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Franklin Technology Fund - News
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Franklin Technology comment - Jul 06
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Monday, 28 August 2006
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Fund Manager Comment
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In July, Franklin Technology Fund underperformed its benchmark, returning a net -6.15% (in U.S. dollars) versus -5.22% for the Amex Merrill Lynch Technology 100 (MLO-100) Index.
The largest positive contribution to the fund's relative performance in July came from an overweight allocation to the communications sector. An overweight allocation to the health technology sector also benefited the fund.
By contrast, stock selection in technology services, particularly information technology services and data processing services, acted as a drag. Stock selection in electronic technology, including the semiconductor subsector, also hurt the fund. However, stock selection in the computer processing hardware subsector benefited the fund. Within communications, specialty telecommunications had a notable positive effect on the fund's performance. Within health technology, allocations to both medical specialty companies and biotechnology helped the fund's relative returns.
By contrast, stock selection in the semiconductor subsector of electronic technology represented the biggest detractor from performance in July. Other notable underperformers through the month included internet software/services, a subsector of technology services, while stock selection in telecommunications equipment, a sub-sector of electronic technology, also weighed on performance.
Positive individual contributions came from American Tower Corp. (communications), Silicon Laboratories (electronic technology), Flir Systems (electronic technology) and Akamai Technologies (technology services). An overweight position in Apple Computer (electronic technology) also benefited the fund, as its share price jumped significantly from the prior month.
By contrast, positions in NetLogic, Marvell Technology Group and SiRF Technology Holdings (all electronic technology) hurt the fund's relative returns. Overweight allocations to Yahoo and VeriSign (both technology Services) hurt the fund, as both underperformed.
Outlook
We continue to search for and invest in leading technology companies, focusing on those that possess differentiated, innovative, and disruptive intellectual property and are led by superior managers. The outlook for continued economic growth suggests that well-positioned technology companies that can execute their business plans will generate superior revenue and earnings growth over the next 12-24 months.
Demand for technology goods and services from emerging economies is extremely vibrant and the outlook for numerous emerging technologies remains robust. We continue to position the portfolio to take advantage of a number of technological trends including VoIP, GPS, Gigabit Ethernet, on-demand software, Internet commerce, storage, network security, satellite radio, 3-D design/simulation software, off-shore IT outsourcing, voice-recognition technology, and the proliferation of digital data, to name a few. We expect companies facing powerful secular growth opportunities and/or product cycles will enjoy a productive 2006.
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Franklin Technology comment - Sep 05
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Friday, 18 November 2005
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Fund Manager Comment
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For the three-month period ended September 30, 2005, Franklin Technology Fund under-performed its benchmark, returning a net 5.86% (in US dollars) versus 9.80% for the fund's benchmark, the Amex Merrill Lynch Technology 100 (MLO-100). The Fund's performance placed it in the 76% percentile for its Lipper peer group.
For the first time this year small capitalization stocks kept pace with larger capitalization stocks during the third quarter. In the face of challenging news, technology stocks generally advanced through the third quarter. We witnessed a decoupling of the inverse relationship between technology stocks and crude oil as the price per barrel climbed USD9.75 during the quarter, to end at USD66.24 a barrel.
Communications and commercial services sectors both produced relative out-performance for the fund. The process industries sector was a particular bright spot, and was the single largest sector contributor to outperformance.
Headwaters, a Utah-based maker of synthetic fuel briquettes from coal derivatives - the fund's only holding in the process industries sector - was a significant positive contributor to relative performance. American Tower Corp., an operator and developer of wireless communications - the fund's sole communications sector holding - likewise added to relative out-performance. The stock's three-month performance was aided by an upgrade by Moody's Investors Service during the quarter. Moody's said the company had a track record for providing good revenue, cash flow growth, and free cash flow generation.
Getty Images and Ultimate Software Group were two commercial services holdings that contributed positively to the Fund's third-quarter performance. Getty Images, a leading provider of imagery and film to communications professionals, reported a record 23% increase in revenue in the second quarter, while operating income grew 39% to USD55.5 million. Ultimate Software Group, a leading provider of Web-based payroll and workforce management solutions, benefited from positive news flow through the quarter. Its stock has gained 47% since the end of 2004.
An underweight allocation to electronic technology sector was the single greatest detractor from relative performance in the third quarter. However, one notable positive contributor in this sector was American Science & Engineering. The company, which produces X-ray inspection systems for homeland security and other critical defense applications - an overweight holding for the fund - was buoyed through the quarter by a major new US government contract.
Overall, no single stock stands out for its negative relative contribution, however allocations to names like SanDisk Corp., Dell, VeriSign, ZiLOG and FormFactor hurt the fund's performance through the quarter.
Outlook
We continue to search for, and invest in, current and leading technology companies. We focus on companies who posses differentiated and innovative intellectual property, led by superior managers. The outlook for continued, albeit modest, economic growth suggests that well-positioned technology companies that can execute on their business plan, will generate revenue and earnings growth over the next 12-24 months.
Though end-markets are experiencing modest growth at best, subtle technology trends underneath the surface are creating superior growth prospects for select well-positioned companies. It is these companies we will seek to hold in the fund. The consumer has proved resilient in his/her discretionary spending thus far, and corporate balance sheets are cash-rich. Inventory levels throughout the technology supply chain are lean by historical standards.
The uncertain geopolitical environment, inconsistent pace of economic growth, price of oil, lack of visibility for technology companies, and investors' short-term focus should continue to generate significant volatility in technology stocks, which we plan to take advantage of - relying on our meticulous technology and company research, as well as valuation discipline.
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Franklin Technology comment - Jul 05
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Wednesday, 14 September 2005
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Fund Manager Comment
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The SICAV Franklin Technology Fund advanced +a net 5.85% in the month of July. The fund's official benchmark, the MLO-100, advanced a more substantial +6.79%. The technology sector out-performed the broad market in July, as evidenced by the S&P 500's positive, but smaller, +3.60% return. We firmly believe investors should focus on long-term performance, especially in the volatile technology sector. Once again, small cap technology stocks out-performed large cap technology stocks, as the Russell 2000 Technology Index (small cap) generated a +7.31% return during July, versus the Russell 1000 Technology Index's (large cap) +6.24% advance. The fund has more exposure to the small cap segment than its benchmark, helping its relative performance in July.
Technology stocks maintained a consistent upward trajectory for the entire month. Seventy-seven of the one hundred stocks in the MLO-100 advanced during July. Eight stocks (SanDisk, Amazon.com, Teradyne, Garmin Ltd., e-Bay, Avaya, Freescale Semiconductor, and Broadcom) generated returns greater than 20% for the month. Two contract manufacturing companies, Sanmina and Celestica, were the bottom-two performing stocks in the index, declining by more than 10% in July. This was beneficial to the fund, as we do not hold any contract manufacturing stocks.
Technology stocks advanced, even in the face of crude oil rising during July, to $60.57/barrell at the end of the month. Should oil continue its climb, it would seemingly mute incremental consumer and enterprise demand for technology goods and services. Interest rates also increased, as the 10-year U.S. Treasury Note yield climbed to 4.28% by the end of the month. Consumer confidence reports were generally in-line to higher-than expected for the month. Industrial production surprised on the upside (+0.9% vs. expected 0.4%). The Leading Indicators report similarly was a better-than-expected 0.9% (vs. 0.5% expected). Lastly, durable goods orders (ex-transportation) were a robust +2.6% (vs. expectations of 1.0%). Initial jobless claims throughout the month were also positive. These macro economic reports no doubt helped investors feel better about future economic growth, and propelled technology stocks higher.
July also featured Q2 earnings reports, and Q3 guidance, from the technology sector. The number of good reports, and guidance, out-numbered those disappointing. Companies like Accenture, Alcatel, AMD, Apple, IBM, Motorola, Hewlett- Packard, Lucent, e-Bay, Microsoft, Google, Texas Instruments, Amazon.com, and Electronic Data Systems provided positive results. Converseley, Yahoo, Intel, Nokia, Lexmark, Sun, Electronic Arts, Samsung, and Sony disappointed the market. All-in-all, the overall demand environment appears stable, and is entering a typically seasonally stronger secondhalf. The effects of higher crude oil prices cannot be overlooked, however.
Hardware related industries generally out-performed software and IT service related groups during July, with instrumentation/electronic equipment and semiconductor equipment stocks leading the way. The group with the single best performance, however, were retail internet stocks, led by e-Bay and Amazon.com (as mentioned above). Trailing groups included the aforementioned contract manufacturers, storage, and internet software & service sectors. The fund benefitted from its over-weight position in instrumentation stocks, which out-performed, but was negatively impacted by a slight under-weight in semiconductor equipment, and an over-weight exposure to storage and internet software & service segments. The fund was under-represented in the benchmark stocks that had greater-than 20% returns for the month, this month. Given the strong positive move in technology stocks in July, our cash balance, though not excessive, did detract from our relative performance.
We adamantly believe well-positioned, innovative, higher quality companies will generate superior returns to shareholders over the long-term. We expect significant stock volatility to continue in the technology sector. This volatility presents opportunities for patient and disciplined investors. We believe our meticulous investment research process and long-term investment horizon enables us to take advantage of this volatility, for our shareholders, as the market has dramatic reactions to near-term issues that do not similarly impact the company's net present value.
We are confident that well-positioned and well-managed technology companies will continue to generate growth this year. Global IT spending should increase, as corporate profits expand, complementing the demand for technology goods & services that has been driven by individuals to date. Emerging markets should provide a further catalyst to overall technology demand. We will continue to look for those select companies that either enjoy, or are driving, secular trends, that should enable them to generate growth in a more muted/cautious technology spending environment. There are numerous powerful trends within technology sectors that can drive attractive growth and profitability for select companies. These trends include the adoption of voice-over-IP, GPS, gigabit ethernet, data-center virtualization, wireless data services, 3G, IT outsourcing, data-storage, network security, mini-hard-disc-drives, power-over-ethernet, broadband-overpowerline, removeable solid-state storage, wireless-connectivity, HDTV, the digital home, satellite radio, satellite and T.V., business intelligence software, x-ray based screening technology, 3-D design automation & physical simulation, and many others.
The Fund's investment strategy has not changed since its inception. We focus the fund's exposure on those investment ideas in which our technology analysts have the most conviction. Our investment approach has not changed. We identify definitive secular technology trends and innovation paths, then find those companies that, due to superior technology, business models, and/or management teams, preferably all three, can generate sustainable superior growth rates, profitability, and shareholder returns. Our consistent valuation discipline complements our meticulous company and sector-specific due diligence, in evaluating technology stocks.
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Franklin Technology comment - Jun 05
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Tuesday, 16 August 2005
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Fund Manager Comment
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The SICAV Franklin Technology Fund declined -1.91% (in US dollars) in June. The fund's official benchmark, the MLO- 100, declined a more substantial -2.36%. The technology sector under-performed the overall market in June, as evidenced by the S&P 500's flat performance for the month. We believe investors should focus on long-term performance, especially in the volatile technology sector. Small-cap technology stocks out-performed large-cap technology stocks, as the Russell 2000 Technology Index (small caps) generated a +0.68% return during June, versus the Russell 1000 Technology Index's (large caps) -1.70% decline. The fund has more exposure to the small-cap segment than its benchmark, thereby helping its relative performance in June.
Technology stocks were flat for the month, through June 23rd, at which time they then experienced a sell-off through the end of the month. Four of the last five trading days saw declines in technology stocks. Oracle reported a strong earnings report late in the month, and companies like PMC-Sierra reaffirmed positive guidance, but these positive data-points were overshadowed by negative reports from the likes of Solectron, ATI Technologies, Creative Technologies, and Research- In-Motion. These divergent updates reinforce the need for detailed technology market and company analysis, as well as selective stock purchases within a sector offering widely diverging prospects.
Crude oil had its largest upward move in some time in June, with the price-per-barrel increasing $4.52/barrel, to $56.49 by month's end. Technology stocks have appeared more resilient of late in the face of rising oil. However, should oil climb significantly higher, it could hurt incremental consumer and enterprise demand for technology goods and services. As one might expect during a directionless month, macro-economic data was mixed. Factory orders, durable goods orders (ex transportation), non-farm payrolls, wholesale inventories, retail sales, the Help Wanted index, and the Chicago Purchasing Managers Index all came in below expectations, casting a cloud over economic growth assumptions. However, industrial production, unemployment, the Producer Price Index (ex food and energy), consumer confidence, and the final upward revision of first-quarter GDP growth (to 3.8%) were positive indicators. Late in the month, Advance Micro Devices ('AMD') filed an antitrust lawsuit against long-time rival Intel. We will no doubt hear much more about this high-profile claim and witness counter-claims in the months and years ahead.
Within the technology sector, performances varied widely in June. Stocks in the Home Entertainment Software (+7.7%), Electronic Manufacturing Service (+3.3%), and Data Processing Service (+1.3%) industries generated noteworthy positive returns in June. This included stocks such as Electronic Arts (+7.75%), Sanmina-SCI (+7.25%) and First Data (+6.11%). By contrast, the Retail Internet (-13.1%), IT Consulting (-12.6%), and Internet Software & Service (-6.9%) industries all experienced meaningful declines. These groups include stocks such as e-Bay (-13.15%), Unisys (-12.57%), and Check Point Software (-12.72%).
The top-ten performing stocks in the MLO-100 for June were National Semiconductor (+9.49%), Electronic Arts (+7.75%), Sanmina-SCI (+7.25%), Infosys Technology (+7.09%), First Data (+6.11%), Corning (+5.99%), Advanced Micro Devices (5.73%), Tellabs (+5.71%), Google (+5.66%), and BMC Software (+5.46%). The bottom-ten performing stocks in the MLO-100 for June were Unisys (-12.57%), Check Point Software (-12.72%), eBay (-13.15%), Autodesk (-13.16%), Adobe Systems (-13.43%), Citrix Systems (-13.91%), Symbol Technology (-14.25%), Mercury Interactive (-14.98%), Seagate Technology (-17.30%), and ATI Technologies (-21.37%).
The fund out-performed the MLO-100 due to stock selection and strong absolute returns in the IT Service, Computer Peripheral, Data Processing Service, and Specialty Communication segments. The fund's cash position, and, as stated before relatively higher exposure to smaller companies, also benefited performance. Packaged Software, Telecommunications Equipment and a few semiconductor stocks detracted from the fund's relative performance.
We adamantly believe well-positioned, innovative, higher quality companies will generate superior returns for shareholders over the long term. We expect significant stock volatility to continue in the technology sector. This volatility presents opportunities for patient and disciplined investors. We believe our meticulous investment research process and long-term investment horizon enable us to take advantage of this volatility for our shareholders, as the market reacts dramatically to near-term issues that do not similarly impact individual companies' net present value.
Outlook
We are confident that well-positioned and well-managed technology companies will be able to generate growth in 2005. Global IT spending should increase, as corporate profits expand, complementing the demand for technology goods and services that has been driven by individuals to date. Emerging markets should provide a further catalyst for overall technology demand. We will continue to look for select companies either enjoying or driving, secular trends that should enable them to generate growth in a more muted/cautious technology spending environment. There are numerous powerful trends within technology sectors that can drive attractive growth and profitability for select companies. These trends include the adoption of voice-over-IP, GPS, gigabit ethernet, data-center virtualization, wireless data services, 3G, IT outsourcing, data-storage, network security, mini-hard-disc-drives, power-over-ethernet, broadband-over-powerline, removable solid-state storage, wireless-connectivity, HDTV, the digital home, satellite radio, satellite and T.V., business intelligence software, x-ray based screening technology, 3-D design automation & physical simulation, and many others.
The Fund's investment strategy has not changed since its inception. We focus on those investment ideas in which our technology analysts have the most conviction. We endeavor to identify definitive secular technology trends and innovation paths, then find those companies that, due to superior technology, business models, and/or management teams (preferably all three), can generate sustainable superior growth rates, profitability, and shareholder returns. Our consistent valuation discipline complements our meticulous company and sector-specific due diligence in evaluating technology stocks.
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Franklin Technology comment - Mar 05
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Friday, 29 April 2005
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Fund Manager Comment
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Franklin Technology Fund declined -9.43% (in U.S. dollars) during the first quarter of 2005. This performance trailed its primary benchmark, the MLO-100, which declined -7.14%. For the trailing 12-month period, the fund out-performed its benchmark, declining -1.12% versus the benchmark's -3.03% decline. As always, we encourage investors to focus on long-term performance, given the sector's volatility, and the fact we manage the fund with a long-term view, not using a monthly or quarterly time horizon.
For many technology companies, the first quarter is a seasonally weak quarter for demand, especially consumer-related products. This seasonal weakness often results in uncertainty about the general demand environment, appropriate inventory levels and capital expenditure budgets. The first quarter of 2005 was no exception. After a strong seasonal rally during the fourth quarter (the MLO-100 advanced over 18% in Q4- 2004), technology stocks experienced a sharp and linear decline in January, continuing the trend of extreme volatility in the sector that existed for all of 2004. January's decline of -7.1% accounted for 87% of the quarter's decline. We suspect much of this selling pressure was a give-back of some of the fourth quarter's exceptional performance. Crude oil's move to $48.20/barrel during January also increased investor concern about technology stocks' growth potential in 2005. Crude oil's further move to $55.40/barrel by the end of the quarter was a prominent negative factor for technology stock performance for the full quarter. Interest rates increased 22 basis points during the quarter to 4.48% (10-year USTN), fanning concerns about future domestic economic growth potential.
Financial activity in the technology sector continued during the quarter, further increasing speculation and stock volatility. Oracle eventually outbid SAP to acquire Retek, Silver Lake Partners plans to acquire Sunguard Data Systems for approximately $10 billion, and IAC/Interactive Corp. bid almost $2 billion to acquire Ask Jeeves. We expect financial/M&A activity to continue during 2005.
For the quarter, larger capitalization technology stocks meaningfully out-performed smaller stocks, reflected by the 303 basis point performance differential between the Russell 1000 Technology Index (-7.12%) and the Russell 2000 Technology Index (-12.15%). This phenomenon hurt the fund's relative performance, as it has more exposure to the sub-$2 billion market capitalization range (approximately 20% vs. 0%). We have gradually been increasing the fund's exposure to large and mega capitalization technology stocks.
Sectors that had a significant negative impact to the fund's relative performance were computer communications, electronic production equipment, and semiconductors. Significant out-performance during the quarter was limited to the software segment. The under-performance in computer communications was largely a result of one stock's -37% decline during the quarter, a stock the fund holds but is not in our benchmark. Under-performance in electronic production equipment stemmed from the fund's holdings under-performing their peer-group, though we believe we hold the stocks that are best positioned longerterm. Under-performance in the semiconductor space was the result of, what we believe are, lower-quality companies outperforming the industry during the quarter. The software sector's out-performance for the fund was led by continued relative strength demonstrated by the fund's holdings. Our cash position was a positive factor, as the market experienced a significant decline during the first quarter.
While our investment process, focus on quality, and valuation discipline will lead to quarters where we trail the benchmark, we believe over the long-term, we will out-perform using this investment discipline/philosophy. The strategy of the fund has not changed since inception. We continue to search for, and invest in, the current and future leading technology companies. We focus on companies who possess differentiated, innovative, and disruptive intellectual property, that are led by superior managers. The outlook for continued, albeit modest, economic growth suggests well-positioned technology companies can execute their business plan, and revenue and earnings growth over the next 12-24 months. The uncertain geopolitical environment, inconsistent pace of economic growth, price of oil, increasing interest rates, lack of visibility for technology companies, and investors' short-term focus should continue to generate significant volatility in technology stocks, which we plan to take advantage of, given our disciplined investment process.
Though often difficult to see during quarters like the first quarter, when virtually all technology stocks declined, there are numerous positive secular trends taking place that will benefit select, well-positioned technology companies. Strong market trends like the adoption/proliferation of W-CDMA, VoIP, Gigabit Ethernet, Ethernet over SONET, PCI-Express, iSCSI, IPMI, HD-TV, SFF-HDDs, GPS, Blu-Ray storage, ID/network security, and RFID, just to name a few, can generate outsized growth and profit opportunities for a select group of well-positioned technology companies that possess differentiated intellectual property.
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Franklin Technology comment - Feb 05
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Wednesday, 23 March 2005
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Fund Manager Comment
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The SICAV Franklin Technology Fund increased +0.22% for the month of February. The fund's official benchmark, the MLO-100, advanced +1.74%. Year-to-date, the SICAV Franklin Technology fund has declined -5.94%, versus the MLO-100's -5.49% decline. For the one-year period, the SICAV Franklin Technology fund has advanced +0.88%, while the MLO-100 has declined -3.01% during the past year. We believe investors should focus on long-term performance, especially in sectors as volatile as technology.
Technology stocks enjoyed a muted rebound from January's sharp correction, as earnings season winded-down. While interest rates remained stable during the month, rising slightly to 4.38%, crude oil moved above the $50 barrier again, ending the month at $51.75. The market shrugged this off for the most part, but one would expect it to negatively impact investor sentiment the longer it stays above $50, or approaches $60. Initial jobless claims came in better than expected for most of the month, and the U.S. unemployment rate declined more than expected, down to 5.2%. Technology M&A remained active, as SAP bid to acquire Retek (later to be met with a competing bid from Oracle).
The MLO-100's performance was driven by greater-than +10% returns in thirteen stocks. Of these thirteen, six were semiconductor stocks and three were semiconductor equipment stocks. This included stocks such as Nvidia, National Semiconductor, Texas Instruments, Micron, Advanced Micro Devices, Maxim Integrated, Lam Research, Novellus, and ASML Holdings. Other significant contributors included Indian IT Service firms like Cognizant Technology and Infosys. Apple Computer continued its strong performance (+21.3%). Noteworthy technology stocks that suffered significant declines in February included Amazon.com (-18.6%), Nortel (-17.5%), Juniper Networks (-14.3%), Alcatel (-9.3%), Yahoo (-8.3%), and Research-In-Motion (-7.3%).
The fund's February performance trailed its benchmark. The top performing industries for the month were the semiconductor and semiconductor equipment industries. Noteworthy laggard sectors were the Internet and communications equipment sectors. The fund's industry weightings were not a primary cause of under-performance for the month, though the fund was only "market-weight" in the top-performing groups, and "over-weight" one of the underperforming sectors. More meaningful, was several specific stocks that significantly under-performed during the month. These specific stocks operate in six different industries, suggesting we are not missing a major sector trend. Simultaneously, some stocks that we believe are lower-quality and/or more speculative in nature, experienced strong performances during the month. Some of these stocks are listed in the previous paragraph. We did take advantage of some severe negative performances to initiate positions in stocks we had not owned due to valuation discipline.
We adamantly believe longer-term the well positioned, innovative, higher quality companies will generate superior returns to shareholders over the long-term. We expect significant stock volatility to continue in the technology sector. This volatility presents opportunities for patient and disciplined investors. We believe our meticulous investment research process and long-term investment horizon enables us to take advantage of this volatility, for our shareholders, as the market has dramatic reactions to near-term issues. Selected volatility in February enabled us to add to stocks we believe have compelling long-term growth opportunities.
We are confident that well-positioned and well-managed technology companies will be able to generate growth in 2005. Global IT spending should increase, as corporate profits expand, complementing the demand for technology goods & services that has been driven by individuals to date. Emerging markets should provide a further catalyst to overall technology demand. We will continue to look for those select companies that either enjoy, or are driving, secular trends, that should enable them to generate growth in a more muted/cautious technology spending environment. There are numerous powerful trends within technology sectors that can drive attractive growth and profitability for select companies. These trends include the adoption of voice-over-IP, gigabit ethernet, data-center virtualization, wireless data services, software application development outsourcing, data-storage, network security, mini-hard-disc-drives, power-over-ethernet, broadband-over-powerline, wireless-connectivity, HDTVs, the digital home, satellite radio, satellite TV, and switching voltage regulators.
The Fund's investment strategy has not changed since its inception. We continue to focus the fund's exposure on those investment ideas in which our technology analysts have the most conviction. Our investment approach has not changed. We identify definitive secular technology trends and innovation paths, then find those companies that, due to superior technology, business models, and/or management teams, preferably all three, can generate sustainable attractive growth rates, profitability, and shareholder returns. Our consistent valuation discipline complements our meticulous company and sector-specific due diligence, in evaluating technology stocks.
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Franklin Technology comment - Sep 04
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Thursday, 18 November 2004
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Fund Manager Comment
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The SICAV Franklin Technology Fund returned +5.19% in the month of September. The fund once again out-performed its benchmark, the MLO-100, which was +5.05% for the month. Year-to-date, the SICAV Franklin Technology Fund has outperformed the MLO-100 by +6.41% (-3.18% vs. -9.59% for the benchmark).
Technology stocks, volatile all year, experienced a consistent downward trend in July and much of August. September brought a much-anticipated rally for technology stocks. This rally suggested that, for the time being, the market had "priced in" much of the disappointing news received in September. This news came in the form reduced September-quarter guidance, and later in the month, additional negative pre-announcements. Several semiconductor companies actually lowered guidance twice within the quarter. Forward estimates continue to be reduced. Investors are struggling to properly calibrate growth prospects and valuations, given disruptive exogenous factors, such as high oil prices, muted job growth, terrorism, the Iraq war, and the upcoming US Presidential election. The severity and duration of the current technology demand slowdown, from an unsustainable rate in the first-half of 2004, is also uncertain. Visibility for most technology companies can be measured in days, not weeks, months, or quarters. This environment makes it difficult for technology stocks to enjoy a sustained and meaningful rally. Rather, we expect significant volatility to continue. This volatility presents opportunities for patient and disciplined investors. We believe our meticulous investment research process and long-term investment horizon enables us to take advantage of this volatility, for our shareholders, as the market has dramatic reactions to near-term issues.
The fund's +0.14% out-performance during the month, relative to its technology benchmark, was driven primarily by the fund's relative weightings and, more significantly, stock selection, in the internet software/services, instrumentation, data processing services, and electronic production equipment sectors. Given September's market advance, our cash position had a negative impact on relative performance.
We believe well positioned and well-managed technology companies will be able to generate additional growth in 2005. Global IT spending should increase, as corporate profits expand, complementing the demand for technology goods & services that has been driven largely by individuals to date. Emerging markets should provide a further catalyst to overall technology demand. We will especially look for those select companies that either enjoy, or are driving, secular trends, that should enable them to generate growth in a more muted/cautious technology spending environment.
The fund's investment strategy has not changed since its inception. We continue to focus the fund's exposure on those investment ideas in which our technology analysts have the most conviction. Our investment approach has not changed. We identify definitive secular technology trends and innovation paths, then find those companies that, due to superior technology, business models, and/or management teams, preferably all three, can generate sustainable attractive growth rates, profitability, and shareholder returns. Our consistent valuation discipline complements our meticulous company and sector-specific due diligence, in evaluating technology stocks.
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Franklin Technology comment - Aug 04
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Tuesday, 21 September 2004
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Fund Manager Comment
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The SICAV Franklin Technology Fund returned -2.41% in the month of August. The fund once again out-performed its benchmark, the MLO-100, which declined -4.45% for the month. Year-to-date, the SICAV Franklin Technology Fund has outperformed the MLO-100, its primary benchmark, by +5.99% (-7.95% vs. -13.94% for the benchmark).
Technology stocks continued their recent decline in August, though at a lesser pace. As has been the case this year, August was really made up of two different trends. The MLO-100 declined -10.4% through August 12 th , then increased +6.6% for the remainder of the month. An overall decline in business activity, and the uncertainty about how much was due to normal seasonal weakening from a very brisk first-half, versus a more protracted economic slowdown, has generated extreme volatility in technology stocks. The number of negative pre-announcements increased, and forward estimates are proving to be optimistic, making August a difficult environment for stocks to enjoy a sustained rally.
Investors continue to struggle with calibrating future growth prospects and valuations, while at the same time attempting to gauge the impact of exogenous macro factors, such as rising interest rates, high oil prices, and geopolitical events. This volatility presents both opportunities and risks. We believe our meticulous investment research process and long-term investment horizon enables us to take advantage of this volatility, for our shareholders, as the market has dramatic reactions to near-term issues. I am very optimistic about the high-quality technology stocks we have been able to add to the portfolio during the recent market sell-off.
The fund's +2.04% out-performance during the month, relative to its technology benchmark, was driven primarily by the fund's relative weightings and stock selection in the software, semiconductor, instrumentation, and semiconductor equipment sectors. Given August's market decline, our cash position not only enabled us to take advantage of select buying opportunities, but also positively impacted performance (especially in the first-half of the month).
We believe technology sector fundamentals will support continued growth in 2005. Global IT spending should increase, as corporate profits expand, complementing the demand for technology goods & services that has been driven largely by individuals to date. Emerging markets should provide a further catalyst to overall technology demand. Several years of under-investment in capacity should support price stability and leverage for well-positioned technology companies. We will especially look for those select companies that can still generate growth in a more muted/cautious technology spending environment. With that positive backdrop, we believe well-positioned technology companies that are executing on solid business plans should continue to report strong growth in revenue and earnings during 2004. In meeting with numerous companies in the field, it is clear that the pace of innovation has not slowed.
The Fund's investment strategy has not changed since its inception. We continue to focus the fund's exposure on those investment ideas in which our technology analysts have the most conviction. Our investment approach has not changed. We identify definitive secular technology trends and innovation paths, then find those companies that, due to superior technology, business models, and/or management teams, preferably all three, can generate sustainable attractive growth rates, profitability, and shareholder returns. Our consistent valuation discipline complements our meticulous company and sector-specific due diligence, in evaluating technology stocks.
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Franklin Technology comment - Jun 04
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Friday, 13 August 2004
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Fund Manager Comment
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The SICAV Franklin Technology Fund returned +3.83% in the month of June. The fund once again out-performed its technology benchmark. The MLO-100, the fund's primary benchmark, returned +3.00% for the month. Year-to-date, the SICAV Franklin Technology Fund has returned +3.13%, out-performing the MLO-100's +0.28% return.
At month's end, the fund had approximately equal exposure to both small and large-cap stocks, with a larger exposure to mid-cap stocks. The number of small cap positions increased in June, as a few select stocks experienced dramatic declines, and we initiated positions opportunistically. However, we continued to reduce the overall number of positions held in the fund, thereby increasing the fund's exposure to those investment ideas in which our technology analysts have the most conviction. Our investment approach has not changed. We identify secular technology trends and innovation paths, then find those companies that, due to superior technology, business models, and/or management teams, preferably all three, can generate sustainable attractive growth rates, profitability, and shareholder returns. Our consistent valuation discipline complements our rigorous fundamental due diligence.
Noteworthy sectors that drove much of the fund's +0.83% relative out-performance in June (+3.18% vs. +3.00%), include: telecom equipment, computer communications; semiconductor capital equipment; data-processing services; IT services; packaged software and internet software/services. The fund's exposure to the semiconductor sector had a noticeable negative impact to performance. In June, our cash position had a negative impact on performance. We took advantage of weakness in specific high-quality instrumentation stocks to add to positions. We initiated positions in two semiconductor stocks that experienced dramatic sell-offs due to near-term news. We believe in both cases their long-term growth prospects are now no longer valued in their stock prices. The fund reduced its exposure to the storage sector, as fundamentals show signs of deterioration.
Technology stocks continued their rally that started in May. More signs that the economic recovery was progressing, led investors to bid-up technology shares in June. Negative pre-announcements in late June were certainly not numerous, but were more than expected and more than previous quarters, which will likely lead to continued volatility in the technology sector. Investors continue to struggle with calibrating future growth prospects and valuations, while at the same time attempting to gauge the impact of rising interest rates, high oil prices, and geopolitical events. This volatility presents both opportunities and risks. We believe our meticulous investment research process and long-term investment horizon will enable us to take advantage of this volatility, for our shareholders, as the market has dramatic reactions to near-term issues.
We believe technology sector fundamentals will support continued growth in the second-half of 2004 and into 2005. Global IT spending should increase, as corporate profits expand, complementing the demand for technology goods & services that has been driven largely by individuals to date. Emerging markets should provide a further catalyst to overall technology demand. Several years of under-investment in capacity should support price stability and leverage for well-positioned technology companies. With that positive backdrop, we believe well-positioned technology companies that are executing on solid business plans should continue to report strong growth in revenue and earnings during 2004. In meeting with numerous companies in the field, it is clear that the pace of innovation has not slowed.
The Fund's investment strategy has not changed since its inception. We focus on leading companies in the most attractive technology-related sectors, and smaller companies that, through innovation, are driving advances that will become mainstream technology in the future. We diversify fund holdings across numerous technology sub-sectors and multiple geographic regions. Our analysts perform meticulous fundamental company and sector-specific research in evaluating stocks. We then overlay a top-down view of secular technology trends that we believe will drive future growth.
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