Why Leverage Ratio Matters for Technology Companies

Technology Fund - The Fund's Portfolio Managers describe the Fund's stringent criteria when seeking companies and why they believe leverage ratio is an important operating metric for companies within the Technology sector. They describe the Fund's universe of stocks and explain why the portfolio is limited to just 60 stocks.

January 2018

  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Portfolio Manager

Would you please describe the Fund’s strategy for investing in the Technology sector?

The Fund seeks high-quality companies that have the potential to participate in the growth and innovation of technology. We utilize several metrics to analyze Technology companies with market capitalizations over $175 million, selecting the top 60 stocks that demonstrate the following:

  • Sector-leading cash flows and profits, with the ability to sustain profitability
  • Attractive balance sheet risk profile
  • A history of delivering excess returns over the cost of capital
  • Attractive relative valuation
  • Ability to generate cash

Within the Technology sector, many companies have historically experienced a high level of price volatility. Based on our extensive research, we have found that a focus on companies that can generate a high level of free cash flow can help minimize volatility.

As a result of our stringent criteria, the Fund is comprised of 60 stocks, ranging in market capitalization from $200 million to $400 billion. As of December 31, 2017, the Fund had a median market cap of approximately $5.5 billion and an average market cap of $39.7 billion.

Would you please describe the type of Technology stocks in the portfolio?

The Fund is focused on Technology stocks, but does not generally invest in biotech companies. Holdings are selected from the Information Technology sector as well as Consumer subindustries, including internet and direct marketing retail businesses and internet software and services companies.

The portfolio includes well-known Technology companies including Amazon, Apple, and IBM as well as stocks some investors may not consider to be tech-related, such as MasterCard. In addition, because of the Fund’s ability to invest in small-, mid- and large-caps, the Fund can invest in up-and-coming Technology companies with potentially long growth runways.

Why is a company’s leverage ratio an important operating metric in the Technology sector?

We prefer Technology companies with a low book leverage as it can be an indication of operating performance strength. By computing total assets to common equity, this ratio suggests that changes in leverage can signal changes in the condition of its underlying operating performance. For example, an increase in a company’s book leverage can infer the deterioration of the underlying operating performance.

Would you please discuss why the Fund holds just 60 stocks?

We hold 60 companies as we aim to provide a balance of returns, diversification, and volatility. In our extensive analysis of past performance, we believe that maintaining a fairly concentrated portfolio gives investors the best opportunity to outperform the overall Technology sector while potentially limiting downside risk.