A switch from behemoth US internet stocks into Japanese automation specialists is one of the key moves Mid Wynd International Trust made in 2017, according to manager Simon Edelsten.
As such, while the large US internet stocks performed very strongly last year, he has sold out of some positions, preferring to leave early than be caught out too late.
“We had a lot of money in the internet stocks – i.e. we had a medium amount of money in them but they all went up an awful lot,” Edelsten said.
Indeed, while the S&P 500 has made a strong total return of 45.44 per cent in dollar terms over the last three years, the information technology sector has outpaced it, returning 81.27 per cent.
Performance of indices over 3yrs
Source: FE Analytics
“The technology investments, which might have started off being 17-20 per cent of assets when we took over, had gone up to 24 per cent – quite a lot of the fund,” he said.
“On top of that, some of our stocks had led the bull market up and the share prices had risen more than the cashflow per share in our estimation.”
However, the driver behind this rise has been extraordinarily high revenue growth – something that does not underpin share prices in the long run, he argued.
The manager noted: “What underpins share prices is cash and it is very difficult inside all that revenue put on by these stocks to work out how much cash profit there is.”
As such, at a free cashflow level these companies are more expensive than they were three years ago while the growth potential to seems to be going down, he said.
One example is Amazon, which has been a darling of the stock market for much of the last seven years, during which time its share price has risen from $138.47 in December 2009 to its current level of $1,294.58. 
“Amazon is taking on huge amounts of growth but a lot of it is new ideas like grocery whereas 10 years ago their growth was selling people things like CDs,” Edelsten (pictured) said.
While selling items online is a relatively low cost, high margin business, groceries require infrastructure and higher costs, meaning they are historically much lower margin enterprises.
The manager said: “It is no criticism of the company, you do the easy stuff first and then you get onto the difficult stuff later, but we thought we had made a huge amount of money and that the market was expecting better growth in future.”
As well as this, quite a lot of the rising share price had been a change in valuation rather than an improvement in earnings and margins, he said, resulting in the fund selling out of its position.
The other US internet giant Edelsten has sold out of is Facebook, which unlike Amazon has been hit by issues surrounding its product.
“Facebook has had problems with keeping its website clean. People thought that might be a political problem,” he said.
Indeed, the company has been in the headlines in recent months coming under criticism for too many advertisements on the site, as well as the emergence of so-called ‘fake news’ articles spreading.
Edelsten said: “We don’t think it is a political problem we think it is an economic problem – they’ll have to hire lots of people to clean it up.
“It starts off seeming as though it is a political debate and then it becomes a business debate and it is not unusual for it in time to matter to the cashflow and margins to look under pressure.”
So far, however, concerns over Amazon and Facebook have been largely ignored by the market, with both continuing to rise, although the latter has recently come under pressure following comments on user disgruntlement from chief executive Mark Zuckerberg.
The manager said this does not matter to him however as he is “proud” of having a reputation of selling shares quite early.
“In order to build a capital protective fund you generally need to leave parties quite early – that’s what we believe generally active fund managers do,” he said.
“The great thing for us is when we decided to take profit from that part of our growth portfolio, we found that another one of the themes we have been keeping an eye on for years – automation – was taking off very rapidly indeed.”
This is an area he has looked at since before he took over running the fund in 2014 and has decided to move into as the internet exposure has been reduced.
“This is a group of stocks that we have been looking at for four years and they are almost entirely Japanese stocks,” he said.
“Automation has been going on for years but the interesting bits that we want to invest in are where robots have got smaller, nimbler, and cleverer and are able to enter production lines that have not been automated before such as food preparation, making clothes and shoes, finishing smart phones.”
Japanese automation companies have been boosted by demand from China in recent years but with order books appearing to peak last year, their share prices slipped, giving the management team an opportunity to buy.
“We were finding high quality stocks with decent growth potential but on much more modest valuations because they are Japanese. People don’t keep an eye on that market as much as they used to,” Edelsten said.
“Investors were ignoring the fact they are world leading companies and always have been that very little to do with the Japanese economy.”
As such, at the time the fund sold its holding in Amazon it bought Japanese firm Daifuku, which saw its shares dip 8.7 per cent over a one-month period between March and April last year but has rallied strongly since.
“The company is the world leader in making automated warehouses and is growing its top line at 100 per cent while on a much more modest rating,” Edelsten noted.
Edelsten has managed the four FE crown-rated Mid Wynd International Investment Trust alongside Rosanna Burcheri and Alex Illingworth since it moved from rival Baillie Gifford to Artemis in 2014.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
During their tenure it has returned 98.84 per cent, 22.64 and 28.12 percentage points ahead of the IT Global sector and MSCI AC World benchmark respectively.
This is not the first time the manager has made big sector shifts within the portfolio since taking over, however.
“When we took over the fund we had a lot of consumer staples, we now have almost none left. We then had a lot of internet stocks and now we are moving away from there and looking at other things,” he said. “In terms of the stocks we own we are much more different from the other funds than we have been.”
The investment trust has a yield of 1 per cent and a clean ongoing charges figure (OCF) of 0.7 per cent.