Technology is changing the way we live. A typical day for many people could start with an alarm call from their smartphone, followed by a quick look on social media, checking train times, ordering a cab and then pre-selecting breakfast from their favourite coffee chain’s app.
‘It’s no secret that technology is changing the way people live and work. We refer to this as the ‘stay-at-home economy’. More and more, we can do everything from shop, to bank, to work, while staying at home or any other place.
‘No industry faces more disruption than traditional retailing, but there are other losers, including legacy media, commercial real estate and some packaged-goods brands,’ Feuerman says.
Information technology is currently Feuerman’s top long position with 15.34% of his fund allocated to the sector. Companies such as internet and software giant Alphabet, where he has a 2.55% allocation, are among his top five long holdings and Citywire + rated Feuerman says the disruptive tech environment is positive for the S&P 500 index.
‘Technology now accounts for 23% of the index, up from 17% in 2007 and this sector has continued to enjoy robust growth,’ he says.
The fund has reaped rewards from this tech tilt, with the portfolio returning 13.2% in euro terms over the three years to the end of July 2017, compared with a sector average of 5.8%. Feuerman says even non-tech companies have been able to take advantage of the sector’s growing influence.
‘This is mostly from cost-saving opportunities but also from new revenue sources. Examples include banks that need fewer branches, downward pressure on rent expense, and lower operating costs from the shift to cloud computing.
‘To the extent that technology disruption is helping to lower inflation and interest rates, it’s a positive for the valuation of all stocks. This seismic shift is creating both disruption and opportunities,’ he says.
The big short
The portfolio currently has a gross short exposure of 12.73%, with the real estate sector being the biggest short with 0.55%.
Feuerman adopted this position partly in response to a study from consumer transaction technology firm NRC, which said that by 2019 self-checkout machines in shops could rise from 191,000 units (recorded in 2013) to 325,000. This rise, combined with a surge in online shopping, has meant that traditional retailers have taken a hit.
‘In addition to our large allocation to technology stocks, we’ve also chosen to exploit this secular theme on the short side via a basket of retail REITs,’ he says.
Away from the technology sector, Feuerman holds a 4.33% allocation to fast food outlet McDonald’s and 2.5% to pharmaceuticals giant Johnson & Johnson. These big blue chips are the type of company where his team has its strongest conviction, Feuerman says.
‘Generally, these companies are high quality, have strong management teams, improving or strong business trends, as well as earnings that we believe will beat consensus over the next three-to-five years.
‘They also have strong free cashflow and are using that to increase shareholder value.’
McDonald’s is currently the fund’s largest long stock position and Feuerman sees it going from strength to strength.
‘We own the stock based on its multi-year plan to rejuvenate an already powerful global brand, and for the compelling financial characteristics of a company moving to a model in which virtually all of its stores are franchised.
‘We didn’t expect it to report as strong a quarter as it did’, Feuerman says.
His team anticipates very good business momentum over the next few years as the company remodels stores, upgrades its franchisees and benefits from its new delivery service, which has recently launched across the UK with UberEats.
Earlier this year the fast food retailer succumbed to demand from UK residents to provide deliveries, after 43 years of resisting. The McDelivery service has been available in the US since 1993 and even made it to India in 2004.
‘McDonald’s CEO Steve Easterbrook has established an ambitious revitalisation plan, and the execution of that plan has been outstanding so far,’ says Feuerman.
For these reasons, he says, it’s increasingly difficult to see what would lead investors to lose interest in such a successful company.
‘A resurgence in value and cyclical stocks could push these businesses out of favour as investors take profits and shift their exposure.
Negative earnings surprises, lower future guidance from management, or increasing competitive pressures could also be catalysts.
‘However, for us to eliminate our long position and initiate a short position, we would have to see a deterioration in fundamentals and our conviction in the company’s long-term growth prospects.’
This article originally featured in the September edition of the Citywire Selector magazine.