Where next for technology?

On Wednesday 8 November, technology companies helped to push the S&P 500 to a record close of 2,594, one of a series of all-time highs driven by the strong performance of companies such as Amazon, Apple, Alphabet and Facebook.

Investment companies investing in technology have delivered impressive gains. Over five years, both companies in Sector Specialist: Technology, Media, Telecommunications have more than trebled investors’ money, with Allianz Technology Trust returning 273% and Polar Capital Technology Trust gaining 213%.

In the Sector Specialist: Small Media, Communication & IT Companies, Herald Investment Trust has also performed strongly, returning 42%, 81% and 128% over one, three and five years respectively.

On Monday 13 November, the Association of Investment Companies (AIC) held a media roundtable with Walter Price, Portfolio Manager of Allianz Technology Trust, Ben Rogoff, Lead Manager of Polar Capital Technology Trust and Katie Potts, Manager of Herald Investment Trust, to discuss their outlook for the technology sector, where they are currently finding opportunities, and technology's emerging trends. Their thoughts have been collated alongside other managers with technology exposure.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “With the rise of companies such as Facebook, Amazon and Google we have seen technology businesses grow to become some of the world's largest companies. The closed-ended structure of investment companies means they are well suited to investing for long periods, helping investors to benefit from this long-term growth. Of course we don’t know who the new global companies of tomorrow are going to be, but investment companies’ professional fund managers give investors the opportunity to benefit from expert stock selection.”

Prospects for FAANG stocks and the US technology climate

Walter Price, Portfolio Manager of Allianz Technology Trust, said: “We have a somewhat cautious view of this group of stocks in the near term, given the recent investigations for Alphabet and Facebook. Amazon’s recent quarter was strong, but persistently rising costs could potentially weigh on near-term earnings growth. Our long-term view remains positive for these companies because they have strong competitive positioning, they continue to innovate, and we see significant opportunities for attractive earnings growth.

“We believe the US technology climate remains favourable despite the recent strong run in the sector. New technologies are helping businesses operate more efficiently and improve productivity. As corporate spending increases, we believe the stronger technology companies will continue to benefit.”

Finding opportunities

Katie Potts, Manager of Herald Investment Trust, said: “In the UK, AIM continues to be dynamic in the microcap space, and we have been put inside on 71 secondary offerings in the technology, media and telecommunications space this year. In contrast the US market is more sluggish with the market virtually closed to small offerings, and venture funding in the US marginalising the quoted markets. Whilst there seems to be money everywhere due to minimal interest rates and so on, it is least available where it is needed, i.e. in small developing companies where bank debt is inappropriate and unavailable. There is also an entrepreneurial culture in the UK as evidenced by the number of start-ups in EC1V.”

Don San Jose, Portfolio Manager of JPMorgan US Smaller Companies Investment Trust, said: “With markets flirting with all-time highs, investors have grown increasingly concerned with valuations. In our view, compared with historic measures, US stocks are trading somewhat above long-run equilibrium but not excessively so.

“Some names we like in the technology space include GrubHub and Guidewire Software. GrubHub is an online platform for restaurant delivery which has been particularly prudent with its over-capitalized balance sheet. We view its recent acquisitions of Yelp and Groupon’s food ordering platforms as necessary and opportunistic, to enable the company to further solidify its strong market share position. Guidewire provides software to the insurance industry. Through a combination of industry-leading innovation and a strong customer-first culture, we believe the company is positioned to be the long-term winner in its market.”

Jon Forster, Co-Manager and Managing Director, Impax Environmental Markets plc, said: “We see increasing ‘technology content’ across environmental markets.  Three areas where we are currently finding compelling investment opportunities are lighting, software, and electric vehicles (EV). 

“In lighting, the falling cost of technology has seen Light Emitting Diode (LED) markets expand quickly, and the latest mobile phones, TVs, and other displays are now using organic LEDs (OLEDs). Both technologies are much more energy efficient and, being digital, lend themselves to integration with the internet of things.

“An interesting software application is precision agriculture which uses global positioning system (GPS) information along with weather, soil and crop data to optimise farmers’ planting regimes to use less water, fertiliser and pesticide.”

Walter Price, Portfolio Manager of Allianz Technology Trust, said: “We are finding attractive opportunities in multiple segments and themes in the technology sector, in particular, semiconductors such as Micron Technology, cloud computing and software as a service like Amazon, robotics and automation such as Teradyne, and security, for example Palo Alto Networks. Compelling opportunities are presenting themselves across the high growth, growth at a reasonable price, and value segments of technology.”

Outlook for technology

Katie Potts, Manager of Herald Investment Trust, said: “The technology, media and telecommunications sector is in a particularly dynamic phase with unparalleled disruption in many industries. The migration to public cloud is driving hardware costs down, and there is increased open source software, i.e. free applications such as Hadoop databases and artificial intelligence and machine learning tools.

“Our small cap focus makes us aware how much the big datacentres of Amazon, Microsoft, Alibaba and Google are sourcing components and not systems and driving down costs, and they are competing for business offering bundles of security and applications either free or at lower costs than traditional suppliers. These big companies have supply chains which can benefit numerous small companies. Furthermore this is providing much lower capital requirements for small entrepreneurial businesses to enter the market and compete.”

Ben Rogoff, Lead Manager of Polar Capital Technology Trust, said: “Underpinning our own excitement is a new cycle thesis that appears to be gathering strength with every earnings season evidenced by a growing divergence between incumbents and next-generation companies now that the Cloud has become the default computing platform. This bifurcation is likely to intensify from here as units of compute continue to gravitate towards the public cloud, while emerging technologies such as artificial intelligence (AI) are likely to accelerate this trend.

“Having just returned from Gartner’s annual symposium held in Barcelona, I was struck by the uptick in urgency on the part of IT leaders (CIOs) to transform themselves into ‘digital’ companies. This likely reflects the accelerated pace of disruption occurring across myriad sectors fuelled by transformational technologies including cloud computing, smartphones, the internet of things and artificial intelligence. While Amazon’s disruption of retail is well documented (and ongoing), many other industries are also being reshaped with new winners emerging.”

Walter Price, Portfolio Manager of Allianz Technology Trust, said: “We continue to believe the technology sector can provide some of the best absolute and relative return opportunities in the equity markets – especially for bottom-up stock pickers.

“The growth in technology is coming from the creation of new markets, rather than simply GDP growth. Investors need to find companies generating organic growth by creating new markets or effecting significant change on old markets. Sectors such as automobiles, advertising, security, retail, and manufacturing are all being shaped and transformed by advances in technology.”

Sector Specialist: Technology, Media, Telecommunications and Sector Specialist: Small Media, Communication & IT Companies investment companies’ % share price total return performance (to 31 October 2017)

Source: Morningstar

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Notes

1. Sector Specialist: Technology, Media, Telecommunications and Sector Specialist: Small Media, Communication & IT Companies investment companies’ discrete annual performance – share price total return to 31 October 2017.

   Company	AIC sector	01/11/2012 - 31/10/2013	01/11/2013 - 31/10/2014	01/11/2014 - 31/10/2015	01/11/2015 - 31/10/2016	01/11/2016 - 31/10/2017
   Investment company weighted average (ex VCTs)​		22.67	6.42	5.13	15.83	16.81
   Allianz Technology	Sector Specialist: Tech Media & Telecomm	67.85	3.80	9.04	37.41	42.70
   Polar Capital Technology	Sector Specialist: Tech Media & Telecomm	27.46	12.97	13.09	33.39	43.90
   Herald	Sector Specialist: Small Media, Comms & IT Cos	27.65	-1.52	11.89	14.08	-42.17

   Source: Morningstar
2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 349 members and the industry has total assets of approximately £172 billion.
3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.