Most investors tend to view the technology space as high growth AND high risk, yet performance data of tech funds shows an underappreciated resilience during the coronavirus sell-off.

That fund values have fallen in absolute terms is understandable given the widespread sell-off in global stock markets, yet relative performance has in many cases been somewhat encouraging.

For example, T Rowe Price Global Technology Equity (BD446KO) has fallen by 17.9% over the past month, yet that is not as bad as the 24% fall of global shares, based on the MSCI World index.

The fund, run by US-based Alan Tu, takes stakes in the most dominant and super cash generating companies the world has to offer. Chinese digital commerce company Alibaba is currently its biggest single stake.

More than half of the technology funds available to UK retail investors have declined by less than the global share benchmark since late February, with half a dozen funds and investment trusts reporting declines of less than 20%.

This tallies with the relative performance of the iShares Expanded Tech-Software ETF (IGV), seen as a tech sector benchmark by many, versus the S&P 500.

‘Software stocks have pulled back, but the 14% fall of the IGV ETF vs the S&P’s 23% decline year-to-date suggests large cap software remains relatively attractive for investors,’ says investment bank UBS.

This is eye opening considering these tech funds own stakes in some of the biggest tech firms, and companies in general, in the world. They include names like Apple, Amazon, Microsoft and Google parent Alphabet, which have declined between 20% and 26% since the sell-off began.

Facebook, owned by both the T Rowe Price technology fund and the Polar Capital Technology Trust (PCT), is the world’s fifth largest listed company and has sunk 28% since February.

Polar Capital Technology Trust is run by the highly respected manager Ben Rogoff. While the trust’s strategy sees it remain reasonably closely knitted to its benchmark holdings, such as Microsoft, Apple and Alphabet, he is also a keen supporter of tech firms that have emerged from the Far East, owning stakes in Alibaba, TSMC and Tencent, the social network and gaming firm.

TOP TECH AT A DISCOUNT

The relative robustness of the tech sector has got many fund managers and equity analysts excited about the opportunity to buy stock in dominant, cash-rich, software giants at relatively discounted valuations, particularly cloud enablers and suppliers of subscription software, or software-as-a- service (SaaS).

Cloud, SaaS applications and wider digital transformation are already widely seen as structural shifts for most businesses and public sector organisations thanks to the operational and cost flexibility. This allows many people to work relatively seamlessly from home during periods of self-quarantine or area-wide lockdown, such as being seen today in the UK and elsewhere.

‘We share the view that the future of IT is multi-cloud and hybrid,’ says Stifel technology analyst George O’Connor. ‘We also believe that pragmatic companies will, post the lockdown period, never waste a good crisis and begin to plan for the post crisis world.’

The theme is also recognised by Tom Slater, one of the joint managers of the Scottish Mortgage Investment Trust (SMT), one of the most popular growth funds with UK retail investors.

‘No matter where a business is based, the attractions of the cloud are apparent,’ he says. ‘The likely cost savings are appealing but the value from the business intelligence it creates is even more significant.

‘This is where artificial intelligence (AI) comes into play as it excels when making predictions from large datasets and ultimately, the cloud is how many companies are going to make use of AI.’

SAAS UNDERPINNING FORECASTS

UBS estimates that the growing adoption of subscription models means more than 80% of 2020 full year revenue forecasts for most SaaS names is either already booked or will come from renewals set to close during the year.

The bank admits that a growth slowdown is likely in 2021 but suggest that this leaves most tech businesses with time to get costs under control and protect profitability.

‘Even in our severe recession scenario with new business falling 30% year-on-year and churn rates ticking higher, we estimate 2021 revenue would still come in only around 11% below current forecasts, with profitability targets potentially still intact,’ says UBS.

Customer relationship management software specialist Salesforce is a UBS key stock pick, with the bank’s analysts also favouring ServiceNow and Microsoft, owned by several UK funds including the aforementioned ones from T Rowe Price and Polar Capital.

Analysts at broker Canaccord Genuity agree with the attractions of the subscriptions theme and highlight Kainos (KNOS) and Ideagen (IDEA:AIM) as among the stocks to buy.

DISCLAIMER – The author owns shares in Scottish Mortgage.

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