It is hard to think of an industry which has failed to be touched by the digital revolution. From healthcare to retail, the media to the military, almost every sector seems ripe for disruption.
Yet the majority of investors remain under exposed to technology stocks, argues Robin Geffen, founder and CEO of Neptune Investment Management, and manager of the firm’s Global Technology Fund.
“The UK stockmarket in particular, as well as European indices, are underexposed to tech stocks,” he says, pointing to the FTSE All Share, which has just 2 per cent in Information Technology. The MSCI World, in contrast, has 15 per cent.
A typical ‘growth’ investor in the UK might have just over 7 per cent of their total portfolio in tech stocks, claims Mr Geffen. “And a strong tech positioning is so important.”
Even we see only modest technological disruption, which seems unlikely, a portfolio with a weak tech position may achieve standard market performance, but without the diversification benefits a stronger tech position would bring, he says.
If however, we see widespread disruption, a portfolio with a weak position in tech would experience a large loss of value due to the obsolete assets it held and its compromised income security.
“A portfolio with a strong tech position, on the other hand, will have the potential to capture large amounts of value creation and would be hedged against income disruption,” says Mr Geffen. “If you want to get a feel for obsolete assets, walk up a high street or around a largely abandoned shopping centre to see the impact technology can have.”
Future proofing
Holding tech stocks is all about future proofing a portfolio, claims Will Geffen, an analyst at the firm and Robin’s son.
He points to the rise of artificial intelligence, or AI, which he describes as a “macro” invention, similar to electricity in that it spurs change in others.
Although AI has been around for a while, certainly since the 1970s, there is now enough data and computing power available to transform the technology into a true disruptor.
“We are not saying jobs will be taken away, but there will be a lot of change,” says the younger Mr Geffen. “And that means real portfolio risk. The only way to manage this is to include tech stocks. And to take an active approach – you don’t want to hold onto the losers.”
Neptune takes a three-silo approach to capture value in technological change – splitting the stocks into frontier firms, enablers and adopters.
“What you do hold is as important as what you don’t,” says the elder Mr Geffen. “I had one of the worst meetings I have ever had when I went to see Facebook in June. I came back and sold it all.”
The fund, which has £44.7m ($58.4m) in assets, is building its exposure in Asia, but is overweight the US.
“In the short-term, technology is still relatively expensive, but then so are other sectors, for example consumer staples and utilities,” he says. “But tech stocks are still relatively good value by historical standards, especially on the back of recent corrections.”
Time to buy?
Indeed, the recent market turbulence may indeed provide a buying opportunity for those investors looking to get into the sector.
The MSCI US Technology Index experienced was hit hard in the fourth quarter last year, falling by 24 per cent from its peak in early October, before rebounding 13 per cent from its trough on Christmas Eve.
“All in, between its peak and now, the US technology sector has corrected 14 per cent, says Hou Wey Fook, chief investment officer at DBS. “We view the recent correction as an opportunity to re-engage.”
US technology companies remain in a sweet spot, he believes. Many have developed a strong portfolio of patents and intellectual property, giving them ultimate control over product design, while they also tend to keep a tight grip on their supply chains.
“They outsource most parts of the assembly, component manufacturing, labour works, and inventory burden to Asia; the region generally has lower profitability due to higher capital requirements and labour intensity, resulting in superior earnings for US tech firms,” says Mr Hou.
They have also amassed large amounts of cash, giving US companies the financial muscle to execute mergers and acquisitions, while strong brand recognition further cements their global positioning and product pricing power.
Although some big names, for example Amazon, Apple, and Nvidia, have cautious earnings outlook in the short term, and are citing the impact of trade tensions and slower end demand, there are still companies confident in their earnings outlook, claims Mr Hou. These include firms concentrating on the payment space, server storage, data base management, and networking systems.
“With the decade-long earnings expansion, the future promises higher-quality growth and sustainable earnings,” he adds.
