Conal Gregory: Join the technology revolution but beware of the risks involved
It is the entrepreneur’s role to distinguish which ideas appear realistic and are worth backing. From how shopping is conducted and ordering taxis or takeaways to banking or interacting with friends, a tech revolution has occurred which is not going to stop.
Just 20 years ago, under 10 per cent of households could access the internet and smartphones and tablets had not arrived.
Today’s investor has a myriad of choices in the technological field with notable advances continuing in robotics, artificial intelligence and driverless vehicles which are changing our lives.
Investing can be lucrative but “it works both ways with the scale of risk and reward roughly symmetrical. Higher upside potential creates higher downside potential”, says Newcastle-based private client broker, Vertem, citing caution over relatively new and unregulated cryptocurrencies like Bitcoin.
Technology is dominated by foreign companies, notably by the famous FAANGs: Facebook, Amazon, Apple, Netflix and Google (now Alphabet). There are strong Asian names like Alibaba, too. They are profitable businesses with stable customers but there is no guarantee that they will be the success stories of tomorrow.
Some attract political scorn, such as the Chinese tech giant, Huawei, which seeks to provide the next generation of mobile phone networks.
Many people are still nervous about investing in technology after the dramatic boom and bust of 2000. It was a painful loss for those who invested close to the top of the market.
Today the spectrum from the dotcom boom has changed although the sector is still a fast-paced environment and subject to volatility. There is the risk that the technology advanced by one firm can quickly be overtaken by another. For safety, opt for a specialist fund rather than a single company, says Graham Spooner of The Share Centre.
Investing in a well-resourced collective, probably having researchers in Silicon Valley who can check on the expertise and experience of those to be backed, could be the way forward. However, Darius McDermott of Chelsea Financial Services feels the sector looks expensive, citing disappointing launches by Lyft (mobile app provider) and Uber.
He also wonders if some tech assets should be thought of in another sector. Revolut could, for instance, be a tech firm or a property company.
Spooner likes Polar Capital’s Technology Investment Trust which concentres on North America and Asia. Its top 15 holdings form 49 per cent of the assets. It launched in 1996 and has a good long-term track record, avoiding early stage investing.
Axa Framlington Global Technology is also tipped by Spooner for investors seeking “potentially ground-breaking advancements with an excellent track record”. Backed also by McDermott, it holds 87 per cent in North America with the balance in global emerging markets. Its three top sectors are software, semi-conductors and interactive media and services. Its experienced manager, Jeremy Gleeson, has been running the fund for over a decade.
Consider Smith & Williamson’s Artificial Intelligence fund, suggests McDermott. The fund launched two years ago and has attracted £126m. It has 37 holdings including Alphabet, Intuitive Surgical, L3 Technologies and TransUnion, based mainly in the US, UK and Japan.
Managed from San Francisco, the Allianz Technology Investment Fund is also worth considering, says Spooner. Founded in 1995, it is essentially North American with major holdings in Facebook, Okta (which provides cloud software), Paycom Software and Cree (lighting class LEDs).
Among the major tech investment trusts, it is the top performer with a very impressive growth of 212.5 per cent over five years and 649 per cent in 10 years, according to Morningstar analysis.
Many may not realise that an investment in a global or US equity fund will bring exposure to the sector since technology accounts for about one-fifth of the American stock market. Examples include Merian North American Equity (with 23 per cent in tech), Rathbone Global Opportunities (25 per cent) and even a tracker like HSBC American Index (22 per cent).
“Those investing in technology funds therefore risk duplicating exposure and increasing reliance on a smaller number of companies in their portfolio,” warns Patrick Connolly, chartered financial planner at Chase de Vere.
As a consequence, the firm does not recommend tech funds but if clients specifically request, it likes Axa Framlington Global Technology or, for a cheaper alternative, Legal & General’s Global Technology Index fund which follows the FTSE World Technology Index and has an annual charge of only 0.32 per cent. Over 10 years, the two funds have grown 529 and 427.6 per cent respectively.
Innovative tech businesses have not been a feature of the main UK stock market. The exception is the smaller companies section. “Blue Prism is hot,” declares Laura Foll, co-fund manager of Henderson Opportunities Trust with 25 per cent in tech stocks. She says it is among the three world leaders in robotic process automation software, dramatically increasing sales in a short time.
Foll has also identified Zoo Digital (which can ‘dub’ content quickly), Keystone Law (disrupting traditional law firms), Boku (mobile payments technology) and LoopUp (conference call facilities).
Savers who stick in a typical UK equity fund can be “dramatically underexposed to this increasingly disruptive and dominant sector”, warns Ben Gutteridge, head of fund research at wealth manager Brewin Dolphin, who recommends looking beyond British shores to achieve tech exposure.
He likes Baillie Gifford for its expertise, notably in Scottish Mortgage, and Baillie Gifford’s open-ended American Growth and closed-ended US Growth funds. Although they include high flyers like Wayfair, there are some controversial stocks like Tesla. For a purer play, Gutteridge likes Polar Capital Global Technology, which is up 554.1 per cent in a decade.
Sarah Coles at Hargreaves Lansdown likes both Rathbone Global Opportunities for its “compelling track record and world-class tech companies” and Scottish Mortgage. The latter has been built around themes and holds around a quarter in technology including the US health firm, Illumina.
If a single company is preferred, Coles tips Apple even though it “has had a rollercoaster ride since October but remains interesting.”
Her novel tip is the graphics chips firm, Nvidia, which will benefit from the continued growth of the gaming industry but also demand for an ever-expanding list of industries that need processing power.
If a single share is expensive, consider buying a fractional amount and on a regular basis to reduce volatility. Halifax Sharedealing is very competitive with a Sharebuilder account costing £2 monthly and an ISA only £12.50 annually.
As technology advances, one concomitant is bound to be the decline in long-established companies and sectors. The losing ones need to be identified and culled from savings.