The US technology sector is facing a wave of over-optimism as expectations in both the large and small-cap spaces increasingly pulls away from reality, Fidelity’s HyunHo Sohn has warned.
Sohn made the comments in a conference call regarding his $723 million Fidelity Funds – Global Technology fund.
Speaking shortly after a trip to Silicon Valley, Sohn said the feeling was market liquidity had pushed exuberance ahead of fundamentals, with mid-cap companies sitting in a difficult position.
‘I sensed a bit of over optimism among investors which is driving sentiment ahead of fundamentals in some areas,’ Sohn said.
‘Within the cheap money, low interest rate phenomenon, some people’s risk tolerance increases and they are willing to pay huge valuations for companies which have growth but unproven economics.’
‘We also heard from companies complaining about problems of rising compensation costs. We heard how mid-sized firms are being squeezed by international firms with deep pockets on one side and venture capital-funded start-ups on the other. The competition for talent driving up costs has returned.’
Sohn, who earmarked cloud computing, security software and consumer internet as the most positive trends discussed on his trip, also offered a word of caution about rampant takeover activity in the tech sector.
‘We are seeing increasing M&A with lack of strategic of rationale. We heard people saying M&A is driving cost efficiency but not many talked about cost of capital, which is low now but will normalise in the future.’
‘I believe this mixed environment requires increasingly vigilant bottom-up stock-picking. I like companies with good ROEs, good cash flow and those that tend to outperform in a rate rising environment.’
Sohn has 67.5% of his fund exposed to the US market, while large-cap names such as Google, Cisco, Samsung and Apple account for his top stock positions. On the call he name-checked Google specifically as company which warrants its current valuation.
‘Google owns key internet properties, so the company provides well-targeted advertising solutions for its customers and it is a key beneficiary of growing direct access achieved through a strong shift to online spending,’ he said.
The Fidelity Funds – Global Technology fund returned 76.1% in US dollar terms over the three years to the end of May 2015. This compares to a rise of 69.99% by its Citywire-assigned benchmark, the FTSE AW/Technology TR, over the same period.