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Darius McDermott: Different ways to allocate to technology – Portfolio Adviser

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Sep 21, 2022

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Home / Features / Darius McDermott: Different ways to allocate to technology
By , 21 Sep 22
It has been oversold to the point where some tech now looks particularly attractive

It’s been a tough year for tech investors. The Nasdaq Composite Index – often considered to be a good barometer of how well the tech market is performing – has fallen by some 15% since November 2021 (global equities are down 5%), having been down almost 30% as recently as June this year.
Having become the first company to reach a market cap of $3trn in January, Apple is now down over 15% year-to-date, and it is not alone. Meta (Facebook), Amazon and Alphabet (Google) are down 55%, 26% and 28%, respectively. The ugly duckling that is Netflix is down over 63%.
We’ve seen lots of stories about companies that have over-extended themselves in the post-Covid world. But, ultimately, we still feel tech has been oversold to the point where some of it now looks particularly attractive. The big boys are a perfect example – Apple, Amazon and Google all generate huge amounts of cash and have rock solid balance sheets. These are exactly the sorts of companies you should be targeting amid a looming recession.
That’s in stark contrast to 1999/2000, when many tech stocks were dependant on “blue sky thinking” rather than those reliable cashflows – while valuations were also far higher prior to the tech bubble.
It’s also without taking into account the generational shift seen in the last 30 years, accelerated by the Covid pandemic. Cloud-based architecture, digital payment technology and AI-enabled automation are the bedrock of many companies and are entrenched in people’s lives – creating numerous sub-sectors as a result.
With this in mind, here are four different ways to invest in technology today.
This is an unconstrained multi-cap, specialist fund that seeks growth from technology stocks from around the world. Its lack of benchmark constraints means it is free to invest in ‘new technology’ rather than ‘old technology’ – as manager, Jeremy Gleeson’s view is that the benchmark is populated with the successful technology companies of the past, not necessarily the future. It is important in any fund to avoid the losers but no more so than in the technology sector. Gleeson has run this fund since 2007 and has been specialising in technology stocks since 1998.
While the fund does hold companies such as Apple and Alphabet, it also has exposure to the likes of software company Cadence Design Systems and Broadcom Inc, a US-based firm focusing on semiconductor and infrastructure software solutions.
Robots are already being brought in to do the everyday tasks we loathe in the home – like tidying up or doing mundane and dangerous tasks in the workplace. It’s a wider part of the move to automation, which is essentially the creation and application of technologies to improve or maximise tasks and processes.
It started life on the factory floor, as automotive companies aimed to improve manufacturing techniques, but has since evolved to influence multiple aspects of how we live and work. Robotics and AI are also driving autonomous vehicles from science fiction to reality. Engineers have built self-driving cars that have clocked up millions of miles on our roads.
The Sanlam Global Artificial Intelligence fund is designed to tap into these trends. Managed by Chris Ford, the fund ‘eats its own cooking’ using an artificial intelligence (AI) system to help find companies whose business models are aligned to benefit from this growing theme. Interestingly, the fund looks for companies that incorporate AI, rather than just making it, allowing a more diversified play on a theme growing in popularity.
As I mentioned, we do believe a number of the Faangs (Netflix aside) have been oversold to a degree and do look attractively priced. These are huge companies with amazing balance sheets. We have to remind ourselves that all of these tech behemoths are playing into long-term structural themes, and that, contrary to belief, these companies also suffered during Covid. For example, Apple closed all its retail stores and Google lost all its revenue from travel-related searches. These companies are exceptionally well positioned for future growth.
A good entry point would be the likes of the T Rowe Price US Large Cap Growth fund, which currently has Microsoft, Alphabet, Apple and Amazon as its four largest holdings – accounting for over a third of the portfolio. Manager Taymour Tamaddon looks for companies that can generate above average growth for the next three to five years, determined by how much free cash flow they can produce.
The growth of numerous subsets within the technology sector also makes it an attractive hunting ground for funds further down the market-cap spectrum. And let’s not forget that the US is not the only place where technological innovation takes place.
One fund that comes to mind that encapsulates both these aspects is the Liontrust UK Micro Cap fund, which has historically had a strong exposure to the tech sector (currently 32.6%), which is in part due to its focus on profitable, hard to replicate, capital-light businesses that can scale quickly.
A good example in the portfolio’s top ten is Oxford Metrics, which offers integrated smart sensing solutions – solutions it believes will help bring about the partnership between humans and machines to achieve what neither can do alone.
By , 21 Sep 22
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