Should you invest in the technology boom or fear a bust? Where the opportunities lie and four top funds
- Funds in the IA tech sector universe turned ￡10,000 into ￡24,998 in five years
- But the sector experienced a dip in the first half of November
- Managers of tech-centric portfolios claim there are still good opportunities
Many investors have scoured the technology sector for dazzling returns in recent history and there is little wonder why.
Funds in the Investment Association's Technology and Telecommunications universe turned ￡10,000 into ￡24,998 in five years on average, according to FE Analytics figures.
What's more, the three As - Apple, Amazon and Google's Alphabet - along with other US superstar firms of a similar ilk have helped steer Wall Street to record highs this year.
Apple, which recently launched the iPhone X, is one of the five best performing tech stocks
The worry for investors is how to pick the genuinely game-changing companies from the hyped-up wonders - and how to deal with what can be sky-high valuations.
Rarely has a sector been more closely watched for the first signs of boom turning into bust.
As an example, the tech sector has experienced a slight pull back this month - down around 1.4 percentage points between the start of the month and 15 November - and that led to the questions being asked of does this signal the start of a downturn period?
What makes evaluating tech investing particularly hard is that technology stocks are cool. Some of these companies have developed ingenious products and services which, in some instances, have transformed our everyday lives.
Two companies born in two different eras highlight this: Apple and Facebook. The iPhone and Facebook's service have genuinely changed the way people live, their behaviour and how businesses operate, from selling things to targeting customers.
For investors, they hold the potential to deliver impressive returns - with many piling into the shares in the hope that they are backing the next big thing that will make them rich.
But with great hope comes the potential for disappointment - and in the tech sector that worry looms large.
Is tech too big to fail??
An interesting element that becomes clear once you look deeper into the holdings of global indices is quite how big some of these tech companies are.
For example, the top four holdings of the FTSE All World index are Apple, Microsoft, Amazon and Facebook.
Apple, the top holding, makes up 1.98 per cent of the index,?almost as much as Australia, which is 2.36 per cent.
What's more, the firm's fortunes will have a greater impact on passive funds tracking the index's performance than the entire allocation to India and Denmark combined - which are just 1.19 per cent and 0.60 per cent of the FTSE All World Index respectively.
The line graph illustrates the average performance of funds in the IA Technology & Telecommunications sector over the past five years
Technology is now the largest sector in the S&P 500, representing 22.8 per cent of the index. So anyone with a US tracker fund already has significant exposure to technology and does not need to?run out and invest in a specialist fund, according to Jason Hollands,?managing director of broker Bestinvest.
The likes of Google, Facebook and Netflix - whose services many of us use every day - have generated impressive growth in the past, but investors should be wary about just how far valuations have moved in a short space of time, Hollands adds.
It is also important to remember the big names in technology emerged from obscurity a little more than a decade ago, so it's not beyond the realms of possibility that they could be knocked of their perches by emerging challengers in the future.??
Hollands says: 'I think the euphoria surrounding tech stocks is symptomatic of overconfidence by investors who have become immune to risk because of years of extreme monetary policy underwriting equity markets [quantitative easing] and bubble-like valuations compounded by the rise of index trackers throwing cash at the stocks without regard to their prices.'
What are the headwinds for the tech stars??
A series of headwinds are on the horizon for technology stocks, so it is important to think long and hard before ramping up your portfolio's weighting to the sector.
For instance, some have come under the spotlight for aggressive tax mitigation manoeuvres, while social media companies are under increasing pressure to implement measures to curb exploitation by hostile governments and terrorist organisations.
Hollands adds: 'A key risk hanging over markets at the moment is a policy slip up. Bull markets don’t die of old age, but the US Federal Reserve has a track record of murdering them.?
'The unwinding of trillions of dollars of quantitative easing that the Fed has just commenced, alongside three expected rate hikes next year, could lead to a wholesale reappraising of risk and if that happens, many tech stocks stand in line to feel the full force of gravity.'
Firms manufacturing semiconductors are a popular choice among many ?tech fund managers
Where fund managers hope to profit from tech
However, it is not all doom and gloom for technology, according to Darius McDermott, managing director of funds rating service FundCalibre.
'I like technology as an investment but it can be volatile and, a lot of the time, avoiding the losers is as important as finding the next Apple.
'The sector has had a phenomenal run but the managers I talk to are still positive (some very excited) and think the pull back was just a pause for breath.'??
Alongside investment funds, one of the most popular ways of gaining exposure to the technology sector is through investment trusts - which are similar to a fund in that they pool investors' resources but are also listed companies in their own right with shares that trade on the stockmarket.
Over the past five years, investment trusts?in the Association of Investment Companies's Sector Specialist: Technology, Media, Telecommunications have more than trebled investors’ money, with Allianz Technology Trust returning 273 per cent, according to the trade body.
Walter Price, who manages the portfolio, claims?opportunities are presenting themselves across the high growth, growth at a reasonable price, and value segments of the sector.
Price believes he is on to a winner by investing in stocks such as Micron Technology, Palo Alto Networks and Teradyne, which offer exposure to the production of semiconductors, cyber security, as well as robotics and automation, respectively.
He said: '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 in old markets.?
'Sectors such as automobiles, advertising, security, retail, and manufacturing are all being shaped and transformed by advances in technology.'?
Price is less optimistic on the prospects of FAANG stocks , which is an acronym for the five most popular and best performing tech stocks in the market: Facebook, Apple, Amazon, Netflix, and Alphabet’s Google.?
'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.'
Get help investing for your income?
If you want to ?invest for income then professional help can be invaluable.
Many people like the idea of making all their own investment decision but often find that they do not have the time or expertise to build a portfolio themselves.
A good financial adviser can help you work out your goals and how you plan to get there - and then make sure you stick to your financial objectives.?
This is Money has teamed up with Timber to offer readers easy access to carefully selected financial advisers who you can trust, with fair and affordable charges.
Meanwhile, Hyun Ho Sohn, who manages the Fidelity Global Technology Fund, claims at an average price to earnings ratio of around 18x, the technology sector is significantly cheaper than its historic peak - during the dotcom bubble - and in-line with the broader market,?by this common investment valuation metric.
The portfolio's focus on individual stocks rather than economic conditions and the movement of the broader sector, has resulted in its above-average weighting in?software, semiconductors and internet retail, and underweight technology hardware and IT services, Ho Sohn said.
He added: 'In software, I am finding many companies with high-quality business models and recurring revenues. The industry has numerous structural drivers that will underpin long-term earnings growth.
'Small and mid-cap application software will benefit from digitisation and business model shifts – such as moves to online subscription models in accounting and design software.
'In the semiconductor space, I own large-cap names including Intel and TSMC, which I believe will be long-term winners.'
He claims both companies are playing a key role in the development of digitisation and other emerging technologies, and are significantly undervalued compared to other semiconductor firms as investors instead opt for firms boasting greater momentum at present.
'I like Japanese internet stocks; the industry there is unique, and I am finding winners in the digital advertising and ecommerce space.?
'Because of Japan’s relatively mature economy, the growth profile of these companies is not as strong as those FAANG or Chinese internet leaders, but still offers relatively robust growth with reasonable valuations.'
Four of the best funds to invest in tech?
Cherry-picking the best tech stocks is by no means an easy feat so more often than not this is a game best left to the professionals and their research resources.
We asked Fund Calibre's McDermott for four funds that could fit the bill.?
Darius?McDermott of FundCalibre claims the pace of disruption in the technology sector is creating opportunities
Our preferred fund in the sector is?AXA Framlington Global Technology, run by Jeremy Gleeson. It invests in all sizes of technology companies around the world and the manager prefers to find 'new technology' stock ideas rather than 'old commodity' companies.?
Technology is inherently risky but by avoiding the blue sky companies (good ideas but zero income and burgeoning development costs) and waiting for companies to fully develop their products the team is more likely to avoid the pitfalls that affected tech funds in the early 2000s.
If you want a technology investment trust, we like Polar Capital Technology,?run by Nick Evans and Ben Rogoff. They are two very experienced managers who really know this sector inside out.?
They have a decent exposure to Asia as well as the US (which tends to dominate in technology funds) and 22 per cent in medium sized companies and 2 per cent in smaller companies – so some more unusual names in the mix as well as the usual suspects.
If you want a cheap fund, then L&G Global Technology?Index is worth a look. It tracks the FTSE World Information Technology Index and the big US companies will very much dominate the fund (the top three holdings are all more than 10 per cent of the fund), but it does only have an ongoing charge of 0.32 per cent.?
So if you just want exposure to the sector and don’t mind the big US bias and big bets on a few companies, it will do the trick.
And finally, robots and artificial intelligence is the new rage among fund launches. Some people have gone as far as saying that AI will change our lives as much as the internet has done. If you want something this specific, you could look at the?Smith & Williamson Artificial Intelligence fund. It will look to tap into the rise of robots and AI and is run by Chris Ford and Tim Day, who joined from specialist manager Pictet.
Most watched Money videos
- Big Money Questions show: What is a dividend?
- Exciting preview displays the Lamborghini Urus at high speed
- Watch the evolution of the Range Rover model from 1969 to 2018
- How to invest a pension pot in retirement
- Lars Kroijer: You can't beat the market, so invest passively
- Award winning 412GW Next Base dash cam records in 1440p resolution
- Life hack: Save money by installing foil behind your radiators
- Buy banks, not beer: How to invest for higher inflation
- Big Money Questions:Will economists foresee the next crisis?
- Big Money Questions: Can you live well for cheap?
- How to invest like Warren Buffett in the UK
- SEAT's new smart car featuring protection against drunk driving
The comments below have not been moderated.
The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline.
By posting your comment you agree to our house rules.