ValueAct Holdings and technology stocks
During the first quarter of 2015, ValueAct Holdings had exposure to two technology companies—Adobe Systems (ADBE) and Microsoft (MSFT). The positions in MSFT and ADBE respectively represented 17% and 7% of the fund’s 1Q15 portfolio, which was worth $18 billion. MSFT has yielded returns of 3% so far in 2015, and ADBE has generated returns of 10.07%.
Reasons why hedge funds are increasing stakes in tech stocks
Hedge fund investments in technology stocks appear to be based on the view that such stocks could outperform the market because they have strong cash reserves and robust earnings growth.
Recently, Market Realist published a series called Why Tech Behemoths Could Continue to Outperform Broader Markets. In it, we observed that mature technology companies such as Apple (AAPL), Microsoft (MSFT), Google (GOOG), and Cisco (CSCO) have stacked up a lot of cash. In fact, technology companies possess about half of the total corporate cash reserves in the US. Together, these companies hold a staggering ~$413 billion. Of this amount, Apple holds $194 billion.
These cash reserves can be used by the companies for either dividend distribution or investment in research and development, or R&D. This financial stability should allow tech stocks (XLK) to navigate the upcoming tide of higher interest rates with greater ease.
This could be one reason why hedge funds have been increasing their stakes in MSFT. It may also be why the funds expect a sharp correction in the market value of tech stocks, including MSFT, when interest rates increase.