Somel (pictured) inherited the fund from Graham French, who told investors ‘I’m not very good at looking at technology’ before announcing his retirement in November last year, and bought a stake in Microsoft.
‘Is this becoming a general global equity portfolio? Answer: no,’ Somel said. He noted that three quarters of the fund was still held in the strategy’s traditional three sectors: consumer staples, basic materials, and industrials.
‘Those are the core sectors: hard assets, high return stocks that we continue to focus on. There are sectors like telecommunications that we have not added to and will not add to, or financials which I have not added to and will not add to. This remains a concentrated, high conviction portfolio and that is how it will remain going forward.’
Somel insisted, then, that buying Microsoft was not a precursor to changing the fund’s style.
‘This question has basically come about since I put Microsoft in the portfolio in November. It is a new stock for this portfolio and it is a new sector – a sector that we have never invested in before. Microsoft, I would say, is the exception rather than the rule for this portfolio.’
So why did Somel invest in Microsoft? ‘It is an excellent company and it is well managed. Now, we have never invested in technology before because technology predominantly over the longer term becomes a commoditised sector. That is not the case with Microsoft. They are not a technology manufacturer; they are an owner of assets.’
Somel observed that Microsoft software is used by 90% of businesses globally, and that there are more computers in China today using Microsoft products than there are in the US.
‘But Microsoft has not been able to benefit from that growth due to piracy,’ he recognised. Somel contended, though, that the situation was ameliorating now that Microsoft was focusing on subscription models rather than charging a large sum upfront.
Furthermore, Somel viewed the changing of the company’s management – with Satya Nadella and John Thompson coming in as chief executive and chairman respectively, replacing Steve Ballmer and Bill Gates – as a positive. ‘This company is now focusing on shareholder returns,’ he claimed, rather than simply growth at any price.
‘If I could find another 10 Microsofts that fit this portfolio, I would buy them all. But at the moment that is the only technology company in the portfolio and I really do believe in its growth potential going forwards.’
The performance of Global Basics has also perked up lately, returning 2.7% over the three months to the end of April compared with an average of 2.3% from its IMA Global Equity sector. It still languishes on a three-year view, however, having lost 8.9% while the peer group gained 20.8%.