The tech correction represents an opportunity but investors must remember to look under the hood of their fund exposure.
That’s the view of Paul MacDonald, CIO and portfolio manager at Harvest Portfolios Group, who in the second part of his interview with WP addressed the perennial question of why so many Canadians were underexposed to tech (3.5% exposure is typical) despite its large US market cap.
He said Harvest likes the sector over the medium term and pointed to the fact it’s been in the fast lane since the “tech wreck” of 2000, with dividend growth, free cash-flow growth and earnings-per-share growth putting it among the best performing sectors of the past 5-10 years.
MacDonald said the correction is a good opening to pick up quality, long-term holdings, which is what he’s been busy doing. But he warned investors against failing to check and understand the recent changes in sub-sectors, which may leave them exposed to what he calls the “Nortel effect” and have their portfolio lean towards two particular names rather than be equally weighted across, say, 20 large-cap technologies.
He said a key question for investors to ask themselves is: what allocation of FAANG stocks should be in your portfolio?
“Of those FAANG stocks, technically only Apple is considered a tech stock. So when you look at one of the largest, which is XLK in the US, Apple is almost 20% now of that index, while Microsoft is 17.5%. They’ve moved Amazon, Netflix, Facebook and Google into various other subsectors, one being internet communication in the new communication subsector, and Amazon was moved to the subsector of consumer discretionary.”
He added: “This would suggest two things. One is with the changes in the subsectors, investor may not own what they think they own and might be at risk of what I call the Nortel effect.”
Some of the lower-than-expected exposure to tech might also be explained by advisors’ long memories. MacDonald said that while many of his clients enjoy the breadth of tech in Harvest’s holdings, there is still a degree of trepidation.
He said: “They like having the diversity within our fund and like that it’s not skewed towards a couple of funds. People who have been in the business long enough to remember 2000-2001 still have apprehension and that’s why we like what we’re doing with our fund.
“In general, there seems to be more appetite for tech, recognising it’s an underweight sector. It’s a bit of tepid interest given some historical concerns that I think have been more than offset by the performance of the underlying businesses, not necessarily the share prices but the businesses.”
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