Fund Briefing: Technology funds

19 September 2017
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Every year we embrace more incredible technological developments that make our lives easier and the world more connected, from the internet and mobile phones to cloud computing and electric vehicles.

These changes also provide opportunities to make money within some of the fastest growing companies around the world, according to Adrian Lowcock, investment director at Architas, the multi-manager investment company.

“Technology can be used to either disrupt existing markets or create new markets and new demand,” he says.

Many technology companies spend a fortune on innovating, just to stay ahead of the competition, he points out. But the increased interest from investors has driven share prices up to levels, which assume success is guaranteed.

“For me, that is a concern as no company has a monopoly on predicting the future with any degree of certainty,” he adds.

“Overall, I think the key is still stock selection as just because it is technology doesn’t mean it will be successful.”

Despite the prominence of technological change in our lives, the IA (Investment Association)Technology & Telecommunications sector is relatively small. It consists of just 17 funds with a combined investment of £2.1 billion, according to IA figures.

Although this is a relatively modest amount – especially compared to the £167.2 billion that has been invested in the IA UK All Companies sector – the figure represents a 50% increase over the £1.4 billion level it was a year ago.

The reason more isn’t invested into these funds may be partly historical as investors have had a troubled relationship with this area since the dot.com boom of the late 1990s, where money was ploughed into the new breed of companies that promised bumper profits.

The valuations of these firms subsequently rocketed, but there was very little substance behind many of the business models and the tech bubble burst in spectacular fashion, wiping millions of pounds off the stock market.

Understandably, such experiences have influenced investor thinking, acknowledges Patrick Connolly, a certified financial planner with Chase de Vere.

“Many suffered significant losses after investing near the top of the market and watching as prices went into freefall,” he says. However, times have changed and today’s technology funds are more likely to be filled with established companies, such as Apple, Microsoft, Alphabet (Google), and Samsung, than many of the dot.com companies from that period.

“This should provide a less erratic journey for investors, although those in technology funds must still expect a high degree of volatility,” adds Mr Connolly. “It’s also difficult to spread risk by investing in more than one such fund as many of them hold the same underlying stocks.”

One of the best performing sectors during the past few years has been IA Technology & Telecommunications, with the average fund in this area having returned 75% in the three years to 1 August 2017, according to Morningstar data.

In fact, only the IA Japanese Smaller Companies sector, with its 80% average return, has performed better over this period. When you consider there are more than 30 different sectors, this is encouraging. However, it’s still important to do your research as not all funds perform the same. Before committing your money, it’s essential to understand how the portfolio invests, whether it has any biases, and how the manager has performed over different periods.

Illustrating the importance of this approach is the fact that investing in the best performing funds in this sector would have given you a return of 35% over the past year, while the worst performing portfolios have only nudged up around 5%.

Darius McDermott, managing director of Chelsea Financial Services, suggests performance has been particularly challenging for actively managed funds in this area that have more restrictions than the index-tracking portfolios. “Some of the biggest tech stocks – such as Apple – represent more than 10% of the index,” he says. “The active funds aren’t allowed to own any more than 10% of a single stock, so they are always underweight, even if they like the company.”

Of course, you don’t need to buy a dedicated technology fund, points out Chase de Vere’s Mr Connolly.

“We prefer to get exposure to these areas through more broad-based funds, which will include technology alongside other sectors to spread the risk,” he explains. Meanwhile, Chi Chan, European equities portfolio manager at Hermes Investment Management, looks to related areas, such as retail.

“Businesses that are effectively evolving their product offering and user experience are capturing increasing market share,” he says.

He cites ASOS, the fashion retailer, as a prime example. “The company has pioneered online logistics so that customers can receive orders within 12 hours, an astonishingly rapid turnaround,” he says. “It has also invested heavily in building customer allegiance.”

Fund to watch: AXA Framlington Global Technology

 

The aim of this fund, which is run by award-winning fund manager Jeremy Gleeson (pictured), is to provide long-term capital growth from investing in technology companies.

The portfolio, which was launched at the height of the tech-boom in the late 1990s, invests in a broad cross-section of companies and sectors.

This is one of the reasons it’s the preferred fund in the sector for Darius McDermott, managing director of Chelsea Financial Services.

“The fund invests in all sizes of technology companies around the world, and the manager prefers to fi nd new technology stock ideas rather than old commodity companies,” he says.

Its largest geographical allocation is the 88% in North America – unsurprising considering this region is home to so many up-and-coming technology companies.

There is also more modest exposure to emerging markets, Europe excluding the UK, Japan and the United Kingdom, according to the latest fund fact sheet.

As far as sectors are concerned, internet software and services has the largest share at 23%, followed by 21% in software and 20% in semiconductors (a chip that goes into products such as mobile phones) and related equipment.

Its largest stock positions, meanwhile, include Alphabet (9%), Apple (8%), Facebook (7%), Visa (4%), and Cisco Systems (3%).

Fund Briefing: Technology funds

Quick guide: Is this area right for me?

Consider investing in technology funds if…

  • You are confident companies will invest more in technology
  • You believe technology is going through an exciting development period
  • You are willing to have at least some of your money in higher-risk areas

How much should I invest in this sector?

  • Low-risk investors: 0%
  • Medium-risk investors: 2%
  • High-risk investors: 6%

Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express.

Read more from Rob Griffin.

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