Facebook, Amazon, Netflix and Google owner Alphabet may have been the stocks to back in 2015, but last year heralded the emergence of a new king in the technology sector: the semiconductor stock.
The PHLX Semiconductor index jumped 34% last year, well ahead of both the broader technology market and the S&P 500, spurred by chip stocks’ greater focus on profitability and a spate of mergers and acquisitions in the maturing sector.
That has spurred the Fidelity Select and Advisor Semiconductors funds, the only funds in the Science and Technology sector to focus solely on chip stocks, well ahead of rivals over three years, with respective returns of 83.4% and 83%.
For the funds' Citywire AA-rated manager Steve Barwikowski, the key for the sector’s continued buoyancy will be its ability to keep finding new areas of demand as the smartphone and personal computer markets cool.
‘Other sources of semiconductor demand are coming to the fore,’ he said in his latest update to investors.
‘One key source is operators of data centers, such as Amazon.com, Google and Microsoft, which are fighting for market share and beefing up their capacity to provide computing power, storage and services via the internet.
‘I think auto manufacturing is another promising area. The average automobile has roughly $350 of semiconductor content, and in luxury models and hybrid electrics, the chip content tends to be much higher.’
Backing the fangs
Fellow AA-rated manager Rahul Narang runs a broader fund, Columbia Global Technology Growth, and has contributed to the best five-year record of any portfolio in the sector over five years.
Narang joined then-lead manager Wayne Collette on the fund in 2012, with Collette moving off the fund last year.
Narang’s biggest sector allocation is to semiconductors, at 27% of the fund, and he boasts one of the sector’s star performers, Nvidia, in his top 10. The stock is up 216% over the past year.
His strong long-term returns have also been helped by his backing of the Fangs – Facebook, Amazon and Google are all among his top five investments, with a smaller position in Netflix.
These stocks accounted for virtually all of the technology sector’s outperformance in 2015, leaving funds with relative lack of exposure trailing.
Such funds included one of the largest in the sector, the $3.9 billion Ivy Science & Technology fund. Manager Zachary H. Shafran sits right at the bottom of the sector, with a return of just 3.2%, having missed out on that narrow but sharp rally.
‘Although the fund had sizeable positions in Facebook and Google, its relative underweight in these positions compared with the index and its lack of exposure to Amazon and Netflix had a negative impact on fund performance,’ he said in the fund’s latest annual report.
Shafran takes a broad approach to technology investing, including in his universe stocks applying the use of science and technology, such as healthcare companies. With healthcare among the worst performing sectors last year, this has further dampened returns.
These stocks suffered from presidential candidate Hillary Clinton’s rhetoric over drug pricing in the election campaign and have not received much respite under Donald Trump’s presidency, with the 45th US president claiming drug-makers have been ‘getting away with murder’ with their high prices.
‘We expect the new president’s propensity to tweet will drive more day-to-day volatility in various sectors, but the ultimate policy changes will be benign,’ said Shafran in his latest update to investors.
Top 10 semiconductor funds by three-year total returns
|Rank||Manager||Fund(s) Managed||Total Return (%)||Manager Ratio*|
|1 Year||3 Years||5 Years|
|1/42||Steve Barwikowski||Fidelity Select Semiconductors|
Fidelity Advisor Semiconductors
|2/42||Rahul Narang||Columbia Global Technology Growth||37.5||49.1||132.5||0.9|
|3/42||Mark Oelschlager||Red Oak Technology Select|
Saratoga Technology & Communications
Warren Matthew Johnson
David H. Smith
|7/42||Ken Allen||T Rowe Price Science & Technology|
John Hancock Science & Technology
|8/42||Matthew Sabel||MFS Technology||30.3||39.6||99.3||-0.2|
|9/42||Anita M. Killian|
Robert L. Deresiewicz
John F. Averill
Bruce L. Glazer
|USAA Science & Technology||25.9||38.8||126.2||-0.2|
*The manager ratio is the average information ratio of the funds the manager has run in this sector over the past three years. A positive figure means the manager has outperformed their benchmark(s).