Investors pile into tech funds as experts urge caution on big five US tech giants

15 November 2017

Investors have been moving out of UK funds into technology funds, according to The Share Centre.

The investment platform says that in October (the latest data available) it saw investors moving money out of UK funds and into technology funds instead.  Sheridan Adnams, investment manager at The Share Centre says: “This is possibly a symptom of difficult Brexit negotiations and the possibility that the UK economy might be entering a slower growth trajectory than other developed economies.”

Instead, investors are opting for technology specific funds including AXA Framlington Global Technology and Henderson Global Technology.

Mr Adnams says: “The roll out of the iPhone 8 series happened in October after the announcement of its impending release in September, and these funds have c. 10% of their holdings in the technology titan which could have spiked investor’s interest. Generally, however, there appears to be a wider momentum in what is a very attractive and undervalued sector with clear longer-term prospects.”

However, tech fund managers say they are cautious about the big US technology giants.

The term “FAANG” has become a very 2017 buzzword. It is an acronym for the big five US technology giants, Facebook, Apple, Amazon, Netflix, and Google. These stocks have posted impressive returns in the past 12 months, and little seems to dent their ambition to expand further.

Walter Price, portfolio manager of Allianz Technology Trust is optimistic with a heavy dose of caution: “We have a somewhat cautious view of this group of stocks in the near term, given the recent investigations for Alphabet and Facebook.” 

“Amazon’s recent quarter was strong, but persistently rising costs could potentially weigh on near-term earnings growth. Our long-term view remains positive for these companies because they have strong competitive positioning, they continue to innovate, and we see significant opportunities for attractive earnings growth.”

Facebook and Google have been forced to appear before US Senate committees in recent weeks due to allegations surrounding Russian influence of the 2016 US presidential election. This might be enough to make investors nervous in the short-term.

Regulatory crackdowns are on the horizon in Europe too, with the arrival of General Data Protection Regulation (GDPR) on 25 May next year. The legislation looks to significantly curb the data mining activities of big firms such as Facebook and put the control of online information back in the hands of consumers.

While this affects companies such as Facebook heavily, others such as Google and Amazon have a much wider breadth of revenue streams to make these issues less troublesome. They are also moving into new territory, competing with old players in established marketplaces.

Katie Potts, manager of Herald Investment Trust, says: “Our small cap focus makes us aware how much the big datacentres of Amazon, Microsoft, Alibaba and Google are sourcing components and not systems and driving down costs, and they are competing for business offering bundles of security and applications either free or at lower costs than traditional suppliers.

“These big companies have supply chains which can benefit numerous small companies. Furthermore, this is providing much lower capital requirements for small entrepreneurial businesses to enter the market and compete.”

The tech revolution is now

The tech revolution is only just getting started however, and Ms Potts points out that the FAANGs are the companies providing the platforms (ostensibly in the form of the ubiquitous smartphone) for other tech companies to jump on board with.

Mr Price adds: “We continue to believe the technology sector can provide some of the best absolute and relative return opportunities in the equity markets – especially for bottom-up stock pickers.

“The growth in technology is coming from the creation of new markets, rather than simply GDP growth. Investors need to find companies generating organic growth by creating new markets or effecting significant change on old markets. Sectors such as automobiles, advertising, security, retail, and manufacturing are all being shaped and transformed by advances in technology.”

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