The coronavirus crisis has acted as a catalyst, speeding up the rate of technological change. But it’s not just a story of the over 60s adopting Zoom and What’s App. The digital transformation we are seeing is much broader and deeper.
As manager of Allianz Technology Investment Trust, Walter Price, explains, the pandemic has highlighted the need to reduce costs and increase flexibility, which is accelerating the move to cheaper and more productive solutions such as cloud computing, software-as-a-service, artificial intelligence and cyber security. Amid a period of rapid change, he argues the importance of technology is key to the prosperity of most industries – and this environment is likely to provide attractive growth opportunities despite an already-impressive run of share price returns across the sector over the past few years.
Big tech stumbles
It hasn’t all been plain sailing for the global stock market’s most prominent sector, though. So far 2021 has been a more difficult period with investors increasingly migrating to areas sensitive to the reopening of the physical economy. And while this narrative takes the limelight, the rapid earnings growth of ‘lockdown’ beneficiaries such as video conferencing, on demand entertainment and gaming is being viewed with more scepticism.
The larger tech companies are also facing more scrutiny on taxation and regulation, plus inflation and interest rate expectations have risen which tends to be a headwind for shares in companies with higher rates of earnings growth. As such, the net asset value return of Allianz Technology Trust is close to zero year to date despite having been 8% up in mid-February. Just as revealing is that the share price is down by almost 10% over this period, highlighting the weakening investor sentiment towards the sector. It also means shares in the Trust stand at a discount of over 6% presently, having generally traded much closer to net asset value in the recent past.
Despite a bit of a change in sentiment, there are still plenty of reasons for optimism. According to Mr Price, many of 2020’s trends remain very much intact as they are structural rather than temporary. He believes enforced working from home has helped increased collaboration within companies, and this has often led to greater innovation and efficiency. He suggests companies which enable flexible work, remove cost, help accommodate supply or demand disruptions and assist efficient manufacturing processes, including automation, vision and solution systems, are well placed.
One example is cloud computing - external, on-demand computer power, resources and data storage. Cloud accounted for just 10% of IT spend in 2019 (and only 1% in 2010), but is forecast to be 50% of spend by 2030 as more companies realise the need to accelerate digital transformation and newer businesses operate mainly, or even entirely, through cloud services. Accordingly, the managers are seeking opportunities in suppliers to the leading cloud infrastructure companies, and in artificial intelligence which builds on the proliferation of cloud data storage and promises to spawn new businesses and provide considerable cost savings for existing ones.
Mr Price is also positive on the outlook for semiconductors as the global economy is rapidly getting more ‘semiconductor intensive’ and he believes valuations in the space are not demanding – especially in relation to other parts of the tech sector. It is frequently cited that an electric car uses six times as many chips as traditional vehicles, but this principle applies to many manufacturing industries too. Semiconductor intensity also implies more computing, more information flow and more data, which further supports other areas of the tech universe.
These and other major themes such as vehicle electrification and entertainment on demand are built on an era of very rapid change and potential growth, but Walter Price is also quick to point out that the Trust's portfolio is not overly expensive in relation to the potential earnings trajectories on offer. Additionally, semiconductor stocks and other areas of more moderate growth offer lower valuations. Indeed there are some holdings where performance has been far from spectacular, one example being Expedia which has faced the challenges of reduced personal and business travel.
A well-rounded way to invest in the sector
There’s a variety of options for dedicated exposure to the tech sector, but Allianz Technology Trust represents the option preferred by our Collectives Research Team. Managed by Walter Price and a team based in San Francisco, the Trust invests worldwide with the aim of long-term capital growth ahead of the Dow Jones World Technology Index. As well as offering exposure to many of the large US technology companies, an attraction of the Trust is that it also targets the next wave of exciting businesses.
The managers are not constrained by formally referencing an index, which can mean zero or minimal weights in some of the established tech companies which they don’t believe have their desired level of future growth potential. It also means they are free to express their views on smaller firms. These can lead to some periods where performance deviates from that of the broader technology sector, however over the long term the managers have proven adept at finding the excellent opportunities and have outperformed – although past performance is not a guide to the future.
Recent performance and current positioning
The portfolio outperformed its benchmark (the Dow Jones World Technology Index) by a wide margin over the past year, building on a strong longer-term track record. Top contributors included Tesla, Zoom and Square, which helps businesses manage takeaway deliveries and pickups. However, these have also been among the weaker performers year to date as sentiment ebbed.
Elsewhere, Zscaler and Crowdstrike, cybersecurity businesses critical to the proliferation of working from home and cloud computing, have been longstanding successful positions, while MongoDB is a database company benefitting from migration to cloud services.
Large tech is an important part of the portfolio even though the managers are under exposed to these stocks relative to the index. Amazon, Alphabet, Facebook and Microsoft are all top ten positions, as is Samsung. However, the managers believe many opportunities for higher returns reside among the modestly sized emerging companies where earnings growth will ultimately be stronger.
The disruptive power of technology provides both the opportunity for transformation and a significant threat to any incumbents who do not respond effectively. There is therefore a strong argument for dedicated technology sector exposure in a portfolio.
With their deep company knowledge and analysis, we continue to rate the managers of this Trust highly. Well resourced, based close to California’s Silicon Valley and working together for over 30 years we believe they should be capable of providing superior long term returns versus their benchmark and peers. The flexible, high-conviction stock picking approach that constantly seeks out the best growth opportunities could represent an exciting investment; though given the high level of volatility involved, as well as the specialised nature of the sector, it should be considered as an adventurous addition to a broad portfolio. The Trust remains part of our Direct Investment Service Preferred List of preferred investments across the major sectors.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.