AXA Framlington Global Technology: February 2023 fund update

• Lead manager Jeremy Gleeson has more than two decades of experience investing in technology companies
• While the fund has delivered higher returns than the broader technology sector over the longer term, it has struggled more recently due to the sharp rotation in investment styles
• The fund could add diversification and boost the long-term growth potential of a more adventurous portfolio
• This fund does not currently feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Over the years we've witnessed the advancements in technology tap into almost every area of our lives. There is an abundance of companies across the globe, and it can be difficult to sift through the good and the bad. The AXA Framlington Global Technology fund invests in companies that research, design and develop technology across all sectors. These can be companies of any size, including higher risk smaller companies.

Investing in specialist areas, like technology, adds risk, and our analysis shows it's difficult for managers investing in these areas of the market to perform better than their benchmark through good stock picking over the longer term. We think specialist funds like this should usually only form a small part of a well-diversified investment portfolio.

Manager

Jeremy Gleeson has over two decades of experience investing in technology. He joined AXA Framlington in 2007 and has been the lead manager of the Global Technology fund ever since. He also manages the Digital Technology fund and is co-manager on the Robotics fund. These are run in a similar way and invest in some of the same companies. We think he can comfortably manage his commitment to each.

Gleeson can make use of wider resources at AXA Framlington, drawing support from other portfolio managers including Tom Riley, Stephen Kelly, Pauline Llandric and more recently Brad Reynolds.

Riley has worked closely with Gleeson for many years and specialises in industrials. Kelly has been running US funds for over 20 years and has a natural overlap in the technology space, given the sector makes up a large part of the US market. He brings a more detailed focus on the economy and its outlook. Llandric focuses on some of the big names in the US too, but also spends some time looking at opportunities outside of the US, including China or Europe.

Reynolds is the latest addition to the team and joined in November 2022. Prior to this, he was a technology analyst at Polar Capital and boasts over 15 years' experience in the industry. He specialised in software and internet companies, so will be a welcome addition to the team.

With access to the wider resources at AXA Framlington, and a strong team surrounding him, we think Gleeson is well resourced to focus on the job in hand.

Process

Gleeson prefers to avoid higher-risk start-up or ‘blue sky' companies, as these are largely unprofitable and tend to disappoint in the early stages. Instead, focus is placed on investing in companies that are run by progressive, quality management teams, which have high potential growth and profitability prospects.

These types of companies can be found across the globe but as the technology sector makes up a large part of the US market, Gleeson tends to find more opportunities there. The US currently makes up just under 83% of the fund.

Gleeson believes that a lot of early-stage US technology companies are staying private for longer and benefit from the government's support. This means if a company decides to become public, it's from a position of greater strength and is likely more established than some other early-stage companies in Europe for example.

Over the last 12 months, Gleeson has reduced his exposure to the US, though, this wasn't a conscious decision. Following a tricky end to 2021, they reviewed the fund, re-checking their conviction in each company and compared this against the state of the economy. The outcome was to trim some of their US investments.

Zendesk was the most notable reduction. It's been battling against a difficult market backdrop and at times struggled to provide its advertising services. Discretionary spending has also dropped, which in turn has impacted budgets for campaigns, so the team felt it right to sell. Snap Inc, which owns camera company Snapchat, and social media platform META, formally known as Facebook, were also sold.

Outside of the US, the team find opportunities across Europe, including the UK, and parts of Asia, including some higher risk emerging markets. They recently added Infineon, a German semiconductor manufacturer. The company has been on the radar for some time, but it has always been too expensive. It has now fallen into a range where the team feel comfortable, so it was added last year. Meituan, a listed company in Hong Kong that operates out of China, was also added. It provides a variety of services to consumers and could be set to benefit from the pent-up demand once the Chinese economy opens.

Culture

The company was formed in the early 19th century. The name AXA was introduced in 1985 and they bought specialist investment manager Framlington in 2005. AXA's investment culture is based on proactivity and collaboration, with research shared across AXA's equity investment teams. They promote a strong focus on investors’ interests and ensure they align with those of fund managers. Managers are rewarded on performance, with a focus on the longer term, alongside client growth and increasing the fund size over time.

ESG integration

AXA has significantly improved its approach to Environmental, Social and Governance (ESG) factors in recent years. The firm's bolstered its team of ESG specialists with a significant number of new hires, split between a central team and the various investment teams. The firm's developed an internal research, analysis and rating database, which provides ESG information on thousands of companies, in over 100 countries, and all AXA fund managers and analysts have access to it. The system considers the ratings awarded by a variety of different providers, with the aim to arrive at a more balanced view.

The firm excludes companies involved in controversial weapons, palm oil (those that haven't achieved ‘sustainable palm oil' status), soft commodities, coal and tar sands from all its portfolios. The list is widened to include tobacco, defence, violators of the UN Global Compact and companies that achieve the lowest ESG scores in their ESG integrated portfolios.

ESG has always played an important role in the analysis Gleeson and his team conducts, particularly the governance pillar. Gleeson believes this part of ESG helps them identify good quality management and how they look at the business over the long term. He also believes that a low score isn't necessarily a reason to exclude a company. What it does do is trigger further analysis. This provides the team with a good starting point to question management teams around their issues. Similarly, good ESG scores alone don't provide a reason to invest.

Cost

The standard annual ongoing charge for this fund is 0.82% a year. This is one of the lowest charges among actively managed Global technology funds. The HL platform fee of up to 0.45% per annum also applies.

Performance

Gleeson became lead manager of the Global Technology fund in July 2007 and over his tenure, the fund has returned 818.79%* compared to the IA Technology & Telecoms sector average gain of 565.06%. Over this time, the fund has benefited from the tailwinds of investing in high quality companies with above average earnings growth, also known as growth investing.

While his preferred style of investing has done well over this time, this doesn't mean it will continue. We've seen evidence of this over the last 12 months. These types of high-quality growth companies were hit hard by the sharp rotation away from growth investing, particularly early in 2022.

Rapidly increasing inflation and interest rates have also impacted the fund. Rising supply and labour costs, alongside an increase in borrowing costs, are putting pressure on the share prices of some technology companies.

Gleeson believes that in a normal environment, where rates and inflation don't rise at such an aggressive pace, technology has the potential to hold up well. Varying forms of technology are needed globally, but they haven't been able to withstand the pace or intensity of the recent market pressures.

Over the last 12 months, the fund fell 12.23% versus a fall of 10.88% for the average fund in the IA Technology & Telecoms sector. Though this is over a short timeframe. Past performance is not a guide to future returns, and you should consider this performance in the context of a longer time horizon.

At a stock level, cloud communications platform Twilio and META were among the funds worst performing companies. Dented demand hurt Twilio and the company has struggled to bounce back. META struggled primarily due to the harsh backdrop for digital advertising. In contrast, Infineon and Microchip both held up well. They maintained demand and have benefited from the bounce back in semiconductors.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2023.

Find out more about AXA Framlington Global Technology, including charges

AXA Framlington Global Technology Key investor information