Is It Time For A Different Approach To Technology Investment? - Forbes

Last week, technology stocks officially entered a bear market with the Nasdaq having dropped over 20% from its August peak. Some investors may see this as a buying opportunity. After all, the disruption created by technology shows no signs of slowing. But is it worth investors reappraising the way they approach technology investment in 2019?

Over the past couple of years a whole raft of specialist approaches to technology investing have emerged. A number of these have been from ETF providers: Lyxor, for example, launched its Rise of the Robots index in September of this year. LGIM’s ‘Future World’ range includes funds focused on climate change and gender equality. Launches by active managers have included the Nikko AM Ark Disruptive Innovation Fund. Smith & Williamson created its Artificial Intelligence fund, while CPR Asset Management has its Global Disruptive Opportunities fund. Pictet Digital has been going since 2008.

The question is whether these funds offer a better option than a more generalised technology fund, which may have exposure to some of the same themes, but in a less concentrated way. In performance terms, it is difficult to draw a conclusion: The Pictet Digital fund, which has Tencent, Alphabet and Baidu among its top ten holdings, is up 72% over three years and is down 8% over the past three months of rocky markets. This is a lower three year performance than some of the straight technology funds, Fidelity Global Technology is up 82% over three years and Polar Capital Global Technology is up 95%, but these funds have been hit much harder in the recent rout, down 11% and 15% respectively. Much depended on exposure to Facebook, which has dropped 30% over the past 12 months.

Direct connection

William De Gale, manager of the Bluebox Global Technology Fund, argues that a changing technology market requires a different approach. He focuses on companies that play to the theme of ‘direct connection’. As he explains it; “in the 20th century, computers existed in a purely digital world, and humans acted as the input and output devices, translating the analog world into digital and feeding it to the computer, and then taking its digital output and interpreting it to act on the real, analog world.  In the past 15 years, computers have begun to sense and interact directly with the analog world, without relying on humans for input and output, accelerating processes by millions of times.”

An example might be a self-driving car. In the old world, the car would tell the driver to stop in a dangerous situation. Today, the car stops itself. The potential efficiency gains are vast. This approach has little space for ‘old world’ technology companies that may be included in a more generalised technology fund.

There may also be a concentration problem for some generalised technology funds that are either passive, or stick too close to the index. Apple and Amazon combined are now around 17% of the Nasdaq and even an underweight position can give a fund a large holding. With this in mind, global technology funds can be overly-focused on larger technology companies. This is by no means universally true, but it does mean investors should ensure that funds are truly active or risk being tied to the fortunes of certain companies.

Diversification

Specialist funds will often focus both on the creator of the technology and those benefiting from it. Chris Ford, manager of the Smith & Williamson Artificial Intelligence fund, points out that AI opportunities exist in sectors as diverse as consumer services, healthcare, financial services and industrials: “far-flung parts of the economy you wouldn’t necessarily associate with being early adopters.” Half of his portfolio is invested outside the tech sector and he argues that he can put together a more diversified portfolio than investors might find in a technology portfolio.

Lyxor argues that its ‘Rise of the Robots’ ETF has been built to draw in smaller companies and start-ups. It points out that 250 companies working on AI have been bought by tech giants since 2012 (source: CB Insight) and that trend has accelerated more recently. This suggests that there is a lot of innovation happening at the small end of the market and that those companies can command a high price.

However, there are risks to the thematic approach. The recent performance of robotics funds can show the perils of focusing too closely on one theme. Walter Price, manager of the Allianz Global Technology trust, points out that the trade war between China and the US has seen companies move manufacturing elsewhere, out to other countries – Vietnam, for example. As such, robotics companies have lost an important source of demand from Chinese factories . He believes a generalised technology trust that can switch between these themes may be a safer bet.

Wesley Lebeau, senior portfolio manager within the thematic equity team at CPR, also says that there can also be problems with valuation if themes get too ‘hot’. He says that assessing the right level of valuation is a key part of the group’s approach. Ford points out that the market still struggled to value data and as such, it is not yet reflected in the share price of certain companies “as such you don’t have to pay a fortune to participate in companies that are in the vanguard of this trend.” However, again, investors need to be sure their manager has discipline on valuations.

In reality, it is probably not a case of one or the other. Global technology funds and thematic technology funds can happily co-exist. In many cases, they will look very different and each has its merits. Either way, investors need to ensure they are in the hands of a good, experienced manager.

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