New risks for the main driver of world markets

New risks for the main driver of world markets

In a few short years, it has become difficult to imagine life without Facebook, Apple, Amazon, Netflix and Google. These powerhouses, shortened to the acronym FAANG, increasingly dominate not just our personal lives, but global markets and investment portfolios too.

A glance at the main US market, the S&P 500, shows that Apple, Facebook and Google occupy three of the top four places by market capitalisation – the remaining position being occupied by Microsoft. That is on the back of several years of rapid share price appreciation. Excluding Apple, each of the FAANG stocks has risen by 100 per cent or more over the past half-decade. 

Lately, this enthusiasm has begun to be tempered. Technology indices have passed their dotcom era highs and the risk of greater regulation has grown.

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Richard Clode, portfolio manager on the Janus Henderson global technology team, says: “Everything has performed well since the financial crisis, but tech has performed even better. The reason technology companies have managed to grow their earnings by 100 per cent in the last decade is [because] everything else hasn’t grown. All of the outperformance of those technology stocks has been taking share of a lot of other sectors.”

Mr Clode remains optimistic about the future of the sector, saying that Google can still grow its top line at 20 per cent a year, but plenty of fund selectors and generalist equity managers have become more cautious.

Fidelity multi-asset manager Bill McQuaker says: “We [have] added to an American equity fund which has lagged peers in recent months as a result of not owning key technology stocks. Technology stocks are where some of the riskiest behaviour has been seen, with investors displaying ever more faith in future expectations.”

Tom Walker, manager of the Martin Currie Global Portfolio Trust, says: “We acknowledge the attractive business models of most of these stocks, but, in some cases, find the valuations too rich.” 

The manager holds Facebook, Apple and Chinese giant Alibaba nonetheless.

Winners keep winning

As Mr Clode outlines, equity markets have enjoyed a rich run of performance in recent years, with tech stocks a key driver.

Table 1 lists the top-performing technology funds and trusts over the past five years and makes for impressive reading. The Investment Association sector, numbering just 17 funds, has achieved average annual growth of 21.9 per cent over the period, bettered only by European and Japanese smaller companies funds. 

Success has been maintained over every measured period, with average growth over 10 years falling just shy of 15 per cent. Allianz Technology trust is the best performing closed-ended vehicle, averaging 26.7 per cent over five years, including a 40 per cent increase in the past 12 months.

Fidelity’s Global Technology fund leads the way in the open-ended space, turning out an average five-year growth rate of 24.3 per cent.

Ali Unwin, global technology fund manager at Neptune, says larger firms still present the best opportunity for future growth. 

Mr Unwin says: “The size and scale of the tech behemoths is not an aberration, but a natural function of an increasingly digital economy. When the costs of distribution and transaction fall dramatically – as is the case with online businesses – we see an increasing tendency for winners to keep winning.”