Funds light on ‘Magnificent Seven’ that have delivered top returns

For the past decade, global stock markets have been driven higher by America’s giant technology shares. The so-called “Magnificent Seven”, Apple, Microsoft, Nvidia, Tesla, Amazon, Alphabet and Meta, have been on a blistering run. This has been driven by rising profits as well as speculation about their future growth, including the potential of artificial intelligence.

Due to their size, accounting for just over 20% of the MSCI World index and about 32% of the S&P 500 index, they have propelled markets higher, which has helped index investors outperform most active funds.

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With returns of 215% over the past decade from the MSCI World index, any global active fund beating this benchmark has performed excellently. If they have managed to do it without relying too heavily on the leading technology shares, then that shows manager skill. It also may make the fund an interesting option to hold alongside a global or technology tracker fund.

We take a look at some of these top funds – and also funds favoured by interactive investor analysts – that are light on Magnificent Seven shares to provide some investment ideas for those worried about these shares being overpriced.

Quality growth

While Magnificent Seven technology shares have delivered profit growth, it has come in some cases with substantial share price volatility.

Quality growth investors look for reliable earnings, strong brands and established businesses, all while delivering steady growth over time. In an ideal world, this should lead to consistent share price growth over time, rather than periods of boom and bust.

Some of the giant tech shares fit this bill, such as Microsoft, Alphabet and Apple, due to their dominant, near-monopoly businesses in the likes of search and workplace software, but others do not. Nvidia and Tesla have volatile earnings, while Amazon has also struggled to make profits from its retail business and instead relies on its cloud computing arm, AWS, for earnings.

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Some funds look to own “quality” businesses and are therefore light on some Magnificent Seven technology shares. One is Morgan Stanley Global Brands, a £992 million fund that only counts Microsoft of the Magnificent Seven in its top 10 positions. Instead, it prefers companies such as Visa, RELX, SAP and UnitedHealth. Nevertheless, technology is still its largest sector exposure.

Terry Smith’s Fundsmith Equity fund is another strategy that seeks to avoid overvalued tech shares. Smith has spoken out about Nvidia, saying that its valuation will come back down to earth. While Microsoft and Meta are top 10 positions for Smith, positions in Apple and Alphabet do not make the most-held positions, and Tesla, Nvidia and Amazon do not feature. Just 12.3% of the £24 billion fund is invested in technology, making it a different proposition to lots of global funds.

M&G North American Dividend, which aims to provide both growth and dividend income, has performed well over three and five years despite being light on big tech. Its biggest underweight positions include Nvidia, Apple, Amazon, Alphabet and Tesla, showing that it is sceptical about the Magnificent Seven group. Instead, it prefers companies such as Visa, BlackRock, UnitedHealth and Broadcom. Technology is still about a quarter of the portfolio, however, but this is lower than the one-third allocation in the S&P 500 index. The fund has a Gold rating from fund research group Morningstar, which is the highest available. 

Another standout performer is Wellington Global Stewards, one of ii’s ACE 40 list of recommended funds. It has outperformed the MSCI World index since inception in 2019, all with limited exposure to the Magnificent Seven. Only Microsoft features in its top 10, with the fund preferring names such as Deere & Co and Texas Instruments.

Source: FE FundInfo, 12 August 2024. Past performance is not a guide to future performance.

Value

Given that America’s leading tech stocks are typically expensive relative to their current profits because investors are happy to pay up for future growth, then funds that take a value investment approach will generally avoid these names.

A global option our fund research team like is Dodge & Cox Worldwide Global Stock fund, which has a price-to-earnings ratio of just 11.8 times, compared with 17.7 times for the MSCI World Index.

While Alphabet is its largest holding, at 4% of the fund, no other technology shares make it into the top 10 positions. Instead, it prefers pharmaceutical companies such as GSK and Sanofi, as well as financial services groups and oil firms. About half the fund is invested in the US compared with around two-thirds for its benchmark.

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Dzmitry Lipski, ii’s head of funds research, says: “The approach relies on bottom-up, fundamental research of companies and industries and favours business with good management, competitive advantages, and good growth potential. These may also be businesses that are under a cloud at the time of purchase.”

Source: FE FundInfo, 12 August 2024. Past performance is not a guide to future performance.

Growth

Not all growth-focused funds rely on Magnificent Seven shares. For example, HgCapital Trust owns private software business providing what it describes as “mission critical” services, such as accounting software.

The trust has delivered annualised returns of around 16% a year for 20 years and currently trades on a narrow discount to its net asset value. This is roughly the same return as the tech-heavy Nasdaq 100 index, all without owning any of the same shares.

A technology fund that invests in listed shares, but is currently underweight the Magnificent Seven, is Fidelity Global Technology. While Microsoft, Apple, Amazon and Alphabet do feature in the top 10 shares, manager Hyun Ho Sohn has said that many AI winners are “priced for perfection” and look unattractive from a risk/reward perspective. He is now focusing more on under-appreciated areas across the tech sector.

He said: “We are also increasingly positive on small/mid-cap software companies, given the reviving appetite for M&A from both strategic acquirers and private equity firms. There have already been many confirmed deals and unconfirmed interest in areas such as data and design software, and we are finding more new ideas in this space.”

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Scottish Mortgage is another technology fund that looks quite different from technology or global tracker funds. While Nvidia is the top stock, at nearly 10% of the fund, and Tesla and Amazon also feature in the top 10, it does not own Apple, Microsoft or Alphabet. The fund managers do not regard these companies as innovative or nimble enough to earn a spot in their portfolio.

This trust, which is one of our Super 60 investment ideas, gives investors access to more niche areas of the technology world, such as rockets via an unlisted position in SpaceX, and emerging market online shopping, via the likes of MercadoLibre and PDD Holdings.

While the shares have been under pressure over the past three years, the long-term track record is strong.

Source: FE FundInfo, 12 August 2024. Past performance is not a guide to future performance.

All-rounders

Some active funds are designed to be “one-stop shops” for equity exposure because they run diversified portfolios and take care not to follow the market into overpriced shares, which can be a drawback of global index funds.

Two that are very popular among customers are F&C and Alliance Trust. Both are multi-manager funds, with Paul Niven at Columbia Threadneedle outsourcing stock picking to specialist teams but taking control of asset allocation, while Craig Baker at Alliance Trust relies on 10 external fund managers to pick their best ideas.

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Both managers are wary of overpaying for technology shares, so despite being well diversified, have less invested in the largest tech stocks than the index.

Alliance Trust does not have Apple or Tesla in its top positions, while F&C has just 1.7% in Apple, and Tesla does not feature in the top positions.

For investors worried about being too exposed to the Magnificent Seven, while also wanting to own some leading technology companies, these could be a good solution.

Source: FE FundInfo, 12 August 2024. Past performance is not a guide to future performance.