Following the inexorable success of technology investments over the past decade, Marcus de Silva looks at why the trend isn’t likely to abate any time soon.
Technology investments have been a popular theme ever since the financial crisis. These companies gave us growth when the world focused on being austere. Now, mega-tech is entrenched, protected by the technologies they’ve built. And we’re only just beginning in a decade of transformation as a new era of innovation emerges.
I love finding out about investment themes – the megatrends that fund managers use to pick investments. Often, these transformative forces play out as exciting new global innovations. They pique our interest. And they enable us to narrow down a long list of potential investments by finding fund managers who agree with our thinking. Most importantly, as trends can take years or even decades to play out, they can be a source of market beating returns long into the future.
Investment themes are what fund managers call trends that drive profits in companies where they’re manifested. They could be economic, social, environmental, or technological.
For example, if you believe, due to recent advances in various bits of technology, such as AI, robotics, quantum computing, and mobile, that society is in the midst of a ‘4th industrial revolution’ (as some experts have described it), and an explosion of profitable technology businesses will be the result, then your investment theme might be technology investments. Finding fund managers with technology investments as a guiding light is a way to access the profitability of these companies. It also leaves the investment decisions to experts and diversifies any risks associated with individual companies.
The big keep getting bigger
If you had bought technology investments for the past 10 years I doth my hat to you. The broader MSCI World Information Technology index – a broad basket of global technology shares – ballooned in value by 4.5 times during this period. And it looks like the winning streak isn’t going to end anytime soon.
In a world of low interest rates and low economic growth, big technology companies with solid finances and strongly growing profits have been very popular with investors. This was especially so during the pandemic as investors ducked for cover in well capitalised business.
Financial resilience and the ability to protect profitability through shear efficiency, scale and technological wizardry makes for an attractive investment case. And its hard to hurdle for any would-be competitor. Businesses that survived dotcom mania have matured to become enormously powerful and cash generative entities. All this points to mega-tech that will likely remain mega that will continue gobbling-up market share for years to come.
Digital advertising is a good example of this. According to Capital Group, an American heavyweight investor – in 2007, the top two leading firms in digital advertising held 4% of the entire market. By 2019, the top two – Facebook and Alphabet (Google) – held 37%. With more users and more markets comes increasingly relevant and better targeted ads, delivering more efficient and cheaper campaigns for advertisers. An undeniable orbit fitted with an accompanying gravitational pull – this ability to attract and retain users and advertisers is known as the all-powerful ‘network effect’.
There’s money in the cloud
There’s also plenty of attractive sub-themes that bubble under the surface of broader tech. Cloud computing, for example, is a $111bn industry, and in 2019 was already growing at a clip of 17%. Rather than housing your own computers, servers, high-end air con units, and legions of technicians to keep everything running smoothly and virus free, your entire IT infrastructure is delivered a service, delivered via the internet.
The unfolding of the Covid-19 pandemic has only poured accelerant on this trend. Satya Nadella, CEO of Microsoft – one of three big players in the cloud space alongside Amazon and Google – recently reported that demand for their cloud services during the pandemic surged with two years of growth in just two months.
Mobile gets an upgrade
The roll-out of 5G is another potent sub-theme. The next generation mobile network will be capable of delivering super-fast connectivity and almost zero latency. 5G will transform how we and devices interact with the internet, somewhere between 10 and 100 times faster than 4G.
This goes beyond being able to stream high definition films while basking on sunny beach somewhere. A multiverse of innovative new businesses will thrive out of the technology. There will be gadgets and appliances connected through the ‘internet of things’, industrial applications such as smart manufacturing and medical applications including remote surgery. There’ll also be AI applications, highly connected smart cities, incredibly immersive augmented and virtual reality. Not to mention agricultural uses including combine harvesters plough fields all on their own.
These applications only scratch the surface. A recent IHS Markit study predicted industries surrounding 5G would eventually grow to the tune of $13.2trn in economic value.
The risks to the investment case
You need long-term view to squeeze the maximum juice out of a given theme and manage broader stock market risks. Independent financial adviser Felix Milton remarks: “you need 5 years minimum for a stock market investment (shares), but really, 10 – 15 years for a long-term view”. Make sure you go through the risks associated with any technology investments so there’s no nasty surprise down the road.
Technology investments – ideas for your portfolio
“If you’re looking for a technology investments, there are 16 in the Investment Association’s (IA) ‘Technology and Telecoms’ sector. There are also four investment trusts in the Associations of Investment Companies (AIC) ‘Technology and Media’ sector.
One example of a technology focused investment trust is Polar Capital Technology Trust. It launched in 1996 with the aim increasing the value of your money – so capital growth – through investments in a broadly diversified international portfolio of technology stocks.
It’s the biggest investment trust in the sector at £3.4bn, and Ben Rogoff has managed it since 2006.
70% of the portfolio is in American companies, with big holdings in Apple, Microsoft, Facebook and Alphabet (Google). There are also holdings in Asia such as Alibaba, Tencent and Samsung. Over the last 10 years, a £100 investment in the trust grew to £525.
The second biggest tech trust in that same sector is the Allianz Technology Trust. It also holds lots of US stocks like Alphabet and Amazon, along with Tesla and Paycom Software. At the moment, its portfolio is about two thirds technology focused with the rest being communications services and consumer companies. If you had invested £100 ten years ago, it would now be worth £814.”
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