Credit: Shutterstock photoThe $1.7 billion Columbia Large Cap Growth Fund III ( NFEAX ) is way ahead of the broad market as measured by the S&P 500 this year, and that's a nice change from last year. The rebound has a lot to do with the rally by growth stocks vs. value stocks in general, especially technology sector names like Alibaba Group ( BABA ) and Facebook ( FB ), says lead manager John Wilson.
[ibd-display-video id=3020793 width=50 float=left autostart=true] Those two holdings are up 101% and 55%, respectively, this year. "Technology this year is anchored by strong performances in internet stocks and semiconductor names and infrastructure (internet platform) software names," Wilson said.
The shift has helped the fund. In 2016 the fund edged up 1.26% while the bogey advanced 11.96%. This year going into Wednesday the fund was up 27.58% vs. a 21.30% gain for the S&P 500 and a 26.97% gain by the fund's large-cap growth peers tracked by Morningstar Inc.
The fund appears poised to keep riding that wave. Its largest sector as of Oct. 31 was technology, with a 34% weighting. That was more than double its next biggest weighting, which was 15.37% in consumer cyclical stocks. Health care stocks were less than one percentage point behind.
In tech stocks, Wilson and co-managers Peter Deininger and Tchintcia Barros are playing several themes. One is a switch by technology consumers. "They are starting to re-architect the different applications they use and software platforms they use," Deininger said. "That benefits some individual software companies like Salesforce.com ( CRM ) and ServiceNow ( NOW )."
Another theme involves the companies that create and supply the internet infrastructure - including the cloud - that firms like Salesforce and ServiceNow use to provide their services. " Nvidia (NVDA) helps power some of the computer processing in next-generation data centers," Deininger said. "It also helps drive business for more mundane suppliers, whether they are Micron Technology (MU), supplying underlying memory architecture, or Lam Research (LRCX), providing capital equipment that drives expansion that we see in the semiconductor industry overall."
Micron makes several types of computer chips , including dynamic random-access memory (DRAM) and flash memory (NAND), which are increasingly important in cloud computing, artificial intelligence, and augmented- and virtual-reality applications on Apple (AAPL) iPhones and other high-end smartphones, Deininger says.
Lam is a semiconductor capital equipment manufacturer. It benefits not only from robust demand for memory chips and a rotation away from old disk drives to solid-state flash-driven drives. It also benefits from the shift to multilayered computer chips and the increasing capital intensity of manufacturing with advanced technologies, Deininger says.
After Alibaba's big share-price gain this year, the fund has moderately trimmed its share count in recent disclosures. "These were modest position trims given the stock's strong performance this year," Wilson said. "It had elevated to the point where we took a modest percentage off the table. It reflects the stock's strong price performance and the fact that its relative weighting had increased a lot, so we made trims to bring the relative risk-return down."
Wilson and his colleagues still like Alibaba because "it's done a good job of monetizing their mobile user base," he said. "There was some concern when they went public (about three years ago) that that would be a slow process. But they've done a good job of improving the relevance of their ecosystem to the Chinese consumer. And they've done an excellent job of tying in their retail network as a marketplace for them to sell a broad variety of goods and services."
He adds that Alibaba has done a good job of developing their infrastructure business like Amazon Web Services and Google Cloud.
The fund has made moderate trims to its share count in Facebook for similar reasons. The fund still likes the stock. "Our view is that the company has a tremendously strong global franchise," he said. "They're increasingly effective at monetizing, especially in their core Facebook platform. And they've done a tremendous job of ramping up their Instagram platform, which is smaller but growing quickly."
He added, "There are six million advertisers in Facebook and only two million on Instagram. But it is fair to say Instagram will get to six million, so it has a lot of runway." User growth will spur advertiser growth, which will fuel Instagram's pricing power, Wilson says.
In addition, he expects the firm to monetize Messenger and WhatsApp. "They have some additional opportunities that are interesting, but not totally clear," he said.
As for Facebook's spending, Wilson is not worried. "Clearly they are spending aggressively to address issues of newsfeed-quality issues," Wilson said. "They're addressing those issues head-on and it is relatively well understood by the marketplace at this time."
Health care may be the fund's third-largest sector, but it is the fund's biggest overweight vs. the Russell 1000 Growth Index. The fund managers like some biotechnology stocks that offer "new revenue streams driven by new products that are perhaps not well understood by the market," he said.
Alexion Pharmaceuticals (ALXN) is one. The company's lead drug, Soliris, has been used to treat blood disorders. The company now has approval to begin selling Soliris for treatment of myasthenia gravis, an autoimmune neuromuscular disease. But the stock, trading around 113, is 24% off its 51-week high of 149.34 set Sept. 5 and attempting a rally from its Dec. 7 low of 105.01.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
