Bubble trouble: how to mitigate the impact
David Prosser on options for rebalancing your portfolio away from big tech.
Are you worried about a technology stock bubble? Or, more to the point, the bubble bursting? Growing numbers of investors are concerned that the value of the large US technology companies, buoyed for an extended period by the excitement around the artificial intelligence boom, has become unsustainable. Concerns of a correction to come – or even a crash – are widespread.
That’s not to say the naysayers will be proved right; and it’s a fool’s game trying to predict when exactly any market trend might turn. Still, now may be a sensible time to take a sober look at your portfolio; you may find you are more exposed to the tech sector than you realise.
The US stock market now accounts for more than 60% of the MSCI World Index; within that, the ten largest companies on the US market – mostly big tech – account for more than 40% of market capitalisation. In other words, many large generalist funds – ostensibly offering diversification benefits – are heavily exposed to technology.
So where to look for genuine diversification? The answer may be closer to home than you realise. Stock markets across Europe, including the UK, are much less technology-centric than their North American peers, as a recent press release by the Association of Investment Companies pointed out, along with suggestions for investment trusts less exposed to big tech.
Many large generalist funds – ostensibly offering diversification benefits – are making big bets on technology.c
David Prosser
Broadly speaking, technology stocks account for around 10% of major markets on this side of the Atlantic, with sectors including financial services, consumer goods and healthcare more prevalent – along with very tangible industries such as energy and industrials.
Continental Europe could be a particularly interesting area to explore, because many UK investors are under-exposed to markets such as France, Germany and beyond. The language barrier is one obstacle, but this is also an awareness issue, with companies in Europe – and there are many high-quality businesses – attracting less attention than their British and American counterparts.
The investment trust sector offers a practical way into Europe’s markets, with seven different funds – including trusts focused on both large and small companies – offering exposure to the continent.
Importantly, these trusts typically invest across the whole of Europe rather than just in the European Union. That brings into play interesting opportunities in markets such as Switzerland and Eastern Europe.
This is a sector where investment trusts have a particularly good track record compared to their open-ended equivalents over the long term. In a study published last year by Mick Gilligan, one of the sector’s best-known analysts, Europe-focused investment trusts outperformed equivalent open-ended funds in every single ten-year and 25-year period studied.
There are some good reasons for that. Investment trusts are allowed to take on gearing – borrowing that accelerates returns in a rising market. They have structural advantages, with managers looking after a fixed pool of assets, which means they don’t have to sell any holdings to fund withdrawals of investors’ cash. And they have strong corporate governance arrangements, with independent boards that have a fiduciary duty to act in shareholders’ interests.
Still, as we know, past performance is no guide to the future – there is no guarantee that investment trusts will continue to nose ahead. But the sector is competitive, with reasonable charges, and a good range of funds to choose from.
The reality, of course, is that it is hard to find a completely safe harbour when a storm rages especially fiercely. If a technology sector shock triggers a major market panic, European markets will suffer too. However, for investors who decide that now might be a good time to think about rebalancing their portfolios after an extended period of US-centric returns, Europe is an interesting – and often overlooked – option to consider.
