Even measured against this bull market’s impressive results, technology stocks have been excellent investments, outpacing the 19.4% annualized return of Standard and Poor’s 500- stock index by four percentage points per year, on average, since March 2009. Tech stocks wobbled in December and have since recovered, but a few scary days were enough to remind investors that these holdings can be volatile. Just ask Charlie Chai, who manages Fidelity Select Technology (symbol FSPTX. In 2008, when the S&P declined by 37%, the average tech fund fell 45%. His fund surrendered 51%.
But investors willing to stomach some volatility will appreciate Chai’s focus on the long term. He concentrates on companies that will prosper from trends he expects to change the technology landscape over the next three to five years, including artificial intelligence, cloud computing and virtual reality. Industry-conquering companies in these arenas make up the largest of three baskets into which Chai divides the fund’s portfolio. These market leaders, which include Facebook and Chinese e-commerce giant Alibaba, may seem expensive relative to their earnings, but Chai nevertheless believes the market undervalues their growth potential.
The second basket comprises stocks whose performance is tied to the ebb and flow in demand for the companies’ products (most are shares of semiconductor companies). Chai aims to buy when weak demand suppresses stock prices, hoping to capitalize on a potential rebound when demand picks up. Top semiconductor holdings include Nvidia Corp. and Taiwanese chip maker Nanya Technology.
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The smallest basket is for what Chai calls “special situations”—beaten-down stocks with a catalyst, such as a merger or a major change in the business model, to spark the business back to growth. Chai cites Autodesk, a maker of design software for architects and engineers, as one such stock. The firm’s shift from selling software licenses to selling cloud-based software subscriptions has boosted its recurring revenues and cut down on piracy, Chai says.
The fund casts a wide net, allocating 27% of its assets to stocks in non-U.S. firms, compared with 13% for the average technology stock fund.
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