Lowes Magazine Issue 115

INVESTMENT

A Change of Pace

Paul Milburn, Senior Investment Analyst, examines accelerating trends in the market and how Lowes is capturing them in the Changing World portfolio

THE COVID-19 PANDEMIC has had a significant impact on the way in which we go about our lives, both from a personal and work perspective. Social distancing and lockdown have meant changing the way we communicate with one another. From my

Whilst all but two of the funds within this portfolio have outperformed the sector and index above, those with a greater focus towards technology and biotechnology have been the strongest performers. This is unsurprising given the strong performance we have seen from these sectors. Focussing on the US, where these sectors are most prevalent, the Nasdaq Composite index (a technology focussed index) is up 24.69% in US dollar terms. This compares to 1.58% for the broader S&P 500. The S&P 500 Biotechnology sector meanwhile is 16.8% higher over the same period. There are some concerns building around the recent aggressive rise in share prices of technology companies and also how focussed this has been in certain stocks, in particular the larger companies. The Nasdaq 100 index, which is the top 100 companies in the Nasdaq by company value, has outperformed the broader index by over 5%. If we equally weight the stocks on the Nasdaq 100, rather than having them in proportion of their size as is usual, the domination of the larger names becomes even more noticeable, with this adjusted index underperforming the normal Nasdaq 100 by almost 11%. According to the latest figures from Bloomberg, the combined value of Apple, Microsoft, Amazon and Alphabet is now greater than the entire Japanese equity market. Even within the US, Apple, Microsoft, Amazon, Alphabet and Facebook, the current five largest companies in the S&P 500, account for in excess of 20% of the index, a concentration which we have not seen over the last 25 years. Whilst these companies are at the forefront of technological and social change, some investors are understandably nervous of the price you are expected to pay today to benefit from their future earnings growth. However, assessment of the earnings potential for these companies can be difficult to gauge, particularly as they continue to heavily reinvest in new technology and projects. Megatrends are exactly that and are expected to play out over many years. Whilst pullbacks in share price are certainly possible in the short term, for now these sectors remain at the forefront of these trends and are likely to remain so for some time to come. On that basis, we are comfortable with the broad exposure within the Changing World portfolio. As far as the individual stock selection decisions go, however, we will continue to leave those to the respective fund managers. [Source for all performance figures: FE Analytics]

perspective, an important part of my day-to-day role at Lowes involves meeting fund managers face-to- face. Lockdown caused a quick rethink on this. While video conferencing facilities have been available for some time now, they have been costly and, I think fair to say, underutilised. We are now however able to use desktop conferencing facilities such as Zoom, a company most people had probably never heard of before March. Advances in technology has enabled online shopping to take an ever increasing market share. With just a click of a few buttons we can now view almost any product online. Those companies which have embraced this change have continued to thrive, those who haven’t have suffered greatly, the problem compounded by the inability of the public to visit stores. In April we saw Amazon launch a recruitment drive to employ a further 75,000 staff worldwide, having just employed 100,000 in March to cope with demand. These were trends which were already established prior to COVID-19, but the pace of adoption has undoubtedly increased. To quote JW Gardner, former US Secretary of Health, Education & Welfare, “we are continually faced with a series of great opportunities brilliantly disguised as unsolvable problems.” Termed by others as megatrends, these are influences which have the potential to be key drivers of change, including technology, the environment, social behaviour and demographics. In recognition of these megatrends, a number of years ago Lowes created the Changing World portfolio, the primary focus being to gain exposure to the potentially high growth areas of technology, biotechnology/healthcare, sustainability and innovation. In the year to date, the increase in the pace of change has stood this portfolio in good stead. From the 31 December to the 21 July, the portfolio has returned 23.25% on a total return basis, significantly outperforming the broader IA Global equity sector average (4.35%) and MSCI All Countries World Index (3.25%).

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