Have share price falls made technology attractive once again?

Technology is everywhere. There’s no escape. Whether you’re using a smartphone, driving a car, or paying for goods in a shop, this sector will have played its part.

Virtually every conceivable business sector relies on technology in some way, and this is only expected to increase over the coming years. Robotics, artificial intelligence, and cloud computing are among the areas most heavily tipped to benefit, as companies focus on how to steal a march on rivals.

How to take advantage

But what does technology mean to investors? How can you take advantage of these remarkable developments that are set to disrupt businesses and sectors? What trends are likely to be the most successful – and how can you pick the right companies that have the best chance of delivering handsome returns?

Picking which tech firm will become the next Microsoft is no easy task. So, buying into an investment fund that analyses all such firms is perhaps an easier option.

What funds buy into technology?

The vast majority of funds will have some exposure to technology companies – even if its indirectly via firms that use what they have produced in their own businesses. A prime example are the global equity portfolios that are often packed full of major tech players such as Microsoft, Alphabet and Apple.

Then you have a tier of more specialist funds that scour the universe for firms that are working hard to develop the next generation of technological advancements. Examples here are Guinness Global Innovators, IFSL Marlborough Global Innovation and Sanlam Global Artificial Intelligence.

Market problems

Technology stocks have not had a good 2022, as rising inflation has made this type of company less popular among investors. But this means that now – when the sector is broadly out of favour - could be a good time to buy.

The recent market falls have provided the chance to buy shares in lesser-known names, according to Simon Edelsten, co-manager of the Artemis Global Select fund. “One area we particularly like relates to the ageing population,” he said. “We have bought shares in Sonova, the Swiss-based global leader in manufacturing digital hearing aids.”

Simon has also added Hoya, the Japanese eyeglass manufacturer, as he believes its valuation – and prospects – are clearly attractive. “Hoya, whose shares are down nearly 30% this year, should benefit from the huge demand for glasses in Asia, where around 80% of 20-year-olds suffer from myopia,” he said.

He particularly likes the longer-term prospects. “These companies’ share prices may not have fallen as dramatically as many, but I think their growth can be reliably predicted,” he added.

Attractive valuations

Jeremy Gleeson, the manager of the AXA Framlington Global Technology fund, expects markets to remain volatile while the geo-political and macroeconomic uncertainties continue.

“The long-term growth potential of many of the companies in the sector remain robust and hence valuations within the technology sector have become increasingly attractive,” he said.

In recent weeks, he has purchased a position in Infineon, the German semiconductor business that specialises in analogue and mixed-signal chips that go into a wide range of end products.

The fund has exposure to a broad selection of technology-influenced sectors, with semiconductors & semiconductor equipment having the most significant share of assets at 28.78%*.

Software is the next most prominent with 23.68%*, followed by IT services, Interactive Media & Services, and Technology Hardware, each with just under 11% each*. “We believe the long-term growth trends which the fund is exposed to are still intact however the strength of the economy will influence the pace of this growth,” Jeremy added.

Attractions of recurring revenues

Ben Leyland, manager of the JOHCM Global Opportunities fund, told FundCalibre’s ‘Investing on the Go’ podcast last month that enterprise software companies were in his quality universe.

He highlighted their recurring revenues and sticky customers, as well as their ability to create intellectual property that can be monetised. “These are all good companies that are on our watch list of investible companies,” he said. “We’ve been put off by valuation (but) have started to dip our toe into names like Microsoft and Adobe over the course of the year on weakness.”

Software over hardware

Ben pointed out that such positions were made selectively, with holdings only accounting for around two per cent each. He also revealed a preference for software over hardware. “In particular, we struggle with the barriers to entry in the social media space, so we never really paid much attention to Facebook – and still don’t,” he said.

He has also steered away from companies such as streaming giant Netflix, pointing out that the “stickiness for consuming facing businesses” isn’t something the team understands well enough.

Selective positioning

Elsewhere, Ben takes a selective approach when it comes to choosing technology companies for the portfolio, in the same way he would do with any other sector. “We do think there are quality names in there,” he said. “We have evaluation discipline, which over the last five years has meant that we haven't been involved in that sector very much.”

He pointed out that during the first five years of the fund – from 2012 to 2016 – it had good exposure to a number of software names. “We’re starting to build that exposure back up, but selectively, patiently,” he added. “We’ll wait for valuations to come to us rather than chasing them purely because they’re a large component of the index.”

*Source: fund factsheet, 31 August 2022

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. Mention of specific securities is for illustration purposes only and should not be taken as a recommendation to buy or sell.

Published on 22/09/2022