A new world order

The pace of change in the realms of information transmission has made the term 'technology' just a little bit limiting for fund managers who want to make the most of the new media opportunities. It is not sufficiently embracing of the whole digital communications revolution. So while Fidelity in Europe has been launching two special sector funds focusing respectively on tech and telecoms, utilising the considerable skills of their US fund management colleagues, Investec Guinness Flight has come out with a broader approach - the 'Wired' index fund.
It's a good sales gimmick for sure, but it is based on a solid idea - that new means of global communication are fundamentally affecting business and consumer behaviour. Gil Scott Heron was wrong; the revolution will be televised. In a relatively short space of time (much shorter than it took PCs to catch on - 30 years - or the telephone - 40 years), we will all be cyber shopping from our living rooms. At the current pace of internet development, this is going to happen inside five years.
The wired approach is not confined to technology as defined by the index, The S&P 500 (the benchmark for global equity managers) has a 20% tech component. But within the index there are another 40% of growth stocks, many of which would fit the broader remit of the 'Wired' Index. The IGF fund invests in just 40 stocks, each of which displays at least one of the five attributes associated with the new economy. These are globalism, communication, innovation, technology and strategic vision. The creators of the index, the publishers of the US magazine 'Wired', like to think they have created the Dow Jones of the 21st Century. Over the past year, it has produced a performance of over 70%, by investing in names such as Sony, Disney, Reuters and Wal-Mart, as well as tech plays such as Lucent, Cisco and EMC. This is in a secular bull market of course, but short term jitters aside, the aforementioned companies would be on most people's list of the stocks to hold for long term growth.
This touches on an important issue for asset allocators. If US wired stocks have returned 70% in the past year, why are fund managers underweight the US and overweight Europe? Look at the relative performance of the markets. Is there a compelling argument to support higher growth and earnings in Europe than the US? Our regular analysis of the asset allocation policy of global equity managers shows the reason why many of them are underperforming. The average weighting to the US is over 13% below the benchmark, while the corresponding weighting to European equity markets is 5% above the benchmark. Add in a liberal dose of euro weakness and you have a recipe for serious underperformance.
The analysis doesn't take into account the ability of the fund manager to produce outperformance by stock-picking, but it certainly brings into question the decisions being made at the top down level. At one end of the spectrum, you have the GAM Universal Dollar Fund, which has a 69% North American weighting and a slightly above benchmark allocation to Europe. By contrast the Templeton GS Global Growth Fund has only 22% US exposure, a 23% European component and a whacking 18.6% UK weighting (against a benchmark of 10%). In its defence, this fund is also heavily overweight Asia and is clearly a very different animal from its peer group. The largest of the offshore funds in this analysis, the Morgan Stanley Sicav Global Equity Fund, was 20% underweight the US at the end of August and 15% overweight Europe.
IGF warns that those companies that do not embrace the 'Wired' revolution may find themselves, like the dinosaurs, doomed to extinction. Maybe a little dramatic, but certainly investors cannot afford to underestimate the importance of US stocks in the new world order.

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