The earnings season has had everyone glued to their computer terminals monitoring the prices of technology and telecoms shares.
Analysts argue that the sector is currently booming and is well over the techniology bubble at the turn of the millennium. While there are just 15 funds, the stock coverage within the Investment Association (IA) the Technology and Telecoms sector is vast.
It includes stocks of companies involved in research, development and distribution of T&T.
These could include stocks from businesses that are focused on the manufacturing of electronics, creation of software, computers, social media and other products, as well as services that are related to information technology. Big name examples include Amazon, Apple, Facebook, Intel and Twitter.
The sector has become quite popular in the past few years for a number of reasons, one being its fast pace. The sector includes companies with some of the largest dividends ever paid and is fast-expanding as software services and products continue to grow with the ongoing technological revolution.
However, with the latest gadgets entering the market on a daily basis, the sector is constantly changing shape. Yield-hungry investors are always looking out for ways to get a piece of that pie.
Measuring the performance
Table 1 shows the top performing funds in the IA sector based on an initial investment of £1,000 over three years, according to FE data. All the funds in this sector have seen a positive return over a one, three and five-year period. The sector saw an average return of £1,052 over one year and £1,541 over three. The IA stipulates funds within the sector must invest at least 80 per cent of their assets in the Technology and Telecommunications sectors as defined by major index providers.
Looking at the discrete data for funds, it is interesting to note that 2013 saw strong performance from all the funds in the Tables. That year saw equity-focused funds generally perform very well as the market took confidence from a more stable global economy. The FTSE All-Share was up 17 per cent at the end of the year and the S&P 500 had gained 29 per cent.
According to the Table, the Fidelity Global Technology fund is by far the top performer with a return of £1,793 over a three-year period – 21.5 per cent annualised. The £455.9m fund aims to provide long-term growth with the level of income expected to be low and has close to 88.1 per cent invested in information technology. In terms of asset allocation, the fund has close to 70.5 per cent invested in US equities, with the remainder shared between South Korea, China, and Japan among others.
Meanwhile, Table 2 shows a list of funds with more than 40 per cent exposure to T&T but which sit in other IA sectors. A total of five funds fall within this category and each saw a positive return during the past year.
The Liontrust UK Smaller Companies fund is the top performer in this Table with a return of £1,245 over a one-year period, outperforming all the pure T&T funds in Table 1 over that time period.
The £401.3m fund has close to 91.7 per cent invested in the UK equity markets. In terms of sector breakdown, the fund has 40.6 per cent in technology, followed by 26.7 per cent in industrials. It also has just 2 per cent exposure to telecoms.
Risky road
Investing in technology comes with its own sets of risks and challenges, especially as new technology enters the market every other day. Changes in customer preference can also have a direct impact on how a company’s stock performs. For instance, the widespread use of smart phones has had an impact on the sale of desktop computers. Similarly, constant competition and innovative changes from Apple and Samsung have an impact on each others’ sales.
Companies in this sector also face operational risks. For instance, companies sometimes find themselves spending millions of dollars on a device to make it more user-friendly to keep up with competitors. The other risk is supply-chain problems and the company’s ability to launch a product in a timely fashion.
For instance, a number of tech companies aim to launch products before Christmas in order to make the most of the festive holiday season. Delaying a launch and missing this window could have an impact on the profits and thus stock prices.
Valuation is another risk faced by investors in this sector. Analysts point out that technology stocks, especially the ones that belong to newly-listed companies, often find themselves trading at high price/earnings multiples since investors expect earnings to continue to grow at double-digit rates. However, share prices can take a hit when the actual financial results fall short of speculated high expectations.
In the fast-paced world of technology and telecommunications, adding tech stocks to your portfolio could be a good way to aim for higher returns.
But the sector is volatile and investors should always read the small print before taking the plunge, especially for funds that are overweight in this sector.
FIVE QUESTIONS TO ASK:
What currency is the fund denominated in?
A number of tech stocks are US dollar-denominated, but most UK-based funds are available in sterling or euro. This may mean the funds are more expensive than others, so keep an eye out for the management fees.
What does the sector include?
It includes stocks that belong to companies involved in research, development and distribution of technology and telecoms. These could include software, computer and social media companies.
How many funds are available in this space?
It is one of the smaller sectors in the IA space at 15 funds. Apart from this, there are five funds that have more than 40 per cent exposure to this sector and many more with a smaller exposure.
Which asset class is used?
There is no stipulation from the IA on which asset class tech managers must use. However, the majority will invest in equities, which holds a greater risk than bonds but could see higher returns.
What are the risks to consider?
Investing in technology comes with a lot of risks and challenges. These can include operational risks, valuation risks among others. Be aware the risk rating for technology funds is much higher than a standard equity fund.
