“The Covid-19 pandemic has accelerated digitalisation, pushing up internet usage and allowed millennials to speed up the transition to a fully interactive world,” Anjali Bastianpillai, senior product specialist for the Pictet Digital Fund, told FSA.
She highlighted cloud services without which businesses would have “ground to a halt” during the enforced shift to home-working, e-commerce which should maintain its momentum as “consumers will be slow to return to ‘bricks-and-mortar'”, and the popularity of video streaming and online gaming for entertainment.
“All these digital transformations are leading to more data crunching and better use of artificial intelligence (AI), confirming our belief in the secular growth of data driven web-based businesses,” she said.
Other fund managers, such as JO Hambro, have also been promoting the “disruptive” qualities of the digital transformation underway, and stressing how market leaders in the space can end up winners from the impact of the coronavirus lockdown prescriptions on future work- and life-styles.
The $3.4bn Pictet Digital fund, which is lead-managed by Sylvie Sejournet, has generated a 31.40% cumulative return during the past three-years, outperforming its MSCI World index benchmark (18.27%), but underperforming the TMT sector average (48.17%), according to FE Fundinfo data. Its returns are slightly steadier than its peers over the same period, with annualised volatility of 18.63%, compared with 20.36% for the sector average.
The fund focuses on companies that must derive at least a fifth of its revenue from digital-related business, although currently the average “purity” level of the portfolio is 65%, according to Bastianpillai.
The so-called “interactive sector”, which includes e-commerce firms, and providers of online video games, online advertising, interactive software, fintech, big data analytics tools and healthcare IT and other beneficiaries of the roll-out of 5G technologies make-up an investible universe of around 400 stocks.
“But, in addition to the structural growth theme, portfolio construction is based on identifying companies that generate stable and growing cash flows and have healthy balance sheets with a positive risk reward profile,” she said.
Source: Pictet Digital Fund factsheet, 30 April 2020
Recently, the fund has used some of its 5% cash position, built up at the end of January, to buy stocks “that have been overly punished in the current market volatility”, including cloud-based software companies and web-development service providers.
The fund doesn’t invest in electronic components companies, semiconductors, telecom equipment manufacturers or traditional hardware businesses, nor does it have exposure to global supply chains or production facilities, according to Bastianpillai.
“Instead, the strategy has a bias towards value stocks that are at historic lows despite sustainable business models and positive risk-reward profiles both in the event of further decline or market recovery,” she said.
The strategy has a low concentration with top 10 holdings representing 32% of the total portfolio, and the average position is between 2% and 3%. The largest holdings include Facebook, Alphabet, Salesforce and China internet giant, Baidu.
“China’s technology sector, in particular, has surged in the past five years and the biggest companies have been able to make acquisitions, expand outside China as well as invest in new technologies especially in AI,” said Bastianpillai.
“Chinese internet is predominantly a mobile-first market and while the West is moving in this direction, it is still quite far behind China when it comes moving all internet to mobile, with four times as many mobile users as the US now ,” she added.
Pictet Digital Fund vs MSCI ACWI and equity TMT sector
