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Henderson's new tech managers outline their strategy

The Henderson Global Technology Fund is the premier technology fund available in New Zealand. It is a tax-efficient, United Kingdom Open Ended Investment Company (OEIC). The fund has a 17-year track record that is second to none in the technology field. It is managed by the technology team at Henderson who manage over $NZ6 billion of technology money worldwide.

Wednesday, August 1st 2001, 3:05PM

The fund is one of a range of Henderson OEICs that are available in New Zealand via investment advisers and financial planners.

The fund is rated 'AA' by Standard & Poors Fund Research, a leading research agency in the United Kingdom.

The managers of the Henderson Global Technology fund, Paul Kleiser and Stuart O'Gorman, discuss the investment philosophy and strategy of the fund.

Henderson Global Technology Investment Philosophy
"At Henderson Global Investors, our technology team employs a 'bottom up' investment strategy with the aim to consistently outperform the market. Each stock is subjected to rigorous analysis to determine its potential to deliver the best returns for investors. Historical performances are scrutinised, and growth prospects are assessed. Our managers rely heavily on their own research, conducting regular company visits to evaluate the quality of operations and management, and continuously monitoring corporate and sector developments through stockbroker reports and the trade press.

"The investment teams are supported by a dedicated in-house 'top-down' research capability. The approach follows a logical approach:

  • Economic forces create market cycles
  • Market cycles generate investment themes
  • Themes support stock selection
  • No single stock selection style works in all market conditions

Working in conjunction with the fund managers, our economists and analysts identify the sectors they believe are most likely to outperform, and determine the themes that form the core of our house asset allocation strategy. We monitor global economic developments continuously and modify our strategy accordingly. Individual fund managers retain enough flexibility to adapt the house policy to their particular markets, but any significant divergence must be vigorously defended.

Fund Investment Process
"Henderson view technology stocks as global, rather than country-specific assets. Though geographical exposure matters to the extent that economic growth rates can vary from region to region, two key characteristics of technology products - the relative ease with which products can be exported, and the speed with which they are improved upon - means that what sector, and what stage of the technology lifecycle a company operates in, matters more.

"The team periodically identifies themes (which may be a specific product, like data storage, or a more general area, like business-to-business) around which to build the portfolio, based on their expected growth and profitability profiles. Our objective is to benefit from the difference between the consensus market view on a particular theme and our own.

"Companies that best represent these themes are identified, and their products are then categorised into one of six stages in the technological lifecycle, each of which calls for a different method of investing:

1) Emerging. We invest in a concept that has the potential to grow rapidly over the next three to five years. All companies that promote it gather momentum; it is unclear which will emerge as the market leader. Henderson use a 'top down' approach, investing a small amount in a large number of companies to ensure sufficient risk diversification.
2) 'Hot box'. Under pressure to maintain competitiveness, companies acquire cutting-edge technology, often irrespective of their price and compatibility with existing systems. We identify suppliers of superior products that are most likely to gain an advantage.
3) Consolidating. Companies shift their focus from purchasing new technology products to investing in services that make them more efficient and cost-effective. Henderson invest in solution providers that integrate different products and systems.
4) Dominant. A winner emerges in a particular area with a dominant market share; monopoly profits are possible. We monitor technologies that could potentially disrupt the status quo, and assess how the company reacts to them.
5) Consumer penetration. Technology has penetrated the mass market: we invest in companies that are agile marketers, and have good distribution and production models.
6) Commoditized. Price becomes the most important factor as product differentiation erodes. Here, again, we use a 'top down' approach, diversifying risk by investing in a broad range of representative stocks.

"Aside from the noted exceptions, Henderson uses a 'bottom up' approach to select stocks. We give particular consideration to barriers of entry, and to whether the company has a strong technology or distribution platform that it can build on. Considerable emphasis is also placed on the quality of the company's management: we look for leaders with the vision and ability to generate strong growth over the medium term, and whose interests are clearly aligned with those of shareholders.

"This is an on-going, rather than one-off, assessment. We regularly visit company headquarters, and conduct thorough market research to gather views from other industry specialists, including the company's own competitors. Our unique network of contacts in investment banking, consultancy and industrial sectors ensures that we are fully informed of all the very latest technological developments, and also provides a constant source of new investment ideas.

"Having identified the stocks we like best, we then determine what price we are willing to pay for them. This valuation assessment is two-tiered: first, we determine if a stock is undervalued relative to its peers and offers a good prospect of short - to medium-term profits; and second, we conduct a sensitivity analysis that tests the long-term growth expectations of the company as well as the sector it operates in, to ensure that the stock is good value in absolute, as well as relative, terms. We are adamant that we only buy stocks that fulfil both criteria: no special allowances are made 'because this is a dotcom and so has to be valued differently'.

Paul Kleiser and Stuart O'Gorman jointly manage Henderson's Global Technology funds. Paul joined Henderson in February 2001 after nearly two decades at Scottish Equitable, where he was responsible for their Technology Unit Trust since its launch in 1985, and their American Unit Trust. He is a graduate in botany from Edinburgh University. Stuart joined Henderson shortly before Paul, also from Scottish Equitable, where he specialised in the technology sector since joining its US desk in 1996. He holds a degree in financial economics from Dundee University. Paul and Stuart, supported by a dedicated team of five, are based in London.

This article has been supplied by AMP Henderson

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