipment 2.8% 44% 138%
Visa Inc. Class A V, +0.17% Finance/ Rental/ Leasing 2.2% 22% 84%
Nvidia Inc. NVDA, +1.52% Semiconductors 1.9% 48% 753%
Micron Technology Inc. MU, +3.83% Semiconductors 1.9% 42% -2%
Sources: Columbia Threadneedle Investments, FactSet
Strategy

Narang cited research by Alliance Bernstein that showed the best long-term returns for tech stocks were among the most expensive and least expensive companies, with the middle of the market “often populated by stocks in growth purgatory.”

The study “has proven that this is one of the best ways to add value, and we have incorporated this balanced approach into our strategy,” he said.

When seeking individual stocks, Narang and his team look for companies with good management teams and that fit into one or more of the three categories.

Moats

These are companies with very strong, durable business models that typically make up 50% or more of the portfolio and have what Narang calls “reasonable valuations.”

Four holdings of “moat” stocks are Facebook Inc












FB, +1.09%










Google parent Alphabet Inc.












GOOGL, +0.99%GOOG, +0.93%










Visa Inc.












V, +0.17%










Apple Inc.












AAPL, +0.59%










Amazon.com Inc.












AMZN, +0.97%










Narang emphasized the advantages of these huge companies, including Facebook’s 1.9 billion active monthly users, Google’s “more than 2 billion Android users,” Visa’s “2.4 billion cards and 44 million merchant outlets” and Apple’s IOS ecosystem (“once you have checked in, you can never leave”).

Secular growth themes

These companies have wind at their backs because of technological developments. Narang said he was most “excited” by the following secular themes: advanced driver assist systems, artificial intelligence, mobile gaming and the Internet of Things, through which more and more household appliances and devices are connected to the internet.

Four companies in this category are Tencent Holdings Ltd.












0700, -0.29%










Alibaba Group Holding Ltd.












BABA, +3.55%










Nvidia Inc.












NVDA, +1.52%










 and Salesforce.com












CRM, +0.74%










   

Value Opportunities

These are companies for which “the risk-reward is attractive and the valuation is higher than the current price,” Narang said. Examples of companies held by the fund in this category include Apple, HP Inc.,












HPQ, -0.67%










Lam Research Corp.












LRCX, +0.54%










 and Broadcom Ltd.












AVGO, +2.14%

The fund’s outperformance

Let’s start with the benchmark. Many stock indexes are weighted to market capitalization. This means that even though a fund tracking the index will be diversified by holding shares of all the companies, diversification is actually limited, as a handful of the largest companies account for a large chunk of the total.

An example is the iShares Global Tech ETF












IXN, +0.56%










where the five largest stock holdings make up 36% of the portfolio, according to Morningstar.

Columbia Threadneedle Investments

Rahul Narang, Portfolio manager of the Columbia Global Technology Growth Fund

Narang, who worked for J.P. Morgan Chase as an analyst covering the technology sector and for several hedge funds before joining Columbia Threadneedle Investments, called this approach “a disservice to investors,” because “if those top-heavy names underperform, you will dramatically underperform.”

His benchmark, the Bank of America Merrill Lynch Technology 100 Index, weights each company equally. He says it’s more difficult to outperform an equally weighted index than a market-cap-weighted one.

The Columbia Global Technology Growth Fund has a number of share classes. They have differing expense ratios, and two have sales charges. The Class Z is the one that ranke fourth among all actively managed open-ended mutual funds, but availability of this share class is limited.

Three of the fund’s available share classes — Class I (CONIX), Class R4












CTYRX, +0.99%










and Class R5












CTHRX, +0.99%










— have been available for less than five years.

If you are interested in the fund, not only should you read the prospectus, as you would for any fund, but you should check with your broker or investment adviser to see which share classes are available to you.

Here’s how the three available share classes that have been around for at least five years have performed (excluding sales charges, if any), through June 12 against the fund’s benchmark, the Bank of America Merrill Lynch Technology 100 Index












MLO, +1.07%










and against the S&P 500












SPX, -0.06%










:

Ticker Average total return – 5 years Average return – 10 years Average return -15 years
Columbia Global Technology Growth Fund – Class Z CMTFX, +0.97% 23.1% 10.9% 13.8%
Columbia Global Technology Growth Fund – Class A CTCAX, +0.97% 22.8% 10.6% N/A
Columbia Global Technology Growth Fund – Class C CTHCX, +0.95% 21.9% 9.8% N/A
Bank of America Merrill Lynch Technology 100 Index MLO, +1.07% 18.4% 8.1% 9.6%
S&P 500 index SPX, -0.06% 15.3% 7.3% 8.1%
Sources: Morningstar, FactSet
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