The funds Thesis sold to reduce technology and healthcare exposure are the $803m Polar Capital Global Technology fund, the $790m Polar Capital Healthcare Opportunities fund and the £740m Worldwide Healthcare Trust.
The reduction in exposure to equities reflects a desire to reduce risk in general and to the two sectors in particular, due to high valuations.
By removing their higher beta holdings the portfolios are more prepared for a period of higher volatility, says Matt Hoggarth, investment analyst at Thesis.
Despite selling out of the funds Hoggarth says he backs the managers and expects the funds to outperform within their sectors.
According to FE Analytics, the funds have outperformed the MSCI AC World index over three years with the Polar Capital Healthcare Opportunities fund in particular having a stellar run.
It has returned 130.47 per cent compared to a gain in the MSCI AC World index of 43.69 per cent.
Performance of fund and index over 3yrs
Source: FE Analytics
While the two sectors have seen strong growth over the longer term and a recovery from their recent sell-off, Thesis believes their high beta characteristic makes them vulnerable to downmarket conditions.
The high growth in the sectors tends to be driven by disruptive innovation in both industries.
These advances tend to be driven by smaller, ‘growthier’ companies and for this reason these sectors usually have a high beta, Hoggarth says.
“This means they both tend to rise faster than the overall market and fall faster than it,” he said.
Investors in technology and healthcare dumped assets in March 2014 following a sell-off in the tech-heavy NASDAQ that spread to other markets, with many analysts pointing to high valuations following several years of strongly rising markets.
“Both sectors suffered during March and April [2014] when demand in the markets rotated towards larger, more defensive stocks,” Hoggarth added.
The sharp correction brought back harsh memories of the dot com bust for many investors with some tech funds falling up to 15 per cent in April and May, though most have recovered much of these losses since then.
The FTSE All Share Technology and FTSE All Share Health Care indices plunged 10.96 per cent and 8.63 per cent over the course of a few months.
Performance of indices in 2014
Source: FE Analytics
The FTSE All Share Technology index is still down 8.48 per cent from its pre-sell-off high while the FTSE Health Care index is down 1.5 per cent.
Hoggarth says that while technology and healthcare have since staged a good recovery, they remain high beta holdings and are therefore likely to suffer in any future market downturn.
“Because of this, they are a good target for equity reductions at a time when we are looking to lessen the overall risk of our portfolios,” Hoggarth said.
“This is because the risk reduction per pound’s worth of equity sold will be greater than it would be for many other stocks.”
Due to the volatile nature of tech stocks many active managers specialising in this area have struggled to beat the index over the longer term.
The best performer in the IMA Technology and Telecoms over three and ten year measures and the second best performer over five years is the Close FTSE Techmark fund - a tracker fund.
According to FE Analytics, it has returned 231.41 per cent over the past ten years compared to an IMA Technology & Telecoms sector average of 164.33 per cent.
Performance of fund and sector over 10 years
Source: FE Analytics
Thesis is holding on to the cash raised rather than adding to existing holdings or buying new ones, Hoggarth says, due to a lack of opportunity elsewhere and to allow a swoop on deflated assets in the event of further corrections.
By doing so, it joins the ranks of several well-known names upping cash weightings over the past year including the likes of Crispin Odey, Schroders’ Marcus Brookes, Troy’s Sebastian Lyon, Investec’s Alastair Mundy and GMO’s Jeremy Grantham.
A global survey by BofA Merrill Lynch of fund managers also found that average cash weightings had increased to a two-year high in July.
Most have cited high valuations after several years of strongly rising equity markets and a belief that a significant market correction or downward market being around corner as their reason for the move to a more bearish outlook.
The tapering of quantitative easing - due to finish in October - and plethora of geo-political conflicts from Ukraine to Iraq are also cited as further headwinds, due to their potential to knock back sentiment or spike oil prices.
