If you’ve recently returned from a life high in the hills, you’d be forgiven for not being familiar with the world’s biggest tech names. For everyone else, it’s highly likely that you’ve developed at least a passing understanding of the rise and rise of the sector giants.
For many, the BATs (Baidu, Alibaba and Tencent) and FAANGs (Facebook, Apple, Amazon, Netflix and Google-owner Alphabet) symbolise the changing of the guard from the 20th Century’s industrial economy to one where we simply can’t keep up with the scale and direction of digital disruption.
However, 2018 has shown that it’s not all one way traffic, with some of the biggest risers becoming some of the biggest fallers on revelations of data mismanagement, slowing growth in main business propositions and heady valuations.
This is when it pays to be diversified between sectors and geographies but, more specifically when it comes to tech, across the spectrum of innovation and digitalisation. All tech firms were not born equal so holding a blend of the main players and more unique and often overlooked opportunities has never been so important.
A good way to make sure your holdings are well-diversified is by tapping into the investment capabilities of active funds with significant tilts towards the sector in all its forms. The Fidelity Select 50 has a number of funds with tech exposure but I’ve singled out three with particularly interesting takes on tackling the long-term theme of innovation and growth in the sector, and how investors can be part of the story.
A brief look at the top holdings in James Thomson’s fund gives a clear indication of the manager’s belief in the future of tech. Despite the recent share price pullbacks, the manager is happy to keep 25% of the fund exposed to the sector, making clear selectivity and diversification are key.
Thomson explains: “Technology is a broad church. We have semiconductor companies, chip businesses, software companies, hardware and the internet, for example. The drivers of those businesses are different so you can’t lump them into one area and think that the whole sector will be under pressure.
“You also have to remember that tech is mission critical for some businesses and this perhaps is what has changed over the last decade. Being at the leading edge of new technology and staying relevant for the next wave of customers really is a top priority for every corporate CEO.”
This sustainability in customer proposition that Thomson looks for in the sector is no accident - it is very much a part of his rigorous, considered approach to identifying good quality companies for the fund he has run for almost 15 years.
Other ingredients in the manager’s ‘secret sauce’ include easy to understand businesses, companies growing quickly but sustainably, and prudent management teams with great vision for the future. He seeks out companies who are shaking up their industry but with positive long-term prospects rather than short-term fads.
A good example here is Abiomed, one of the fund’s top names. The company is a pioneer in innovative healthcare technology and counts the world’s first total replacement heart and the world’s smallest heart pump among its achievements.
On the face of it, the Rathbone fund and Fidelity’s Global Special Situations might look quite similar. Both have a strong US-tilt, both prefer large caps, with small caps making up under 3% of either portfolio, and both have an eye for tech, medical and otherwise. But delve a little deeper and the differences are quite compelling.
Whereas the Rathbone offering has a very strong growth style, Fidelity’s Jeremy Podger prefers a greater balance between value and growth investing meaning the manager is ready to capitalise on any eventual style rotation while positioning the portfolio to make gains in the short term.
Podger also mixes old and new tech, with Microsoft, Apple, Alphabet and medical pioneer HCA Healthcare all occupying top ten spots in the fund’s holdings. This blend allows the manager to tap into developing trends such as cloud computing, while maintaining exposure to the steady growth of less glamorous areas of the sector like corporate software licensing.
For the manager, this year has thrown up some good opportunities to add to the portfolio, but perhaps not where most investors think. Believing that enthusiasm for some of the sector’s big names have somewhat lost touch with reality over the past 18 months, Podger has instead focused on second-tier companies, aiming to identify more attractively-valued future leaders benefitting from the same long term structural growth opportunities.
“We’re very excited about the scope for robotics,” says Matthew Brett, manager of the Baillie Gifford Japanese Fund.
He explains: “It feels a bit like the internet did 15 years ago, where it’s relatively easy to see that robotics could be more significant than it is today. But we’re still at the early stages, moving away from robots being used to make cars in developed countries into the whole matrix of opportunity in new industries and moving outside of the developed countries.”
While more susceptible to the swings of single-nation economic policy than the Rathbone and Fidelity funds, Brett is confident that his focus on long-term structural changes driven by technology shifts holds more sway than near-term political decisions.
It comes as no surprise then that the fund is particularly heavy in companies ready to drive technological change, rather than support existing production and manufacturing methods. The manager has roughly a quarter of the portfolio allocated to internet-related businesses and another 15% of the portfolio in factory automation and robotics-related businesses. Examples here include Rakuten, one of the largest ecommerce platforms in the world, and Kubota, developers of autonomous farm machinery, including self-driving tractors, rice transplanters and exoskeletons for manual workers.
Rather than broadly allocating to tech-focused companies, the manager believes opportunity lies in identifying already successful companies who are adapting and integrating new tech into their businesses with a view to maintaining or developing their market leadership.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.