Long ReadJun 6 2022

Which tech funds to invest in

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Which tech funds to invest in
(Reuters)

Having recently lost its title as the world’s largest company, Apple is being reminded of those same gravity laws in the first few months of 2022. It is also a useful nudge to investors that what goes up can come down.

Tech stock declines

Having become the first company to reach a market-cap of $3tn (£2.3tn) in January, Apple is now down almost 23 per cent year-to-date, but it is not alone. Meta (Facebook), Amazon and Alphabet (Google) are down 46, 37, 27 per cent respectively. Poor old Netflix is down almost 69 per cent.

In a nutshell, tech is being hammered as Federal Reserve hikes hit growth, inflation presses the consumer and geopolitical uncertainty hits demand.

Then there is Covid, the ultimate catalyst for accelerated adoption of tech. The truth is we do not know what the new normal post this seismic event in our lives is and whether tech companies have over-extended themselves in assuming the current levels of increased demand are sustainable.

Clearly tech has had an amazing run; there is a reason the FAANMGs account for around 20 per cent of the S&P 500. But now they are out of favour, the doom-mongers seem overly eager to point to the 2000-03 technology sell-off – imaginary bubbles are bursting everywhere once more.

Could they rise once again?

So, are we now in an environment where tech is in decline? In a word, no, and there is a host of reasons why not, so I will try and be concise.

Let’s start with the obvious: tech remains an integral part of our everyday lives and will only grow in influence in our attitudes to work, social interaction and e-commerce.

We must also understand that the tech that now dominates the market is very different to what was in the 1990s and early 2000s. When the internet was in its infancy, many tech companies had no cash flows in their business models and had no customers.

We were relying heavily on blue sky thinking back in those days. Today, these tech businesses are making money and are fundamentally good businesses.

Valuations were also far higher in 2000, with average price-to-forward earnings at 113 times, compared to 40 times in November 2021. That is without talking about the generational shift seen in the past 30 years, accelerated by the Covid pandemic.

The tech that now dominates the market is very different to what was in the 1990s and early 2000s.

Cloud-based architecture, digital payment technology, and AI-enabled automation are the bedrock of many companies and people’s lives.

Valuations today are now looking pretty cheap for these businesses. For example, Meta is arguably a value stock. I would estimate it is probably trading on something like a free cash flow yield of circa 10 per cent and has a ton of cash on the balance sheet.

It is burning money on the Metaverse and virtual reality, basically giving away headsets at a massive loss. The key is that it has the ability to do this, and should it strike gold again the share price will skyrocket.

You almost have to look at tech as a two-speed economy as most of those big companies have fortress balance sheets – they do not have huge amounts of debt like BP or Shell. They have also got strong earnings growth because they are great businesses, not because we have lived in a low interest rate world since 2009.

There will be more volatility further down the market-cap scale, but that is no different to any other sector, where liquidity becomes a greater issue. That is where an active manager earns their bread.

I will end by saying this: there is now 1bn iPhone users worldwide – if Apple decided to double the price of your device would you get rid of it? The answer for many of us is no. It will not take too many falling apples to hit the market on the head before it realises that either.

Here are some funds to consider for tech exposure:

1. AXA Framlington Global Technology

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.

Jeremy Gleeson has successfully run this fund since 2007 and has been specialising in technology stocks since 1998. His level-headed commitment to finding new opportunities with strong commercial potential and ignoring yesterday’s winners, coupled with his and his team’s vast experience, has led to very strong performance over the years.

2. Threadneedle Global Extended Alpha

Threadneedle Global Extended Alpha is a quality growth fund that buys high return on capital businesses experiencing sustainable structural growth. It has a 130/30 structure, giving it the extra ability to short stocks that manager Neil Robson expects to do badly.

Businesses in the fund will have a strong market position and a competitive advantage. They will earn a high return on capital, be sustainable and have good growth potential. Tech currently accounts for more than a third of the portfolio (30 per cent net), comfortably the largest sector exposure.

3. Invesco Global Focus

Managed by Randall Dishmon, this is a high conviction, concentrated fund, which invests in structural growth winners. The philosophy behind the portfolio, which contains around 35 stocks, is to buy companies that are winning and then let them compound over time.

The manager’s approach is refreshingly simple: understand the structural trends that are changing the world and then invest in the best companies that are benefitting from these trends. One third of the portfolio currently sits in tech, with Facebook (Meta) and Amazon its two largest holdings.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre