In this article we are going to discuss the topic of investing in technology funds. The technology sector is vast, comprising gadget makers, software developers, wireless providers, streaming services, semiconductor companies, and cloud computing providers, to name a few. Any company that sells a product or service heavily infused with technology likely belongs to the tech sector. In this article we are going to gather the best technology funds and ask the fund managers on their opinion on investing in technology funds.
Technology still one of the Megatrends and we wanted to see what funds are the most interesting to investing in technology. We have analysed funds from BlackRock, AllianceBernstein, Polar Capital and Fidelity.
Source: Morningstar 15/07/2021
BlackRock Global Funds – World Technology Fund D2
Tony Kim, Fund Manager
Our strategy in particular is a diversified approach, but really betting on and identifying the beginnings of real innovation as well as new companies at the early parts of development. We look comprehensively across the globe and all sectors, identifying all the new companies and technologies. We deconstruct in detail all of these new companies and we are making bets on who will win and who will lose.
The philosophy is one of compounding growth over time, not in a short period of time, but instead a long duration investment philosophy of finding compounding growth companies that will grow rapidly at the cusp of new innovations and technologies, and we bet across a wide spectrum of these new ideas and themes. The ability to discern and find these new ideas and the winners, and to have the patience to stick with it is crucial, given it often takes time, and growth compounds over time. We have the knowledge and the in-depth experience. While we are based in Silicon Valley, we are also global, scouring opportunities worldwide. We also benefit from the large platform at BlackRock that allows us measurable access and information advantage. The fundamental make-up of the people is lastly a key differentiator – the mindset of being intellectually curious and pushing ourselves to the limit to find the cusps of innovation is what really sets this team and this fund apart from peers.
Technology is the largest sector in the world with nearly 2,500 public companies globally, and $35 trillion in market cap. There are thousands of companies across seven sub-sectors (Hardware, Internet, Software, Semiconductors, Services, Content & Infrastructure and New Industries). If you break these further down, there are likely hundreds of sub-industries. The technology sector is not uniform. It is not a uniform mass of a few companies. Innovation is not captive to a few companies, and it is occurring everywhere in the space. Innovation is not being led by the mega-caps. This is an industry of creative disruption, and there are new companies coming that are creating new technologies, leading to a changing of the guard. The sheer scale and amount of opportunity in the space is staggering. Over the past 15 years, the sector has more than doubled in number of companies and market cap, and shows that it is an ever-growing and expanding universe.
Given the vast amount of opportunity in the space and the high concentration of large and mega cap names in the benchmark, we take an unconstrained approach to investing in the space. While some of the more innovative mega cap names are represented in our top holdings, they are significantly lower weights than the benchmark and than many peers. We balance the demand of an active risk budget, but we also bet significantly on the new companies; new companies driving the forefront of innovation. We balance the two elements: well-established, diversified mega cap innovators, and the emerging smaller companies.
AB – International Technology Portfolio
Lei Qiu, portfolio manager AB International Technology Portfolio, AllianceBernstein
In the current environment, we continue to believe that the focus should be on distinguishing the quality of growth. This includes the near-term cyclical recovery, driven by easy year over-year comparison due to the sudden global shutdown last spring, which is unsustainable long term. This also includes true long-term defensive and durable growth, caused by permanent behavior changes.
While there may be short periods of volatility caused by low quality cyclical rallies, disruptive innovations have taken on powerful and irreversible growth trajectories. We are cognizant of the risks in today’s market as a result of cheap money. One such risk involves funding unprofitable and unsustainable business models. Furthermore after the near-term market exuberance over the “reopening trade” that benefited value stocks, we expect investors to take a more discerning approach. We want to identify the companies that will benefit from permanent behavior changes, not temporary demand surges.
Today’s consumers expect products and services to be accessible, anywhere and anytime. This huge behavioral change has fueled rapid growth in digital mobility and broadband over the past two decades, and is the single greatest force driving us towards a fully digital global economy. We believe that only technological innovation can help provide agile, robust, nimble and affordable solutions. We think that companies focused on digitalization, automation and efficiency are best placed. As an example, many of the companies we look at address what we call the “ABC” of innovation, namely Artificial Intelligence, Big Data and Cloud Computing.
Our strategy focuses on investing in disruptive innovation. We look for innovators with a large addressable market, with the potential to deliver superior long-term growth, high returns on invested capital over time, and attractive valuations. Our aim is to invest in disruptive leaders that are defining new paradigms in various sub-sectors of technology while seeking to avoid those facing challenges from maturing product cycles. We also have a close look at companies’ resilience in case there is a downfall in demand as well as their liquidity situation in order to make sure they can continue to invest, gain share and prepare for the recovery.
Demographics, accessibility, sustainability and geopolitics are megatrends which are changing society, presenting opportunities for innovative companies to enable change and disrupt previously established industries and lifestyle practices. It’s companies like these that we look to invest in. As part of our fundamental research process, we lay the foundation for our thematic research by considering the megatrends that are driving major change around the world. Demographic change is visibly affecting many of our societies, with many of us living longer.
At the same time, as birth rates fall in many countries, the size of the labor force is in long-term decline. This means that we need to find a more efficient way to allocate resources in the future. At the same time, we’re seeing younger generations and emerging-market consumers and workers growing up in a digitally connected high-speed world. As consumers, they have an entirely new set of needs. To fulfill these, companies will have to adapt and change. Sustainability is another important megatrend, as the world grapples with limiting our impact on the environment and tackling a global healthcare crisis. We remain optimistic about the strong growth enjoyed by the new emerging class of innovative leaders that address the needs of many facets of the economy, such as seamless omnichannel commerce activities, new forms of digital entertainment and the building blocks of the digital infrastructures of the future.
Polar Capital Funds PLC – Polar Capital Global Technology Fund
Nick Evans, Lead manager of the Polar Capital Global Technology Fund
The Polar Capital Global Technology Fund is led by Nick Evans who is a technology specialist with over 20 years of experience. The team of 10 is one of the largest dedicated technology teams in Europe, with a multi-cycle track record. The Fund has a global, multi-cap, growth-centric approach within a thematic framework.
This enables the team to harness the secular growth potential of the more established new-cycle beneficiaries while also providing the flexibility needed to take advantage of changing market and/or economic conditions. The result is a diversified portfolio of 60-85 stocks that aims to deliver long-term capital appreciation through superior earnings and cash flow growth, which are often underestimated during periods of technology transition.
The pandemic has materially accelerated the adoption of technology, and many worry that this strength could be a one-off though healthy first quarter earnings should go some way towards allaying these concerns. The team’s confidence in the sector’s long-term fundamental outlook, however, lies in the change in behaviour and expectations that are a direct result of 2020. In most cases, the technology-enabled/enriched experience is simply superior to its predecessor. In other words, we believe the pandemic has accelerated the more widespread acceptance of these technologies.
The Fund has exposure to themes spanning the changing nature of work and leisure, electrification of the automotive industry, the next phase of digitisation of goods and services and the increasing importance of high-speed connectivity, cybersecurity and semiconductor components, to name a few. All these themes are cross-sector in nature, with large potential addressable markets and, in our view, remain in the early innings of adoption. These provide ample runway for a multi-year growth cycle, despite the high 2020 base.
The technology sector as a whole trades at a modest premium to the S&P, but there are pockets where valuations are more elevated, largely reflecting the very strong secular tailwinds and the prospect of a strengthening global economy. The Fund has shifted more towards a barbell shape in the short term to gain exposure to cyclical recovery in specific areas, such as storage, as well as selectively adding to high-growth secular winners, such as CrowdStrike and Roblox. Gyrations in COVID-19 infection rates and inflation expectations may continue to create volatility into Q3 and perhaps through to the end of the year. The team will look to increase their exposure to their preferred high-growth names more aggressively as and when risk/reward becomes favourable. The Fund also uses an option overlay strategy to help optimise portfolio efficiency.
The team continue to retain their high conviction that the post-pandemic world will provide a richer backdrop for technology. The sector is still early in its penetration of non-tech industries – with technologies like artificial intelligence and cloud computing providing the platform to attack these new addressable markets – which may enable strong revenue growth for many years to come, and ultimately strong returns for those willing to take a longer-term view despite the near-term volatility.
Fidelity Funds – Global Technology Fund
Hyun Ho Sohn, Fund Manager
The importance of investing in the technology sector In long-term investments, one of the fundamental aspects is not to miss the major megatrends that will shape the coming decades, regardless of the higher or lower volatility along the way. And technology is, undoubtedly, one of the most important of these, given its cross-cutting nature with all the others (healthcare, demographics, etc.). Although some “COVID winners” face difficult comparisons this year, there is a wide range of companies in the technology sector that stand to benefit from increased consumption as economies reopen.
This group includes digital advertising and travel-related demand in areas such as payments and e-commerce. From a policy perspective, public stimulus is now more closely linked to the IT sector than ever before, as seen in the recent US government stimulus package, which has placed $100 billion for broadband infrastructure development. Public spending is often quite isolated from overall macroeconomic conditions, which helps to reduce the cyclicality of the sector’s returns.
2021 could be the year of hardware covering the return to the office, as enterprises are likely to spend more to modernize their technology infrastructures to meet new demands from video conferencing and hybrid meeting environments. In addition, COVID has delayed investments in 5G infrastructure, something that communications equipment vendors such as Cisco, Juniper Networks and Ericsson will benefit from when 5G investments return. More in the medium to long term, our favorite themes are unchanged: game developers such as Activision and Electronic Arts enjoy enduring monetization opportunities. Demand for artificial intelligence (AI) remains strong and process automation increasingly requires machine learning. Smart construction is a theme that has recently emerged with increased demand for sensors and software that will enable the next generation of construction and manufacturing techniques.
Fidelity International’s technology fund
At Fidelity we offer investors a fund that invests in this megatrend, the Fidelity Funds Global Technology Fund. It focuses on companies that own or are developing products, processes or services that will result in, or will largely benefit from, the technological improvements and advances we have discussed, making them clear sector leaders. Fund manager Hyun Ho Sohn’s favorite investment opportunities tend to be in cloud computing, digital advertising, e-commerce, the internet of things, big data, 3D printing, autonomous cars, virtual reality and artificial intelligence, among others.
If you want to read more articles about investing in technology and other investment topics and funds information check out our insights section.