Beyond technology – five alternatives for investors to consider

It’s hard to ignore the case for investing in technology as the sector continues to drive innovation across the global economy. The influence of technology now reaches out across everything from healthcare to finance. Last year saw the IA Technology & Technology Innovation sector record another incredibly strong year with returns of 23%*, driven by standout performance from the semiconductor industry, reflecting major corporate investment in AI infrastructure.

However, it should be noted the sector did see a bit of a slowdown in the second half of 2024, as valuations of tech firms soared and concerns rose about the timeline for AI development and the ability of some companies to monetise their moves in AI.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Let’s be clear – tech has been the driving force as the leading US index, the S&P 500, rose 51.5% since the start of 2023** with Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — known as the Magnificent Seven — accounting for about one-third of the index***. But it should be noted that the market has broadened out to some degree, with financials – not tech – the best performing US sector in 2024. You could argue that a lot of US large-caps now look expensive, but those tech companies look particularly pricey.

This is a global trend - the top 10 US companies alone now represent about a quarter of the global equities index****. We are now at a point where the diversification of the equity market is currently the lowest it has been for a generation. The last time we saw anything like this was back in 2002, at which point we saw a significant rebound which benefitted every sector apart from US large-caps****.

Tech backers would say these stocks seem to have carved out a cycle of their own, influenced by innovation, market perception, global influences, and sector-specific drivers. However, investors must also consider the risk of concentration within their portfolios, and with plenty of other sectors looking attractively valued, here are a few they might want to consider for diversification purposes.

Small-caps

Global smaller companies normally account for 7-8% of the global stock market valuation, but by mid-2024 underperformance had seen this fall closer to 4%, a 50-year valuation low. Increased M&A (merger & acquisition) activity from companies in this space tells you there is value in the small-cap market, while many of those smaller companies are also buying back their own shares (an indication they believe they are valued attractively).

abrdn Global Smaller Companies is a textbook fund from the abrdn equities team. Based around their powerful screening tool 'Matrix', which former co-manager Harry Nimmo helped create, it identifies smaller companies from all around the globe - including emerging markets - which they believe to have the best growth prospects. The portfolio is concentrated in 50-60 names. Those looking for a UK angle might consider the likes of the WS Raynar UK Smaller Companies or Liontrust UK Smaller Companies funds.

UK

The UK market remains incredibly cheap and the large divergence in performance between different parts of the market creates good opportunities for attractive returns from UK stocks on a medium to long-term basis. Stable politics, attractive dividends and the continued theme of companies buying back their own shares means that now could be a good entry point for long-term investors.

Schroder Recovery managers Nick Kirrage and Andrew Lyddon look for unloved stocks trading on low prices in this value strategy. To find these businesses, the team will perform in-depth analysis on a company’s financial statement, looking to answer numerous questions ranging from how a company turns profits into cash, to how it manages its debt levels. The team do not meet management, preferring to focus on fundamentals and stock valuation.

Income

Having a diversified approach to investing in global equities can be sensible, and having exposure to a broad number of countries and sectors will lessen the risk taken. If you can achieve an income from your investment at the same time, then total returns could get a significant boost.

This explains enthusiasm for the IA Global Equity Income sector. This is for funds investing at least 80% of their assets globally in equities. They must also be geographically diversified and intend to achieve a yield greater than that of the MSCI World index.

One to consider here is the TM Redwheel Global Equity Income fund. Managed by Nick Clay, the fund currently has no significant exposure to the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla)^. His portfolio typically holds 40-60 stocks, each yielding 25% above the market at the point of purchase.

Nick says while income investing is often associated with defensive areas of the market – it is not completely cut off from growth orientated markets, provided they have a premium yield with sustainable cash flows.

India

With the exception of the tech behemoths driving the US market, Indian equities have arguably been the strongest growth story for investors in the past decade, as stable politics has acted as a catalyst to drive markets. But the past few months have seen India’s runaway growth story finally start to slow down. Since September, Indian equities are down by over 13%^^. But there are reasons to suggest this is transitory, with government spending picking up and private consumption remaining strong.

Those wanting exposure to a pure India fund might look to the Goldman Sachs India Equity Portfolio, which is an “all weather” vehicle managed by Hiren Dasani. Those wanting broader exposure through an emerging markets vehicle might look to the FP Carmignac Emerging Markets and the FSSA Global Emerging Markets Focus funds, which have allocations of 20% and 17% respectively to Indian equities^.

Global brands

The last option is a fund that appears to break new ground by tapping into a series of long-term changes in the global economy – while also investing in products with a proven history of performing. The kicker is that the fund even invests in firms that target customers that haven’t even been born yet!

The Artemis Leading Consumer Brands fund is a flexible, global thematic fund which seeks to capture the emerging middle class’s consumption of luxury brands. It is a benchmark-agnostic, unconstrained portfolio targeting companies with robust brand strength, which helps create barriers to entry and gives them pricing power and greater profit margins, offering investors a great compounding growth opportunity. The fund is managed by Swetha Ramachandran, who joined Artemis from GAM in September 2023, where she was previously manager of the GAM Luxury Brands fund.

But back to those investors who haven’t been born yet! This fund is all about the long term and is now targeting Generation Alpha, which refers to people who will turn 18 between 2029 and 2043 (hence some of them not being born yet). The fund is set up as a global diversifier – with low overlap with other global/thematic strategies. It currently has household names like Hermes, Ferrari, Prada and Adidas in its top 10 holdings^.

*Source: FE fundinfo, 2024 calendar year performance
**Source: FE Analytics, total returns in pounds sterling, 30 December 2022 to 28 February 2025
***Source: Financial Post, 4 February 2025
****Source: Lombard Odier, 30 January 2025
^Source: fund factsheet, 31 January 2025
^^Source: FE Analytics, total returns in pounds sterling, 3 September 2024 to 28 February 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.