McDermott (pictured), who is on the AFI’s panel of leading industry experts, says he will top up his ISA allowance before the end of the tax year on 6 April, and believes opportunities are few and far between.
He acknowledges that the recent fall in emerging markets has presented some long-term value, but in general he prefers developed markets on a medium-term view.
“On a 12-month view and beyond I prefer developed markets, and while a lot of areas are overvalued, I think technology is one of the few sectors with decent valuations,” he explained.
“For tech I’ll be using AXA Framlington Global Technology, run by Jeremy Gleeson, which has a particular focus on the cheapest areas in the sector.”
Gleeson has a strong record as manager of the fund since taking over in April 2007, leading it to returns of 116.76 per cent. This puts him ahead of his MSCI World Information Tech benchmark, the MSCI World index and the IMA Technology/Telecoms sector average.
Performance of fund, sector and indices since Apr 2007
Source: FE Analytics
More recently, the fund has struggled against all three measures, in part due to the manager’s preference for growth stocks over value ones.
AXA Framlington Global Tech is behind its benchmark over one and three years, though Gleeson’s growth bias has been rewarded in recent months.
Performance of fund, sector and indices over 1yr
Source: FE Analytics
Gleeson believes that improving signs in the global economy bode well for growth stocks, which are much cheaper than value ones.
“Value stocks have seen strong performance, but they are starting to look expensive, trading above historic levels,” he said at the back end of last year.
“Meanwhile, growth stocks are currently trading at a significant discount to their 20-year average on a P/E basis.”
“With signs of an improving economy in the US, UK and Europe, and even tentative signs of a pickup in China, it is the growth area of the technology market that will be best placed to provide greater capital returns to investors.”
Gleeson points out that stable large cap names such as Apple and Microsoft which were in favour in the aftermath of the financial crisis are now expensive, and are not showing the growth potential they used to.
“Investors are now in a position to be better rewarded by picking small and mid cap companies that are not hampered by their size,” he said.
“In addition, many large caps are generating high amounts of cash and will be aiming to make acquisitions to help stimulate their growth. It is the best-of-class small and mid cap stocks that will be the most attractive targets and investors in these companies are most likely to benefit from any M&A activity, in my opinion.”
He points to the increasing importance of data usage and 4G as a key theme, highlighting Ciena – which enables other companies to transfer more data at faster speeds – as one stock he is playing in his portfolio.
He also likes firms focused on cloud computing, social media and cyber security.
“While Facebook went public in May 2012, in my opinion it became investable in early 2013 once the company had delivered several quarters of results that demonstrated it was able to monetise its mobile traffic, and at the same time not damage the experience mobile users received,” said Gleeson (pictured).
“More recently, Twitter's IPO has proved to be a success, indicating demand for social media is back from an investment perspective. The high profile of both of these companies will have made investors look at the technology sector again, if they hadn't already been doing so,” he added. There have been worries from some quarters that a bubble is forming in certain areas of the tech market, with Henderson tech manager Stuart O’Gorman warning that early-stage internet companies were trading at unsustainable levels.
O’Gorman prefers large cap names, which he says are not caught up in this bubble phase.
McDermott agrees that certain areas of the tech market look overvalued, but agrees with Gleeson that the sector is very different to what it was in the late 1990s.
“Technology is a much bigger sector than it was when it was in a bubble, with multi-billion pound companies such as Apple and Microsoft boasting huge balance sheets and far more sub-sectors,” he said.
McDermott says he is also using his ISA to drip-feed into the battered mining sector, which has made a decent start to 2014 following a disastrous three years or so.
“Mining is another standout value area, but it’s very difficult to know exactly when it will bottom out,” he said. “That’s why I’m drip-feeding into funds in this area.”
“I hold the Investec Global Gold and Smith & Williamson Global Gold & Resources funds, which concentrate on the small and mid cap area of the market. These are the ones that should bounce back hardest.”
“I also hold JPM Natural Resources in my pension.”
Performance of funds and index in 2014
Source: FE Analytics
The two gold funds have made a strong start to the year in particular, but all three are down between 47 and 58 per cent over a three-year period.
