The ultimate guide to investing in the technology space: part 2
In part one, we talked about the attractive growth dynamics of investing in technology. In part two we now discuss some of options for investors wanting exposure to tech themes.
Many investors already have exposure, even if they don’t know it. A US or UK tracker fund would both give you a slice of tech. More than 29% of the S&P 500 index in the US is represented by tech stocks, although it runs to less than 1% of the FTSE 100.
It would be easy to suggest that Facebook, Amazon, Alphabet, Apple and Microsoft are the classic tech stocks to examine, yet the industry goes far wider and deeper.
Names like Salesforce, ServiceNow, Okta, SAP, Dassault Systemes, ASML, Tencent and Baidu are all multi-billion dollar companies with huge revenues and they are big hits with fund managers such as Walter Price at Allianz Technology Trust (ATT), the Baillie Gifford team behind Scottish Mortgage (SMT) or Ben Rogoff, who runs the Polar Capital Global Technology Fund (B42W4J8).
There are thousands of tech companies on the stock market ranging from pre-revenue start-ups to large giants.
Examples of funds with technology exposure
Neptune Global Technology Fund (BYXZ5N7). Holdings include Microsoft, Twilio, Amazon and Visa.
Polar Capital Global Technology Fund (B42W4J8). Holdings include Alibaba, Advanced Micro Devices and Zendesk.
Standard Life Investments American Equity (B7JCD62). Holdings include Baxter International, Equinix and Boston Scientific.
Threadneedle American Select Fund (B7HJLD8). Holdings include Alphabet, LAM Research and Microsoft.
UK technology opportunities tend to sit towards the lower end of the market cap spectrum, including many listed on the AIM junior market. There are several funds which have exposure to the smaller end of the market including Herald Investment Trust (HRI) and TB Amati Smaller Companies (B2NG4R3).
HOW HAS TECH BEING DOING?
The global technology sector has been one of the main driving forces of a 10-year global stock market bull run that is still going. For example, the MSCI World Information Technology index has beaten its MSCI World cousin eight years out of the past 10, rallying 345% since 2004, versus 184%.
The US tech-heavy Nasdaq has nearly doubled in five years (up 92%), almost twice the 51% of the more widely representative S&P 500. The FTSE 100 has gained less than 6% by contrast.
Tech stocks were hit pretty hard during the global markets sell-off late in 2018 but the bounce back has been strong. Nasdaq is up 18% year-to-date, recovering those fourth quarter losses completely. It’s similar in the UK with the technology part of the FTSE All-Share up more than 20% so far in 2019. That compares to a rather more dogged 7.1% of the FTSE 100.
DOESN’T THAT MAKE TECH EXPENSIVE?
Valuations can certainly become elevated, but usually for good reason. The price-to-earnings (PE) multiple of Amazon is around 78-times for 2019 but it has been consistently growing earnings at 40%.
Advanced Micro Devices, which designs clever microprocessors, is growing even faster, turning a $117m net income deficit into a $780m profit in just three years, if 2019 forecasts are on the money.
Shares in more mature tech companies trade on lower earnings multiples, many with copper-plated balance sheets, huge net cash and often paying handsome dividends. The forward PEs of Apple, Alphabet and Microsoft stand at 17, 27 and 29, respectively.
Examples of investment trusts with technology exposure
Scottish Mortgage (SMT). Holdings include Amazon, Illumina, Tencent and Tesla.
Polar Technology Trust (PCT). Holdings include Alphabet, Alibaba, Tencent and Adobe.
Herald Investment Trust (HRI). Holdings include GB, IQE, Bango and Radware.
Murray International Trust (MYI). Holdings include Taiwan Semiconductor, Taiwan Mobile and Verizon.
The story is no different with UK tech stocks where rapid growth today and the promise of significant profits down the line from disruptive business models, products and intellectual property can mean eye-popping valuations.
Software robots supplier Blue Prism (PRSM:AIM) is valued at £1.33bn yet has never made a profit, but investors are not buying today’s opportunity, they are investing for the future potential.
In comparison, mature accounting software firm Sage (SGE) has a long track record of more modest but profitable growth and its 2019 PE is around 25.
PLAYING THE LONG GAME
A longer-term horizon is required for much of the technology space. Yet this is one of the few investment spaces with strong secular growth drivers as the world increasingly embraces digital everything. Innovation is constant and that makes it rational for investors and markets to place a premium on the sector.
Investors might hark back to the dotcom crash in the early 2000s after such a strong run for the technology sector yet fund managers, in the main, have consistently called into question such comparisons. The major difference between now and then is real earnings and cash flow.
‘This time round technology share prices are rising with earnings upgrades that are outstripping an otherwise low growth environment,’ says Allianz’s Walter Price.
Major tech themes
Automation and robotics