Given the volatility in the equity markets in 2016 we feel it’s time for an update on Signature Global Science & Technology Corporate Class. Coming into 2016 there was U.S. dollar headwinds, macro and political uncertainty. Credit spreads had moved wider on bankruptcy concerns linked to falling commodity prices and global central bankers appeared uncoordinated and lacking a strategy to deal with this environment. During this time Signature Global Asset Management shifted to preserve capital by raising cash and buying gold for the core mandates. Given the volatility of the technology sector, we felt it was appropriate to raise a significant amount of cash during the first week of the year.
The macro team at Signature has been diligently tracking all of the important economic and political markets to identify a catalyst to change our defensive positioning. When this team identified a shift in Fed policy, pushing out rate hikes, this provided a backdrop for an improved outlook for emerging markets and equities.
As the macro fears have subsided during the past several months we have shifted to an offensive positioning within Signature Global Science & Technology Corporate Class. Specifically, we have deployed the majority of our cash and tilted the portfolio away from defensive names to more growth oriented companies. We believe the underlying fundamentals of the technology sector are improving.
Thematically we have seen an increase in M&A activity in 2016. Every technology management team is facing pressure from its boards of directors to grow the bottom line. While the IT spending environment remains muted, companies are financially engineering earnings growth via M&A. Cash rich companies such as Microsoft have acquired LinkedIn, Salesforce.com acquired Demandware, Oracle acquired Netsuite and Analog Devices acquired Linear Technology. We continue to expect the M&A trend to continue in the semiconductor, software and internet sectors.
Apple Supply Chain
Despite the low expectations for the launch of the iPhone 7 in September, we believe that the supply chain has shifted from destocking older devices to ramping production of the new iPhone 7. We are positive on certain key components which will be upgraded, such as the dual-camera, memory, and acoustics.
Looking beyond the iPhone 7, the supply chain is working on the iPhone 8. 2017 marks an important milestone for the 10th anniversary of the iPhone series. We expect to see certain key changes ahead as the iPhone 8 could adopt an OLED screen. This could in fact change the iPhone form factor. While the final specs won’t be finalized until 2017, we are doing our due diligence to find the next potential winners.
The valuation of the technology sector is not demanding. The S&P Information Technology Index is trading a touch lower than the S&P 500 multiple of 18.5x FY 2016. The valuation of the technology sector is composed in a barbell like manner. Large mature capitalization companies trade at the lower end of the valuation spectrum while growth oriented names trade at the higher end of the valuation spectrum. We have positioned Signature Global Science & Technology Corporate Class with the leading large capitalization winners balanced with a great group of technological disruptors. We are cautiously optimistic on the outlook for Signature Global Science & Technology Corporate Class based on a stabilizing macro and credit environment that should support IT spending and improve emerging market consumer demand.
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