A few weeks ago I wrote about thematic funds being the “hot new thing” in the world of exchange-traded funds. But until recently, if you were looking for something similar from an active fund manager, there wasn’t a lot of choice. Now, after something of a delay, active fund managers are beginning to embrace the idea of technology-inspired thematic funds.
Although there is no shortage of broad technology funds run by stockpickers, investment manager Polar Capital has now released a thematic fund. The Polar Capital Automation & Artificial Intelligence Fund, which launched in October last year, has already brought in assets of $280m.
The fund’s portfolio has an obvious focus on robotics and artificial intelligence (AI), but holdings can sometimes be a little more ambiguous in their connection. For instance, top holding Relx is probably better known to investors for its big media business units Reed and Elsevier – leading recruitment and analytics specialists. However, the company is apparently making huge strides in developing proprietary machine-learning technology.
At the moment, the Polar portfolio is made up of around 70 stocks, with typical position sizes ranging from 0.7% to 4%. Arguably, the fund’s stock-picking managers will be able to be more “discerning” than their index-tracking peers, and can choose to ignore certain stocks that might feature in a more rigid, rules-based index. Note that it has an annual management charge of 0.95%, plus a performance fee (of 10% of returns above benchmark).
Hope for old-world firms
Another new fund takes these ideas one step further. The Arbrook American Equities Fund was launched in mid-December last year, and has already hit assets under management of more than $50m. The Founder Class, which has a very low annual fee of 0.45% (relative to the normal fee of 0.75%), is still available, but this will close to investors once assets reach the $100m mark.
This is another actively managed fund that takes technology very seriously. Managed by Robin Milway, formerly of Neptune Investment Management, it focuses on US stocks that he believes have “latent, mis-priced potential”. Milway’s key idea is that digitalisation is transforming many “old-world” businesses – with huge productivity gains. The fund points to the US shale-oil revolution, which it argues was enhanced by digitalisation; this rejuvenated a dying domestic industry while growing employment in the sector by 60% and turning the US into the global swing producer in the energy sector.
Milway believes this is just the start. The application of digitalisation to the old-world physical industries “has the potential to transform productivity in the US economy”. In this digital world, those with the data and the best algorithms are “creating their own moats through superior data analysis”. The big are getting bigger, and thankfully their profits are not reverting to the mean.
Time to price in tax breaks
Milway is also positive about US equities and profits in general. In his opinion, analysts “have not even begun” to update earnings estimates for most stocks after the recent tax-legislation reform passed in the US.
Telecommunications giant AT&T is one firm in the fund’s portfolio; its tax rate has dropped from 32% to 20%. This means its tax goes from, say, $7.8bn to $5.5bn. Yet most analysts still use the $7bn number for their forecasts. Reducing the tax rate to the new level raises the valuation of AT&T stock by 20%. “There’s a long way to go before earnings are all fully digested by the market,” says Milway.
Activist investor Elliott Management is “taking on” French media conglomerate Vivendi by building up a stake in Telecom Italia, says Bloomberg. The activist fund is “considering” nominating directors to the board of the Italian phone carrier; it is concerned about the near-30% slump in Telecom Italia’s share price over the past two years and its business performance since Vivendi took control of the board in 2016.
Vivendi, which owns 24% of the phone group, has been under political and legal scrutiny recently, with Italy’s market regulator determining that Vivendi had de-facto control over the former phone monopoly, escalating a legal fight. Shares in Telecom Italia went up by 6% on the news that Elliott was buying into the company, their highest level in nearly six months.
Short positions… BlackRock takes on gunmakers
• Asset manager BlackRock has put companies that make or sell America’s “preferred weapon of mass murder” in its crosshairs, says Rob Cox on Breakingviews. The world’s largest fund manager, which looks after more than $6trn in assets, has “outlined steps” to ensure the three publicly traded arms manufacturers in which it owns stock make “a positive contribution to society”.
BlackRock bears some responsibility, says Cox, in providing capital to fund their operations – including the production of AR-15s. Yet because its customers own shares through passive funds, it can’t simply sell stock and walk away. Last Friday it sent a memo to clients “offering to explore opportunities” to switch them into funds that specifically screen out firearms manufacturers and retailers, says the Financial Times. It’s also “exploring ideas” for new funds that explicitly exclude firms of this type.
• Fund groups will pay £34m in compensation to investors who have been overcharged for investing in “closet-tracker” funds, says Laura Suter in The Daily Telegraph. These are funds that charge people for active fund management, but which in reality merely track the return of an index, as a passive index fund does for a much lower price. The move comes after the Financial Conduct Authority (FCA), the City regulator, flagged the issue of closet trackers in its review of the industry last year, but is not part of “an official redress scheme”.
Managers will also have to change their marketing material “to make it clearer to consumers how constrained they are” when investing in a fund that is restricted to a benchmark, says Megan Butler of the FCA in the same newspaper. In the more serious cases of misleading investors, managers will have to notify existing clients.