Fiducia Wealth Management
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As part of our ongoing client communications, we like to regularly post quarterly Fund Manager Q&As, in an effort to give a little insight into the strategies of some of the managers within our portfolios. With the financial marketplace experiencing such unprecedented upheaval our Investment Committee is working continuously to adapt our portfolios to accommodate and protect against the global fluctuations and challenges presented by Covid-19.

This month, we hear from First Trust Global Portfolios and learn about their Cloud Computing ETF and hope you will find this both an interesting and timely read.

  1. In terms of performance 2020 was clearly a very good year for technology companies – how do you see 2021 playing out for a fund like yours?

In our view Cloud Computing (FSKY) is one of the fastest growth areas if not the fastest growth area within the entire technology sector. We would suggest viewing Cloud Computing as Digital Infrastructure or a Utility going forward. The growth projections of the Cloud Computing area have been consistently upsized over the last few years as the space grows faster than expected, a few of the more recent independent forecasts are shown below which suggest that in 2021 the growth in the space should continue:

The big tech companies have started to report earnings for Q4 2020 this week and are providing clarity on how Cloud Computing is increasingly the fastest growth area of their business. Extract of Microsoft’s earnings release this week below, which references how Azure (their Cloud Business) drove results for Microsoft:

“CEO Satya Nadella said digital transformation and cloud demand drove results for Microsoft. Indeed, Azure revenue growth was up 50% in the second quarter.”

Cloud Computing as an area is a lot more than working from home or data storage. The technology is the underpinning infrastructure of many different themes such as AI, Robotics, Autonomous Vehicles so as those themes grow then so does Cloud Computing naturally. Furthermore Clouds Green credentials will help drive its growth through examples such as Amazon, Microsoft & Google ambition to be carbon neutral and reduce its emissions. Some of the companies are already carbon neutral and the technology is seen as a Green technology.

  1. Tell us what distinguishes your fund from other technology funds?
  • FSKY differentiates itself from the rest of the market by offering investors a pure play approach to Cloud Computing.
  • The fund is different to most other technology funds as it invests in the fast growth companies that you are unlikely to own in other parts of a portfolio or other funds. See illustration below. FSKY has ~ 4x Sales Growth of the S&P 500 and none of our top 10 fastest growth companies feature in the S&P 500 at all.
  • First Trust were the first fund to exclusively focus on Cloud Computing companies (in 2011), and our heritage in offering thematic portfolios to investors has enabled us to develop our unique approach.
  • FSKY’s investable universe (initially filtered for minimum market cap, free float and ADV) is broken down into 3 buckets: pure plays, nonpure plays and broad technology conglomerates. This offers investors access to both the known and unknow names associated with Cloud Computing. The portfolio applies a “score” to the different areas of Cloud Computing: SaaS, PaaS, IaaS pure-play firms.  FSKY’s quarterly rebalancing of its underlying index is one of our biggest differentiators. Our peers’ products are typically market-cap weighted and more focused on mega-cap technology names, subsequently failing to offer investors a pure play on this thematic opportunity.

          3. Could you explain how you formulate the weighting within your fund?  

  • Very simply we are allocating more weight to the Enablers of Cloud Computing vs the Users.
  • The Index employs a modified equal weighted methodology which weights each company by a “Cloud Score” similar to market cap weighted. At every index evaluation, each security has its Cloud Score calculated by receiving a score for each category (IaaS, PaaS, and SaaS), 1 if it is operating in that category and 0 if it is not. The maximum score that can be achieved is a 6 (3 for IaaS, 2 for Paas, 1 for Saas).

IaaS – Infrastructure as a service (Plumbing or pipework of Cloud Computing i.e Amazon, Microsoft etc)

PaaS – Platform as a service (Any platform run on the Cloud i.e. Google Ap engine)

SaaS – Software as a service (Any software ran on the Cloud i.e. Zoom)

  • Each company’s total score is divided by the total sum of the scores in the universe to determine the weight of each security. Individual security weights are capped at 4.5%. The number of securities in the index is limited to 80 securities. The Index is reconstituted and rebalanced quarterly.

         4. There is a lot of talk of a tech bubble forming given some of the current valuations relative to historical norms.    What are your views in this regard?

  • With such good returns for many technology names in 2020 and with such large valuations it’s not hard to see why many investors are asking the questions of “are we in a bubble” and will it burst, often drawing comparisons to the crash. With central banks pumping excess liquidity into markets, has this new money supply artificially inflated the FANG stocks? With those sitting on the outside waiting to buy any potential dip, we bang the drum for a rules-based approach to help remove the dangers of sentiment driven trading, empowering you to act in the face of uncertainty, fear and exuberance. A good example: the FANG stocks are valued at more than the entire FTSE100 Index. But let’s turn that around and raise an crucial question: when was the last time you used the services of a FTSE100 company? Aside from who you bank with? Food for thought.
  • We do not believe we are in a bubble. On the below piece we analyse this in a lot more detail. Market fundamentals and valuations are under those of the tech bubble in ’99. One important distinction now is a lot of the companies in this area are now highly profitable and their share prices move on sales growth and earnings instead of speculation. They also provide services which we use multiple times daily even if we do not recognise it and people and businesses will likely continue using these services more not less in the future.
  • Technology as a space still has huge growth potential for which it can grow into and fully justify its earnings predictions for a strong 2021.



Fiducia Wealth Management

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