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Voices: Best mutual fund of 2019 relied on under-the-radar tech

Taiwan Semiconductor Manufacturing, which is SMH’s biggest holding, tumbled last week after it forecast revenue below analysts’ estimates.

Technology ruled the best stock market in six years as investors focused on five giant companies that also dominated the decade in equity. Apple, Microsoft, Facebook, Alphabet and Amazon.com accounted for more than a fifth of the 31.49% total 2019 return for the S&P 500, according to data compiled by Bloomberg.

An investor who placed big bets on that Big Five last year would have done very nicely. But the best stock picker of 2019 took a more nuanced approach. He is Paul H. Wick, manager of the Columbia Seligman Communications and Information Fund since 1990, and his success owed the most to investments in less-heralded semiconductor makers and more than a handful of firms committed to energy without fossil fuel. His choices and timely trading enabled the 56-year-old Menlo Park, California money manager to produce a 54% total return (income plus appreciation), according to data compiled by Bloomberg.

That's at least 2 percentage points better than the closest competitor among the comparable 226 U.S.-based equity mutual funds with a minimum value of $5 billion and at least three years of history investing 60% of their assets in the U.S. The average return for these funds was 29% while the S&P North American Technology Index, the benchmark for Wick's portfolio, gained 43%. Wick achieved a superior return by increasing his weighting of semiconductor and software company stocks more than the benchmark, according to data compiled by Bloomberg.

“If you want to beat the indexes, you can't look like the indexes,” Wick said in a telephone interview this week. “That's been a conscious decision of mine over the 30 years running the fund. The other thing is, outsized returns come from companies that get acquired, so we made a conscious decision over the years that the mid-cap area was a great place to be because they tend to be faster-growing” and “less-efficiently valued'' companies with insufficient analyst coverage.

He also broadened his holding of companies that generate at least 10% of their revenues from clean energy, energy efficiency or clean technology. These include Advanced Energy Industries, the Fort Collins, Colorado-based manufacturer of power conversion products; Infineon Technologies of Neubiberg, Germany, a maker of semiconductors and microcontrollers; Bloom Energy, the San Jose, California maker of power generation equipment, and Rambus, the Sunnyvale, California developer of high-speed chip-to-chip interface technology, according to data compiled by Bloomberg.

“Certainly the carbon footprint of fuel cells is meaningfully lower than it is for oil and coal,” said Wick. “If we really do have a climate-change issue and power reliability becomes more problematic, especially in places like California, India and Australia, Bloom Energy is a great solution because Bloom has cost-reduced its product line on a continuous basis over the last four or five years. They will be cheaper than grid power in the U.S. and overseas.”

Wick's collection of e-commerce firms catering to the retail market excluded perennial market favorites Amazon, Alibaba, JD.com and Ebay. He instead added the payment-software shares of Global Payments, Fidelity National Information Services and Fiserv. He also acquired Internet security firm ForeScout Technologies.

His biggest winners were Lam Research and Teradyne, each of which produced the same impressive total return of 119%, more than twice as strong as the benchmark for the semiconductor industry last year. At the same time, Intel, which gained 31% in 2019, represented only 0.2 percentage points of his fund, compared to the 3.03 percentage-point weighting in the benchmark. Such idiosyncratic selections — his Lam holding was more than 18 times the comparable weighting in the benchmark and his Teradyne investment was 30 times the benchmark's holding — enabled Wick to outperform the S&P North American Technology Index by 13%, according to data compiled by Bloomberg.

More than half of them track the industry’s top-performing category.
December 18

The fund seemed to identify more profitable, undervalued companies that invested more money in research and development compared to the benchmark. The average price-to-earnings ratio of the stocks in Columbia Seligman Communications and Information Fund is 19 times, compared to 24 times for the benchmark. Wick's companies spend 16% of their revenue on R&D against 13% for the benchmark.

“One of the things we look for is companies that have a lot of intellectual property," Wick said. “The way we maintain intellectual property is to spend money on developing new products and strengthening your existing ones because we've learned that strong intellectual property is the key thing for enduring profitability within the technology sector.”

All of which suggests a recurring benefit. Not only did the fund outperform its peers in 2019, it ranks at the top of comparable mutual funds for total return over one, two and five years as well. — Additional reporting by Shin Pei, Cara Slear and Chase Lynch

Bloomberg News