Investment in technology can prove to be a rollercoaster ride - Conal Gregory

Power play: Information technology has become a driving force in society.Power play: Information technology has become a driving force in society.
Power play: Information technology has become a driving force in society.
Applying science to practical and industrial use has become one of the most successful financial fields in the last decade. Yet following the leading companies can mean a rollercoaster ride with several maverick entrepreneurs and more political involvement than finance usually attracts.

Technology is a key catalyst of change but predictions for how it will transform society are frequently exaggerated. In 1930 the economist John Maynard Keynes forecast that by 2000 tech advances would mean most people would be working a 15-hour week. Yet the robots have not yet created such leisure time.

The large US tech stocks are evident in our lives from the rise of online shopping to daily activities placed on mobile devices. From healthcare to finance, technology is a pervasive force whose trends have been accelerated by the global pandemic.

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The acronym ‘FAANGM’ has been applied to Facebook, Amazon, Apple, Netflix, Google and Microsoft. These six firms dominate the leading US index, the S&P 500.

“Their elevated valuations by almost every metric does pose the question of whether we are currently experiencing a tech bubble,” warns Ben Staniforth from Leeds-based broker Redmayne Bentley.

Enterprising tech companies lure the investor. The meteoric rise of some leaders is hard to fathom. Apple at one recent point was valued at more than the whole FTSE 100.

Consider a proportion for a portfolio mix but be guided by an experienced wealth manager or independent financial adviser and use a fund which will cut volatility. A collective will bring a stock-picking professional manager who will make company visits on your behalf and will usually be supported by a research team of analysts.

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To not venture into the sector risks losing some star gains. According to investment trust research by AIC/Morningstar specially for The Yorkshire Post, an annual return exceeding 30 per cent over three years can be achieved:

Allianz Technology, up 33.8 per cent

Polar Capital Technology, up 27.2 per cent

Hg Capital 20.2 per cent

Herald, up 15.4 per cent.

Their respective tech holdings are 97.8, 95.2, 95.2 and 89.7 per cent.

Buying star names when they dip is usually a good strategy as, for example, in mid March, when such shares fell along with the rest of the market and some have since doubled in price.

“Long term, tech is still a very good investment. Just be aware these big companies could correct further and they are unlikely to double again in value in the short term,” warns Darius McDermott of Chelsea Financial Services.

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When a major price change in a sector or even a single holding significantly changes the asset mix and probably exposure to risk, a rebalance should be done without delay. Technology is no exception. Once Tesla’s shares went galactic, rising 434 per cent this year, Baillie Gifford rightly reduced its holdings from 7.6 per cent to 4.25 per cent.

Scottish Mortgage is among the funds it manages. Over a decade its share price return has been 727 per cent, compared to 19.3 per cent for the FTSE All-World index. To protect the portfolio, it culled Tesla as the electric car maker had grown to 13.4 per cent of the total assets.

The fund has almost one-fifth in tech and is supported by discount broker Interactive Investor which also likes F&C. This is the oldest investment trust, founded in 1868, and is mainly formed of large cap companies, giving a lower risk profile. If seeking specifically tech, Teodor Dilov, fund analyst at the broker, says Polar Capital Technology is “well-diversified”.

Instead of looking at the large FAANGMs, consider the whole sector and non-US regions where good tech valuations can be found. Some of the largest are ‘enablers’ for tech to do even more. Fidelity’s Jon Guinness and Sumant Wahi commented recently that “Zoom was able to scale its daily users from 10m in December 2019 to 300m in April 2020 by tapping into the cloud network Amazon Web Services”.

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Check delivery against expectation. Elon Musk of Tesla suggests tech advances have been achieved but the reality is often rather different. Last month investors anticipated hearing that an electric battery to run a million miles had been created, powering a Tesla vehicle for life, but no such breakthrough has occurred, knocking the share by 15.9 per cent.

Information technology has become a driving force in society. In 2006, mathematician Clive Humby is credited with saying, “Data is the new oil”. With personal data so acutely necessary, Staniforth identifies cyber-security as an investment opportunity.

He cites CrownStrike for its endpoint security solutions, helping customers protect laptops, desktops and mobile devices that are remotely bridged to a network.

Political trade disputes are having an effect, notably between the US and China. Donald Trump has acted against Huawei and TikTok, ordering app stores to block downloads of the Chinese video platform.

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In another move, the largest anti-monopoly case since Microsoft in 1998 has started. The US Department of Justice is taking an antitrust suit against Google, the world’s most popular video service.

Software is “eating the world” is how Silicon Valley investor Marc Andressen has described the situation.

However, it can be for the greater good as the exciting health example of Grail shows, a firm developing a blood test using algorithms to find over 50 cancers through a single phial of blood. The maker is being purchased by US biotech giant Illumina for US$8bn (£6.2bn).

The UK is home to some of the best tech stocks. Russ Mould, investment director at AJ Bell, cites computer-aided engineering software specialist Aveva, telecoms networks testing expert Spirent and precision instrument manufacturers Renishaw and Spectris.

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He says the Chester-based GB Group is a leader in identity verification and therefore at the forefront of the fight against cybercrime.

Open-ended funds with large tech holdings have generally not performed as well as closed-ended. This is probably because they are not able to borrow when an opportunity arises and not subject to the independent scrutiny of non-executive directors.

Over three years, the best annual returns were:

L&G Global Technology Index (UK based unit trust) 25.5 per cent

AS Global Innovation Equity (Luxembourg SICAV) 20.9 per cent

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Threadneedle Global Technology (Luxembourg SICAV) 19.3 per cent.

The latter’s base currency is the US dollar which may be a factor. The proportion held in technology by each of these funds is 80.7, 75.7 and 85.8 per cent, according to Morningstar research.

McDermott’s preferred collective is AXA Framlington Global Technology but, for a generalist fund, tips LF Blue Whale Growth (60 per cent in tech and not the FAANGs), Rathbone Global Opportunities (29 per cent tech) and Liontrust UK Micro Cap (28 per cent in UK tech).

Case study: A flight to Starling

Jason Hadlow, a 57-year-old from Yarm, North Yorkshire, has switched banks to gain modern technology. He was with a traditional high street one until last December when he moved to Starling Bank.

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“I love the mobile aspect of Starling and that I don’t need to go into a branch. I can print off statements at leisure, set up direct debits and use imaging to credit a cheque,” says Jason, who is co-director of a retail furniture firm.

He uses a nearby post office for any cash or any ATM. Starling comes with a list of financial goals and sends reminders when payments are due.

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James Mitchinson

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