The ultimate guide to investing in the technology space: part 1
Modern history has seen a remarkable pace of change. Disruption is everywhere and changes to established industries, employment dynamics and how we all live are shaking to their foundations almost every aspect of life. From transport to energy, communications to healthcare, manufacturing, entertainment, education, even government.
Yet many investors remain reluctant to invest in the technology space – either through company shares or investment funds. They are put off by high failure rates for companies, often inflated stock valuations and sometimes limited profits and cash flow.
To avoid the space entirely is a mistake and an expensive one for those with a longer-term investment horizon.
This is illustrated by research conducted by consultancy McKinsey. It found that evolving technology as a percentage contributor to world output growth had risen from 33% in the mid-20th Century to around 50% today.
Emergence of new disruptive ways of changing what we do and what we want
Managing a larger, wealthier and increasingly elderly global population
Managing climate change and natural resource scarcity through better environmental awareness and regulation
MASSIVE RETURNS POTENTIAL
The technology space has an almost unique ability to create wealth for investors. For example, Apple is the world’s largest company by market value, worth around $1trn, and a stock that has made investors a lot of money over the years.
A £1,000 investment in Apple 10 years ago would today be worth more than £16,000 (as of May 2019). Yet it is not the best-performing wealth creator among the US mega tech companies. Amazon has rallied 3,526% over the same decade. The online shopping colossus would have turned a £1,000 investment into a nest egg worth more than £35,000.
TECHNOLOGY EMBRACED BY ALL
Business and entertainment have been transformed by the invention of the personal computer, the internet and now migration to the cloud.
Customers are constantly looking for cheaper, faster and better services, and providers like Amazon, Salesforce, Netflix, Uber, Airbnb, and many others, have the solutions.
The UK has seen ASOS (ASC:AIM) emerge into a £3.3bn online fashion retail colossus in less than 20 years. Rightmove (RMV) and Auto Trader (AUTO) have used technology to evolve how we buy and sell homes and cars, while clever robotics designed by Ocado (OCDO) are shaking the grocery logistics industry to its foundations and offer a glimpse into a possible automated future.
Little of this would have been possible without Microsoft’s breakthrough in desktop computing, Google’s clever internet search algorithms, Amazon’s transformation of how we buy stuff and the technology creations of countless others.
It is no coincidence that the five largest publicly-listed companies in the US by market value (including overseas companies with US listings) are in the technology sector – Apple, Amazon, Microsoft, Alphabet (the parent company of Google) and Facebook.
Together these five companies account for more than 16% of the overall $25.6trn value of S&P 500 index. The wider technology sphere is now the largest sector in the S&P 500, making up nearly 29.3% of the index. For investors, technology matters.
FLOATING ALL BOATS
This new digital explosion, sometimes called the fourth industrial revolution, has the potential to raise global income levels and improve the quality of life for populations around the world.
To date those who have gained the most from it have been consumers able to afford and access the digital world but technological breakthroughs and disruption to the ways things are currently done have the potential to make products and services available to all, increasing the quality and longevity for everyone.
Ordering a cab, booking a flight, buying a product, making a payment, listening to music, watching a film, or playing a game – any of these can now be done by almost anyone, almost anywhere.
Breakthroughs in medical science, energy efficiency, agriculture and more offer the promise of improvements in almost every part of our lives, and those of our children and future generations.
MAJOR INVESTMENT THEMES
Transforming technologies, such as artificial intelligence, the sequencing of DNA or quantum computing, is one of three fundamental ‘megatrends’ according to analysts at asset management company Robeco.
It sits side-by-side with major socio-demographic change and ‘preserving Earth’ as themes that will dominate the future, creating opportunities for investors to participate in solving some of the biggest questions facing humanity.
Tech winners are big news and their headline-grabbing growth draws the attention of the mass media and investors at every level, from institutions and pension funds to retail investors.
But not every tech story is a Microsoft or a Google. According to Steve Jobs, the co-founder and former chief executive of Apple, his company was just 90 days away from bankruptcy in 1996. For every big winner there are inevitable tech stock disappointments who fail to live up to their early promise. Blackberry, Napster, Palm, Netscape and Friends Reunited spring to mind.
This illustrates the significant risks involved. Technology changes quickly, and one-time leaders can quickly fall behind, or even go out of business.
‘This can be challenging, yet it can also bring significant opportunities,’ states Allianz Global Investors’ head of investment trusts, Melissa Gallagher.
Some investors may still prefer to do their own research, crunching their own numbers and selecting their own technology stocks. But there is a plentiful supply of managed help for those that prefer to take a broad position, investing in the expertise and experience of a trusted fund manager to do the work for you. This approach can spread risk and introduce investors to successes they might not otherwise have known.
Why invest in tech?
Corporations and governments have seen and experienced the benefits of next generation solutions in areas such as the cloud, storage and networking and are accelerating their transition from last-generation technologies.
Tech companies can generate rapid growth in defiance of economic conditions.
The technology sector is an unparalleled source of innovation. Companies that are doing something new may often have a number of years of super-normal returns before the rest of the market catches up. For an investor, this means that share prices can grow very rapidly over a relatively short space of time.
Every other sector of the modern economy is reliant on technology to improve quality or productivity, maintain competitiveness or spur expansion. This gives the technology sector unique growth characteristics.
Some large cap technology companies have very high cash flow yields and hundreds of billions of dollars on their balance sheets. They are starting to offer reasonable yields from dividends and could potentially increase their dividends substantially, returning more cash to investors.
Technology stocks can offer a valuable long-term complement to a portfolio of traditional equities, having outperformed the FTSE 100 over five, 10 and 20 years – although past performance is no guarantee to future returns.
Source: Allianz Technology Trust
Don’t miss part 2 of our guide to investing in the technology space. We will discuss many of the popular stocks, funds, investment trusts and ETFs which provide relevant exposure to tech-related themes. Out on 16 May 2019.