Apple and Alphabet are now bigger than the whole UK stock market, May 2020

The five largest companies in the US are all technology companies. Microsoft, Apple, Amazon, Alphabet (Google’s parent) and Facebook all dominate the US stock market and, to a certain extent, also dominate our lives.

Indeed, such is their dominance that at one point in April, the US Nasdaq index enjoyed a market capitalisation greater than all the developed markets outside America. Or to bring that example a little closer to home: Amazon and Alphabet combined were more highly capitalised than all the quoted British companies put together.

History tells us that in times of crisis, disruptive innovation gains pace, as the traditional world order is up-ended, allowing these disruptors to break through. This could be one such inflection point for a sector that has enjoyed rapid growth already in the past decade: with structural growth fuelling the sector and its use having been highlighted to us all in lockdown, it is one of the few areas to have a positive outlook at the moment.

We take a look at some new technologies and the funds investing in them.

Cyber security

Jeremy Gleeson, AXA Framlington Global Technology

“Proofpoint, is a US cybersecurity software company that helps its customers protect their employees and networks from external threats such as computer viruses, hacker attacks and spam,” Jeremey told us. “It does this by monitoring web and email traffic; flagging anything that looks suspicious, and then importantly also continuing to monitor links to external websites that might become hostile long after the original email was sent.

“Many of us only get round to reading email hours or sometimes days after it has been received; and the would be cyber attackers have worked out that links to malicious websites are easier to spot when first received on corporate networks, but by waiting and switching on these bad websites with a lag once an email has already landed at the recipients inbox, then if there isn’t continuous monitoring taking place the recipient is more vulnerable to phishing, hoaxes and fraud. Only 20% of Proofpoint’s revenues comes from outside the US, yet cybersecurity is a global need, so there is potential for growth overseas.”

Remote learning

Alan Rowsell, ASI Global Smaller Companies

ASI Global Smaller Companies has 28%* invested in technology companies. Co-manager Alan Rowsell cited Chegg, a US online education company, as a current disruptive force. “Chegg provides study tools to help students with their coursework,” he said. “It is an example of a company that has used the internet to disrupt and improve on traditional teaching methods. The structural shift to online education was already apparent prior to COVID-19, with subscriber growth of 29% in 2019. But the shock of the virus has accelerated that trend as students are forced to study from home.

“Subscriber growth has accelerated to +35% in the first three months of 2020 and guidance is for a further acceleration to +45% by the end of July. Whilst this will slow once lockdown is lifted, we think it has driven a step change in adoption that is unlikely to reverse. As the CEO put it: ‘a crisis often accelerates the inevitable and that is what we see happening in higher education’.”

Software vendors

Bertie Thomson, Brown Advisory Global Leaders

Brown Advisory Global Leaders fund currently has 27.9%* invested in technology stocks, including two new additions: Autodesk and Intuit. “We have known both companies and their competitors for a long time and, in March, we had the opportunity to initiate new positions at prices we felt were reasonable for these clear industry leaders,” said co-manager Bertie Thomson.

“Interestingly, both are vertical market SaaS software vendors: Autodesk in computer aided design software for architectural and increasingly construction end markets, Intuit in small business accounting and tax-filing. We believe Autodesk could see cash flow nearly double over the next five years as it completes a transition to subscription and converts “pirates” into paying customers. Intuit continues to extend its lead in SMB accounting software and US tax filing; it may even benefit from more people filing DIY returns this year in the US given extra time at home and an extension to the deadline, compounding its long-term advantage.”

Powering cars by renewable energy

Graeme Baker, Ninety One Global Environment

Ninety One Global Environment fund has 29%* invested in the telecom, media and technology sector. Co-manager Graeme Baker told me about one his top ten holdings, Aptiv: “Lowering emissions to levels that avoid the worst effects of climate change will require a rapid shift away from internal combustion engines to electric, and ultimately autonomous, vehicles powered by renewable energy,” he said.

“Aptiv provides the technology to enable that transition. With deep capabilities in software development, automotive-grade industrialisation and systems integration, it is helping to make transportation safer and more sustainable. The market seems to value the business like an ordinary auto parts supplier. But Aptiv could play a key role in changing the way the world gets from A to B, giving it significant growth potential in our view.”

Organising our business contacts

Archie Ciganer, T. Rowe Price Japanese Equity

T. Rowe Price Japanese Equity fund has 37.9%** invested in IT and IT services companies. “Japan is a highly respectful and polite society and the exchange of business cards is a very important business practice when meeting people in a business setting,” said manager Archie Ciganer. “It is common that the first five minutes of a meeting is just used for exchanging cards. This obviously requires much maintenance and organisation to manage contacts and clients.

“Sansan is software service company that provides business card management solutions – it digitises the process by scanning the cards, which reduces the administration process of card management, but also allows individuals and companies to integrate networks and contacts, almost like LinkedIn. Sansan charges a fee for the software service, but also has optionality around in-app advertising and also recruiting services.”

‘Cloud’ infrastructure

Kunjal Gala, Hermes Global Emerging Markets SMID Equity

With so much more data going into the ‘cloud’, more infrastructure is needed. Kunjal Gala, co-manager of Hermes Global Emerging Markets SMID Equity fund, which has 23.5%* invested in tech firms, believes Accton Technology, a leading hardware supplier for networking infrastructure based in Taiwan, will be a beneficiary of this trend.

“The outlook for data centre spending remains favourable, as the world’s largest hyperscale firms [the aforementioned Apple, Amazon, Google, Facebook, and Microsoft] are better insulated from the current crisis than most types of companies, and they are expected to maintain healthy levels of capital expenditure in 2020, to support rising demand for cloud services, digital entertainment, and e-commerce activities,” he said. “We expect the recovery in cloud infrastructure growth, along with technology migration, to act as a key growth catalyst for the company, driving better margins and earnings.

*Source: fund fact sheet, 31 March 2020
**Source: fund fact sheet, 30 April 2020

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 managers quoted and do not constitute financial advice or a recommendation to buy or sell a particular security.


Published on 18/05/2020