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June 24, 2022

Lipper Leaders Spotlight—Columbia Seligman Fund Uses Experience, Flexibility to Maintain Consistent Returns

by Mike Schnitzel.

The Columbia Seligman Technology & Info Fund, A Shares (SLMCX) is one of the best Lipper Science & Technology Funds using Lipper Leader metrics for the month ended May 30, 2022. The way the fund is able to achieve such consistent returns through even turbulent markets includes having an experienced team and having as big-picture outlook so as to allow for the flexibility to pick securities opportunistically, according to lead portfolio manager Paul Wick. We spoke with Wick to find out how his team manages its portfolio and its outlook on the science and technology sectors.

Lipper Leader Ratings and methodology

SLMCX earned a Lipper Leader Rating of 5 for both Total and Consistent Returns on a three- and five-year basis, and also achieved a 5 for total return on a 10-year basis. The fund has outperformed the Lipper Science & Technology Fund Index over the one-, three-, five-, and 10-year periods  ended May 31.

The Lipper Science & Technology Funds classification is defined as funds that invest mainly in the equity securities of domestic companies engaged in science and technology, according to Lipper methodology. These funds provide investors with assets that can be beneficial to diversifying their portfolios.

The Lipper Leaders Rating System is a toolkit that helps guide investors and their advisors in selecting funds that suit individual investment styles and goals. According to Refinitiv Lipper, “Each fund is ranked against its peers based on the metric used (such as its flagship risk-adjusted return measure, Consistent Return, Total Return, or Expense), and the highest 20% of funds in each peer group are named Lipper Leaders, the next 20% receive a rating of 4, the middle 20% are rated 3, the next 20% are rated 2, and the lowest 20% are rated 1.”

A big picture outlook, flexibility, and access

Wick said his fund’s management prefers not to be too benchmark focused. This way management can search for new and creative ways to improve the fund’s return. “A lot of funds obsess over benchmarks, but our attitude has always been one along the lines of ‘If you look like the index, how can you beat it?’” he asked.

First and foremost, management looks for fundamentally attractive businesses with strong intellectual property, a clear market opportunity, a path to profitability, significant cash flow, and the potential for dominance in whatever industry or niche the company finds itself, Wick said. Profit margins are very important. SLMCX mostly invests in companies with gross margins of more than 50%. He also prefers to see companies engaged in shareholder-friendly activities such as share buybacks, dividend payments, and additive acquisitions.

“We stay away from risky companies and companies with high valuations. We look for tactical, capable management teams with a good track record,” Wick said. “I love to see companies with meaningful recurring revenues, whether it be service contracts or subscriptions. Those are all things that are important to us and a philosophy that has served us well is to find a company whose valuations have some degree of downside protection.”

Generally speaking, SLMCX is U.S.-centric because management has better access to U.S. companies, and Wick said the U.S. has the world’s best technology companies. He said his fund’s management focuses heavily on industry research and that his team’s location in Silicon Valley is advantageous because it gives them an advantage in access other funds don’t have. “There is an opportunity here to interact with lower-level employees at various companies because we’re in Silicon Valley. It’s geographically a good place to be for knowing people in the tech industry—board members, executives, rank-and-file, private equity that focuses on tech.”

Managing risk; opportunities in a volatile market

Three risks on which SLMCX’s management focuses are valuation risk, balance sheet risk, and dilution risk for unprofitable companies which need to raise more capital to stay afloat. Wick said his fund tries to stay away from companies unduly reliant on one product with “faddish” elements such as GoPro or Peloton. Wick also said his fund looks at the quality of personnel of companies. For example, are they stocked with engineers or people with great resumes or educational backgrounds? “If you look at some of these SPAC-related companies…their boards are unimpressive,” he said.

Wick said he always searches for whether companies have best-in-class products and whether consumers have a good experience with them. Otherwise, they’ll be hard pressed to make strong sales, he said.

“One thing we always ask ourselves is, ‘Does this company make sense as a takeover target?’ If not, that’s a red flag,” Wick said. “If you think no smart PE firm or larger firm in the sector would ever want to touch this, that’s a red flag. We’ve had a lot of companies we owned over the years get acquired. For example, the semiconductor industry is consolidating, and we’ve owned numerous companies that have been acquired by strategic competitors.”

While markets have been volatile because of many issues including the war between Russia and Ukraine, 40-year high inflation, the COVID-19 pandemic, and supply chain issues, there are opportunities to produce returns for investors. “The risk-reward outlook over the next one to two years looks pretty good. We always try to have a one- to two-year timeline looking at investments,” Wick said. “Quarterly numbers are important, but I’m feeling fairly optimistic about what things look like on the other side when problems like inflation and supply chain issues lower in intensity.”

Companies involved with electric vehicles, high-end smartphones, and the internet of things (IoT) present opportunities for investors. “There is more and more intelligence and communications ability embedded in wearable devices, cameras, etc. The move to cloud services, streaming music, streaming video [presents opportunities],” Wick said. “Cloud titans like Microsoft, Amazon, and Google are going to spend more this year on data center buildouts than they did last year.”

Providing diversification through exposure to smaller companies

SLMCX could provide diversification to investor portfolios by giving them access to smaller caps. “I think a lot of investors end up in funds—whether they be index or large-cap growth funds—that are skewed toward mega-cap companies,” Wick said. “In my fund, we have a lot more mid-sized companies in our fund. Anyone who diversifies their portfolio with my fund will have more exposure to small- to mid-size companies that are growing faster and are likely to be acquired than mega-cap companies.”

Wick said he thinks one of the problems with small-cap growth funds is they have a preponderance of unprofitable companies in their funds. For example, most small- to mid-cap medical device companies and biotechnology companies are unprofitable and very risky, while SLMCX’s companies are mostly profitable, he said.

“We have over the last 10 years a meaningful overweight in the semiconductor industry. Most diversified funds—be they large cap or small cap—generally don’t have meaningful exposure to chip stocks,” Wick said. “One of the things we like about the chip industry is the consolidation has continued, and profit margins have been reset higher. Valuations are quite reasonable and profitability levels are high. Investors in our funds will have more exposure to these well-managed highly profitable companies.”

Investors flee Science &Technology Funds during a tough year

Investors have shunned funds in the Science & Technology classification, withdrawing $6.9 billion year to date as of June 15, in what has been a rough year for markets—growth stocks in particular. They have withdrawn money in three of the last four quarters ($4.2 billion in Q2, $2.7 billion in Q1, and $530 million in Q3). The classification experienced outflows in seven of the last 10 months, for total net outflows of $4.7 billion over that period.

This year has been a difficult year for Science & Technology Funds, which had been on a tear for the past several years. In fact, 2022 is the first year since 2016 that the classification has experienced outflows. That year, investors pulled $5.1 billion. In the intervening years between 2017 and 2021, Science & Technology Funds accrued net inflows of $44.1 billion.

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