What role do tech stocks play in a US equities portfolio?

“Technology stocks absolutely play a part in a well-diversified portfolio of US equities,” says Eric Papesh, a portfolio specialist in T Rowe Price’s US equity team.

But he says: “Given the strong returns we’ve seen from the technology sector over the past five to 10 years, it’s likely some investors have concentrated their holdings within the space. While there are a lot of interesting companies in the tech sector today, there are even more across other areas of the market.”

With tech giants such as Amazon, Apple and Microsoft having grown profits rapidly in the past decade, Albemarle Street Partners' chief investment officer Fahad Hassan warns of market cap weighted equity indices increasing exposure to areas of recent outperformance.

“This can create concentration risk, which is problematic when there is a shift in the economic landscape. Prudent, long-term investors should seek to mitigate these risks through disciplined position sizing and diversification across sectors and factors.

"This discipline may dilute returns when a limited list of stocks is leading the market but will protect against large drawdowns when the tide turns. Large drawdowns can permanently destroy capital and investors must bear this in mind."

Hassan adds: “While the last decade has favoured growth and momentum, it is important to recognise that quality, value, and low volatility stocks also have a role to play in portfolios. These stocks can help during periods of slowing growth or rising inflation.

“The performance of growth tilted funds in recent months has exposed the dangers of a narrow factor focus. Long-term investors must seek factor diversification to mitigate the risk of being over exposed to a single style of investing.”

Diversification

As Papesh at T Rowe Price puts it, investors can improve the odds of building long-term wealth by having a well-balanced and diversified portfolio spanning all segments of the market, being open to everything from out-of-favour value ideas through to higher-priced companies capable of delivering faster growth.

It’s the deepest, broadest market there is. So you can easily build a diverse portfolio.Stephen Anness, Invesco

Although the tech stocks seem to generate most of the headlines, Invesco head of global equities Stephen Anness describes it as a diverse one with notable businesses in sectors including healthcare, industrials and consumer staples.