As seen in the lastest issue of Master Investor Magazine
Investing in companies that develop or utilise new technology can be a rewarding but risky business. If you had money in the markets during the run up to the dot.com bubble that burst so dramatically in March 2000, you will know exactly what I mean. Stocks like Amazon and eBay that survived the subsequent fallout have gone on to become household names, whereas the likes of Pets.com and Boo.com have largely been forgotten.
The world has moved on since then and although there are still plenty of tech start-ups there are also lots of established global technology giants that have become part of our everyday lives. You would be hard pressed to find anyone aged under 50 that hasn’t used Facebook and Google or bought something from Amazon using a smartphone or tablet made by Apple or one of its competitors. This doesn’t mean that they will all be profitable investments, but at least it gives the fund managers who concentrate on this part of the market something tangible to work with.
There are 14 open-ended funds in the Investment Association’s Technology & Telecoms sector and many of them have built up a good track record. They have been helped by the strength of Facebook, Amazon, Netflix and Google owner Alphabet, which have become known as the FANG stocks.
In 2015 these four shares produced an average return of 83% and were responsible for most of the US stock market’s positive performance, but the year-to-date returns have been a lot more mixed. By 17th May only Facebook and Amazon were in positive territory, whereas Netflix and Alphabet had both given back some of last year’s gains, with some investors starting to wonder if the FANG stocks have lost their bite.
Open-ended options
The 14 Tech funds have made an average return of 52% over five years, with four of them – Fidelity Global Technology, Pictet Digital Communication, L&G Global Technology Index and Close FTSE techMARK – up by over 70%. In the last 12 months it has been more of a struggle, with the sector generating an average loss of 1.5%.
The best performer with a five-year gain of 84.7% was Fidelity Global Technology, which also happens to be the largest fund in the sector, with assets under management of £616m. It has been managed by Hyun Ho Sohn since March 2013 and invests in companies that have, or will, develop products, processes or services that will provide, or will benefit significantly from, technological advances and improvements.
Almost three-quarters of the fund is invested in the US, where most of these companies are based. At the end of March the two largest weightings – Apple and Alphabet – accounted for 18% of the portfolio, while the other significant holdings included IBM, Samsung Electronics, Intel, Baidu and Cisco. The fund is registered in Luxembourg and has ongoing charges of 1.17%.
Pictet Digital Communication provides a very different type of exposure. The fund seeks to achieve capital growth by investing at least two-thirds of its assets in companies that use digital technology to provide interactive services and/or products associated with interactive services in the field of communication. It has an impressive five-year return of 78.9% with ongoing charges of 1.2%.
The fund’s two main sector exposures are to Online Advertising and Network Operators that make up just over half of the assets, with its other key areas being E-commerce, Interactive Entertainment, and Devices. It is a relatively diversified exposure with the 10 largest positions accounting for 44.2% of the 43-stock portfolio. These include the likes of AT & T, Alphabet, Comcast, Facebook, Verizon Communications and Amazon.
Successful trackers
You might think that a specialist area like technology would be one where active managers would be able to add considerable value, but the third best performer in the sector is an index tracker. The L&G Global Technology Index fund tracks the performance of those companies in the FTSE World Index that are engaged in IT activities.
Almost 80% of the constituent stocks are listed in the US, with the three largest being Apple 14.95%, Microsoft 10.48% and Alphabet 10.96%, while the other main holdings all have weightings of less than 5%. It is up 77.4% over five years and the ongoing charges are a much more reasonable 0.32%.
The fourth best performer is another tracker. Close FTSE techMARK aims to replicate the performance of the FTSE techMARK Focus Index and has generated a five-year return of 76.6%. The benchmark is made up of technology stocks with a market value of less than £4bn that are listed on the London Stock Exchange’s techMARK market.
The fund has a concentrated portfolio with the 10 largest holdings accounting for 60.5% of the assets. These include the likes of Shire PLC, ARM Holdings, BAE Systems, Smith & Nephew, Sage Group and Betfair. Its four main sector allocations are Software & Computer Services, Aerospace & Defence, Pharmaceuticals & Biotech, and Technology Hardware & Equipment. The ongoing charges are 0.69%.
Technology ETFs
According to data from FE Trustnet, there are 71 ETFs operating in the Technology, Media and Telecoms sector. The average five-year return is 46.4%, but this masks a massive variation with six of them up by more than 100% and two of the short funds down by over 50%.
Given the strong performance of the sector, it is no great surprise that the biggest gain was from Direxion Daily Technology Bull 3X Shares, which increased by a massive 247.3% over five years. This leveraged ETF aims to generate three times the return on the underlying index before fees and expenses.
It is benchmarked against the Technology Select Sector Index, which is based on the tech companies in the S&P 500. The fund’s largest holdings at the end of March were Apple, Alphabet and Microsoft with weights of 10% to 14%. If the share price performance of these sorts of stocks were to decline it would have a magnified impact on the returns from the fund.
The second best performer also offers a leveraged exposure to the sector. ProShares Ultra Technology aims to deliver twice the daily performance of the Dow Jones US Technology Index. It has the same sort of holdings as the Direxion ETF, although the weightings are slightly different and the five-year return is a more modest 142% as you would expect.
The most successful non-leveraged ETF is the PowerShares NASDAQ Internet Portfolio with a five-year return of 122%. This tracks the NASADQ Internet Index, which is comprised of the largest and most liquid US companies that are engaged in internet-related businesses. At the end of March the five holdings with weightings of more than 5% were: Baidu ADR, Amazon, Alphabet, Facebook and Priceline.
There are also a number of other ETFs that provide exposure to specific sub-sectors of the tech market. These include: the iShares PHLX SOX Semiconductor Sector Index, the First Trust NASDAQ CEA Smartphone Index and the First Trust ISE Cloud Computing Index.
Closed-ended alternatives
There are only two investment trusts operating in the sector, with the best five-year performer being Allianz Technology (ATT) with a cumulative return of 70.5%. It is managed by Walter Price, a veteran with 40 years of experience of investing in technology, who is based in San Francisco to be nearer to all of the companies operating in Silicon Valley.
Price thinks that security is an attractive secular growth area in technology. He says that the increasing sophistication and persistence of cyberattacks has triggered more spending towards providers offering new security technologies and that this trend will continue for several years.
The £152m portfolio is invested in 59 holdings with the largest positions being Apple, Microsoft, Workday, Amazon and Facebook. It has been a consistent performer with healthy double-digit share price returns in 2013, 2014 and 2015, although it made a small loss in the first quarter of 2016 and is now trading on a 7.1% discount to NAV.
The other closed-ended fund is the Polar Capital Technology Trust (PCT), with a five-year share price return of 56.3%. It is much bigger with total net assets of £826m and has a larger portfolio of 126 positions, although the top four – Alphabet, Apple, Microsoft and Facebook – account for a hefty 28.7% of the total allocation. Like ATT it was in negative territory for the first quarter and has moved to a 6.2% discount.
Ben Rogoff, the Director of Technology at Polar Capital, notes that Facebook has a billion users every day – equivalent to one-seventh of the world’s population. He also likes Amazon and says that it should benefit from years of growth from its e-commerce arm, while Amazon Web Services is dominating the use of the cloud. It’s a growth-centric approach with the fund investing wherever the growth is strongest.
Technology funds have had a good five years even though the last 12 months have been a lot more volatile with several sharp peaks and troughs. It is the sort of area that is only really suitable for adventurous, long-term investors, but those who stick with it are likely to be well rewarded. The 21st century is no place for Luddites.