Harnessing the power of technology in your portfolio

Rob Morgan looks at the tech sector and our favoured investment in the area, Allianz Technology Investment Trust.

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  1. Rob Morgan

It has become something of a cliché to say that Covid-19 has accelerated some of the technological trends already taking place, or that several years of change has been condensed into just a few months. However, the shift occurring is genuinely seismic, and investors in the technology space have already reaped the rewards. The Nasdaq, the US technology stock market index, recently recorded an all-time high – despite the tragic death toll, widespread economic disruption and, for many people, loss of income or livelihood.

The coronavirus crisis is acting as a catalyst, speeding up the rate of technological adoption. Working (and playing and ordering) from home plays into the hands of the those already occupying the digital world and disrupts those who primarily inhabit the physical one. Many technology stocks have therefore increasingly become seen as a sure thing by investors due to their dominant market positions and the structural growth available from increased digitalisation.

In particular, helping drive the performance of the technology sector, and broader markets, has been the robust performance of the giant tech stocks including Microsoft and Amazon. There is uncertainty, however, over whether valuations are justified, especially given the potential for additional taxation and regulatory scrutiny, and which companies are likely to see the biggest long-term benefits as the pandemic subsides.

One way to invest in the sector

There’s a variety of options for dedicated exposure to the tech sector, but one that occupies a place on our Foundation Fundlist, our list of preferred funds for new investment, is Allianz Technology Investment Trust. Managed by Walter Price and a team based in San Francisco, the Trust invests worldwide with the aim of long-term capital growth in excess of the Dow Jones World Technology Index.

As well as offering exposure to many of the large US technology companies, an attraction of the Trust is that it also targets the next wave of exciting businesses. Manager Walter Price and his team are not constrained by referencing an index, which can mean zero or minimal weights in some of the established tech companies which they don’t believe have their desired level of future growth potential. It also means they are free to express their views on smaller firms. These can lead to some periods where performance deviates from that of the broader technology sector, however over the long term the managers have proven adept at finding excellent opportunities and have outperformed – although past performance is not a guide to the future.

Recent performance and current positioning

With relatively small positions in Microsoft and Apple, Amazon has recently been the top contributor to the Trust’s strong performance so far this year as the company emerged as a beneficiary of housebound consumers turning to its online marketplace to purchase home goods. Amazon’s fulfilment capabilities were challenged through this period but ultimately it performed well, and the company announced it would hire approximately 175,000 workers to meet increased demand. Amazon’s web-hosting business has also benefitted as consumer and corporate usage has surged. The managers continue to hold the stock believing that consumer behaviour is likely to shift even more to trusted online providers that can deliver goods and services effectively.

Also contributing to strong relative outperformance so far this year were positions in beneficiaries of the remote working and stay at home environment, including software companies providing cyber security, workforce collaboration, video streaming and communication services. This included internet security company Zscaler, video conferencing and workforce communications business RingCentral, and Netflix whose entertainment services have seen robust demand.

In March, the portfolio benefitted from cybersecurity business CrowdStrike reporting a strong quarter of revenue growth, with the CEO noting that the competitive landscape has never looked better. The company is utilising remote video conferencing for sales meetings and reported that initial business meetings are increasing despite lockdown measures preventing physical interactions. As workforces are working remotely due to the global outbreak, device and cloud security remain very high priorities for many businesses and CrowdStrike is so far reaping the rewards.

There has been a small level of additional activity in the fund as a result of Covid-19 developments. Mr Price’s initial reaction to the coronavirus outbreak was to raise some cash and then redeploy it into stocks whose prospects he felt were improving under lockdown restrictions. More recently though, he has begun to eye some areas more adversely impacted by the ‘stay at home’ measures and where valuations look interesting. One stock introduced to the portfolio is online travel business Booking.com. Mr Price is carefully watching the situation in China, given it was first into and first out of lockdowns, to understand how recovery may play out in the West. He is, however, generally wary of Chinese internet stocks and the fund remains almost exclusively US orientated.

Overall, Mr Price believes the events surrounding COVID-19 crisis will spur the use of technology and change how we live and work in the future. He points out that as companies adjust budgets due to supply or demand disruptions, the need to reduce costs should accelerate the move to cheaper and more productive solutions such as cloud, software-as-a-service, artificial intelligence and cyber security. Amidst a period of rapid change, he argues the importance of technology is key to the prosperity of most industries – and that this environment is likely to provide attractive growth opportunities among many technology stocks over the next several years.

Our view

The disruptive power of technology provides both the opportunity for transformation and a significant threat to any incumbents who do not respond effectively. There is therefore a strong argument for dedicated technology sector exposure in a portfolio.

With their deep company knowledge and analysis, we continue to rate the managers of this Trust highly. Well resourced, based close to California’s Silicon Valley and working together for over 30 years we believe they should be capable of providing superior long term returns versus their benchmark and peers. The flexible, high-conviction stock picking approach that constantly seeks out the best growth opportunities could represent an exciting investment; though given the high level of volatility involved, as well as the specialised nature of the sector, it should be considered particularly adventurous. The Trust remains part of our Foundation Fundlist of preferred investments across the major sectors. Presently, shares in the Trust trade at a small premium to net asset value of around 1%. 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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