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Edinburgh Worldwide manager Mark Urquhart has been reducing his exposure to technology giant Apple over concerns the group is facing ever greater competition in the smartphone market.
But Urquhart thinks negative sentiment towards the company may now be overdone, as Apple has continued to sell off.
Urquhart has consistently liked the tech sector although his current exposure to it has reduced slightly to around 37.5% of the £230 million trust, with Apple representing around 4.3%.
Urquhart told Citywire Selection: ‘Apple has always gone for the high end and had yet to launch a low cost phone. There is no doubt that the sector is becoming more competitive and the arithmetic of continuing strong growth is becoming ever harder.
‘But the market has now gone too far and has fallen out of love with it spectacularly. It is now trading on a single digit price-to-earnings ratio, which means people assume it has run out of products.
Urquhart stresses that the group still has ‘plenty of geography to go for’ and cites the recent tie up with mobile firm DoCoMo in Japan to market the iPhone 5s and 5c.
‘If it can get even 10% to 15% of high end smartphone sales in China it will be doing well too,’ he said.
Facebook in favour
Urquhart is also happy to stick with social networking giant Facebook despite its poor performance since its initial public offering (IPO)in May 2012. He has increased the position to 4% of the trust.
‘Facebook has gone from hero to zero in the space of a year but we think the most interesting feature is how much revenue it is deriving from its mobile platform. It has around one billion users, and 700 million of those are active mobile users,’ he said.
‘Advertisers are starting to spend more on Facebook and its share price is back above its $45 IPO price. We are seeing huge advertising market potential from what is a $750 billion market globally. If Facebook gets 1% of that it would derive $5-$6 billion of revenue.'
He cites the recent example of General Motors, which is now using Facebook to advertise to reach end users. ‘The sheer scale of the potential revenues from online advertising is still underestimated.’
Still upbeat on US
Urquhart remains upbeat on the US, where he has just over half of the trust’s exposure, even though he believes future returns might be more muted than those enjoyed by investors over the past two years.
‘It may not produce the annual 4%-5% of the last decade but growth should remain decent and unemployment is gradually falling.’
Japan remains just 1.4% of the portfolio, made up of one stock, children’s licensing group Hello Kitty, as Urquhart believes most of the good quality companies in the country are too expensive.
Elsewhere, Urquhart has added electric car maker Tesla and has been growing his stake in Indian mortgage lender HDFC. He has also sold out of Swedish engineer Sandvik.
‘HDFC is a 30-year growth story and it has a strong balance sheet, is conservatively run and has low historic default rates,’ he explained.
‘We sold Sandvik because infrastructure is a tough sector at the moment. It is a good business but we felt it had run its course for now.’
The gearing on the trust has recently come down to around 8% and Urquhart has built his cash position up to around 6%-7% of the trust’s assets. The discount has also narrowed of late and was standing at around 8% on 16 September.
‘That cash level is quite high but it gives us a lot of ammunition for a market sell-off,’ Urquhart said.
Citywire Selection Verdict: The trust’s manager, Mark Urquhart, is focusing on the gradual shift of global trade from West to East. He has a cyclical bias and does well in market upturns, although he can underperform in less buoyant times. Over the past year, the trust’s large holdings within tech stocks have given volatile returns but we back the unconstrained approach to outperform the market over the long term. The discount has swung widely of late, so keep an eye on this for an entry point with which you are comfortable.
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