The tech sector is an interesting investment opportunity but it is also overcrowded, according to RWC Partners' Davide Basile.
‘Tech is one area we think has greater growth in a world where growth continues to remain low’, he told Citywire Selector.
Citywire A-rated Basile, who currently has around 4% allocated to IT in the RWC Core Plus fund, said there is a breadth of tech companies, particularly in the US which have significantly deleveraged balance sheets over the past few years - making them extremely cash rich.
‘When we look at the sector from a convertible bonds perspective, we want to have very strong credit to provide that dynamic. Strong balance sheets are important for us and broadly speaking the IT sector has them.
‘We also think M&A activity is set to continue in the sector and will pick up mainly because of the high cash balances a lot of these companies have, and the growth they are experiencing.’
Basile currently has around 75% of the fund allocated to convertible bonds and said most companies in the IT sector exhibit lower volatility, which Basile said has been a key driver of performance for the fund.
Beware of BDCs
While favouring the IT sector, Basile said, despite not excluding certain sectors, the counter argument would be some of the high dividend bond companies that are currently trading on the market.
‘Some utilities, BDCs (business development companies) and some of the REITs, especially in the US where they are exposed to the consumer sector, are areas we would typically underweight in the fund.
‘These are particularly unattractive for us because in a rising rate environment some of these companies do trade as if they were bond like. Essentially you are saying that they have a high-income stream because they have dividend payouts. As rates rise, that income stream becomes less viable and less valuable, so they tend to trade in line with bonds.'
‘Although there may be names in both REITs and utilities that may have some attractive dynamics, we would typically stay away from the two sectors’, he added.
The RWC Core Plus fund returned 6.2% in euro terms, over the three years to the end of April in the bond strategies category. This compares with a 3.4% sector average over the same time period.