- While we appreciate the importance of FAANG companies (Facebook, Amazon, Apple, Netflix and Google), we maintain conviction in our philosophy of looking for innovation on a broader scale.
- The Fund’s allocation to healthcare has been a main driver of outperformance in 2017, a vast improvement from the previous year.
- We intend to continue to be prudent in balancing growth with valuations, as we believe there are many potential investment opportunities – especially in biotechnology, data and healthcare – around the world.
The U.S. economy has witnessed steady growth as we have moved through 2017, with the technology and health care sectors as standout performers. With the recent gains, many investors have questioned if these growth trends can continue given political turmoil, rising valuations and the U.S. Federal Reserve’s (Fed) shift to tighter monetary policy. We’d like to provide our thoughts on the current market environment, our outlook moving forward, and how the Fund is positioned.
Innvoation fueling growth
While we recognize several challenges of the world economic backdrop, we are excited about the innovation and growth that is taking place within certain companies. We believe many of the stocks in the information technology space are well-positioned going forward and have strong long-term growth prospects. We strongly believe that confidence is being restored in the economy, with major tax reform likely in the U.S. and the potential for increased capital expenditures in markets around the world. Company management teams are showing signs of optimism about economic growth, which we anticipate should drive a positive reinforcing market environment, where companies begin to see renewed topline growth.
Technology giants and lesser knowns
The information technology sector has performed well year to date, though the sector has recently weakened and volatility has picked up. We believe the increase in price fluctuations results in additional opportunity to benefit from market inefficiencies and price dislocations — a key stock attribute we seek while looking for long-term growth opportunities.
This year, technology giants such as Amazon and Google have provided meaningful returns. And while we appreciate the importance of FAANG companies (Facebook, Amazon, Apple, Netflix and Google), we maintain conviction in our philosophy of looking for innovation on a broader scale. While these names are in the portfolio, our process also goes a level deeper in search for companies benefiting from the broader trends created by FAANG.
The Fund’s allocation to ASML Holding N.V. is a prime example. The firm manufactures lithography tools for semiconductor manufacturing. Lithography is the patterning of semiconductor wafers that is the basis for all chips, and is utilized in an array of technologies from computers to automobiles. Semiconductors have been doubling computing power every 18-24 months, thereby allowing the cost of increasing computing power to fall substantially over time. ASML’s innovative lithography tools, which can cost more than $100 million each, are the key enabler of this cost efficiency. Currently, the industry is transitioning to lithography based on Extreme Ultraviolet Lithography (EUV), and ASML is the only company with this type of technology. As this new type of lithography technology is adopted by manufacturers, we expect significant upside in both revenues and earnings for ASML.
Biotechnology creating growth
The Fund’s allocation to health care has been a main driver of outperformance in 2017, a vast improvement from the previous year. In 2016, the sector was hard hit by headline risks as continued fears around the U.S. election and the potential impact on health care reimbursement and drug pricing pressured the sector. And while the Trump administration has been unable to “repeal and replace” the Affordable Care Act (ACA), adding increased volatility to the sector, we believe the secular growth trend for health care remains intact. We believe companies able to bring economic value to the market, such as fewer hospitalizations or better patient productivity, should see significant returns and appreciating stock prices. In our view, biotechnology, health care information technology systemsand pharmaceuticals are among the greatest innovators and early adopters of new science and technology, so we are paying particularly close attention to companies in those areas. As a result, we opportunistically increased the Fund’s exposure to these industries when many of these stocks pulled back in 2016.
Take Vertex Pharmaceuticals, Inc. for example. This biotechnology company engages in discovering, developing and manufacturing small molecule drugs for patients with serious diseases in specialty markets. The company focuses on therapies for the treatment of cystic fibrosis and other early-stage development programs. We believe the Vertex’s revolutionary cystic fibrosis treatment, shown to significantly improve patient lung function, will enable the firm to maintain its dominate market share. As a result, we believe this will be beneficial to the company’s top and bottom-line going forward.
An additional example is Gilead Sciences, Inc., a researchbased biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical needs. Gilead is a health care name the Fund has been watching for a long time. The company has a core pharmaceutical franchise in HIV and hepatitis treatment, but we believe the company lacked a new engine for growth and innovation. With the recent acquisition of Kite Pharma, Inc., we believe Gilead has the potential to establish a new platform for cancer treatments based on genetic engineering. The Fund previously held Kite Pharma, Inc. so we have high conviction in the new technology and research and development capabilities Kite’s innovative technology brings to Gilead. As time progresses, we believe the market will recognize the potential growth from this new platform and assign a higher multiple to Gilead’s stock price.
Seeking opportunities in an improving market
As we look ahead, we believe the prospect for growth is to the upside. That said, we intend to continue to be prudent in balancing growth with valuations, as we believe there are many potential investment opportunities – especially in biotechnology, data and health care – around the world. As we look at the securities of such companies, we are focused on what we believe are good growth prospects and sound capital structures. We believe there will be improvement in capital spending trends, and we are looking for a continuation of an active mergers-and-acquisition environment.
In spite of unsettling political headlines and domestic natural disasters, underlying business confidence remains relatively high. We expect that optimism to continue, especially if tax reform measures are imposed, which seems likely. Globally, growth and hiring trends are strong and we are seeing these trends reflected in accelerating capital spending and improving earnings outlooks across our portfolio. We are watching Fed policy changes carefully to make sure that a shrinking central bank balance sheet and rising interest rates do not damage credit availability or confidence in the management suite. We believe these policy changes, along with military conflict, are currently the biggest risk to impact sentiment in the markets.
As always, we continue to carefully monitor the macroeconomic environment, but our focus remains primarily on securityspecific fundamental research. Going forward, we believe this attention to bottom-up research, coupled with the innovation and transformation under way across the globe, should continue to provide investment opportunities for the Fund.
Past performance is no guarantee of future results. The opinions expressed are those of the Fund’s portfolio managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through November 2017, are subject to change based on market conditions or other factors, and no forecasts can be guaranteed. The information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance, and time horizon.
Top 10 Equity Holdings as a percent of net assets as of 09/30/2017: Micron Technology, Inc. 7.2%, Microsoft Corp. 5.6%, Vertex Pharmaceuticals, Inc. 4.8%, Microsemi Corp. 4.6%, Facebook Inc., Class A 4.4%, Euronet Worldwide Inc. 4.3%, ACI Worldwide, Inc. 4.2%, Alibaba Group Holding Ltd. ADR 4.2%, WNS (Holdings) Ltd. ADR 4.0% and Cerner Corp. 3.9%.
The S&P North American Technology Index is an unmanaged index comprised of securities that represent the technology sector of the stock market.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Fund’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers. Holdings information is not intended to represent any past or future investment recommendations. Holdings and allocations can and do change frequently.