Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Allianz Technology Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Over the last twelve months, the technology sector has been on something of a journey. In 2020, technology really came into its own, for us all as individuals and for global society. As much of the world’s population was confined to our homes, technology platforms allowed us to work, socialise and order our groceries safely.
At the same time, supply chains were upended by closing borders and companies had to rapidly rethink their business models as in-person locations and services were put on indefinite pause. Technology provided the solutions to these challenges, in a plethora of different ways; from collaborative working through to online security. Yet, many investors will have missed out on some of this upside by largely grounding their technology exposure in a handful of well-known names.
Think further than the FAANGs
Any casual observer of the technology sector in the last half decade cannot have missed the overwhelming presence of the FAANGs. These five stocks – Facebook, Alphabet (Google), Amazon, Apple and Netflix – have been key drivers of the fortunes of not only the sector, but also broader markets for a significant proportion of that time.
The FAANGs’ fortunes went into overdrive following the onset of the coronavirus pandemic, as they seemed some of the few guaranteed benefiters of the global shutdown. All five marched higher in the months following the introduction of lockdowns in March 2020. However, since vaccine rollouts began in earnest at the beginning of 2021, their prices have largely flattened.
This shift, which has been looming for some time, throws a stark light onto the limitations of viewing ‘technology’ as being defined by these five mega-cap companies alone. While these stocks still have some room to grow, as executives at each company continue to invest in innovation, technology extends far beyond these companies and the most explosive growth likely lies elsewhere, especially given the significant multiples these stocks trade on. To truly capture the opportunity set in technology, investors need to cast their nets wider.
New frontiers for tech
One way to hunt for opportunities more widely is to look across the market cap spectrum. This is the approach taken by Allianz Technology Trust (ATT), one of the most established funds in the space, with a strong track record versus its benchmark – it returned 373.5% in NAV terms against a benchmark return of 251.5% over five years.
The managers see many of the best growth opportunities in mid-to-large cap technology stocks which are often in the highest growth phases. They have skewed the trust’s portfolio towards these stocks, with a relative underweight to the mega-cap stocks including the FAANGs. This is because they believe that much of the industry’s growth will be driven by these smaller companies in the coming years, following a growth bonanza for the largest companies in the last decade.
Walter Price, the trust’s lead manager, believes that many mid-cap names will potentially be able to generate 40% to 50% growth per annum, or be able to maintain that level if they are already there – which he anticipates representing a superior outlook to that of most mega-cap names. He is also afraid of the impact potential antitrust issues will have on the future growth of names such as Amazon, Apple and Facebook, which are all in the sights of President Joe Biden and the Democrats more broadly in the US. Of course, the team do not eschew these stocks entirely for the sake of difference, and in fact added to positions in these stocks when their prices fell in late 2020 and early 2021.
Identifying the next leaders
It is this dynamic approach which is most crucial when it comes to the technology sector. As technology becomes increasingly embedded in everything we do, new trends are emerging all the time, while old stalwarts of the sector who have the scale and free cash to invest in R&D can often also see their products and services in sharp demand.
The team at ATT identifies sub-sectors of the overall technology umbrella, and seeks to have a diversified exposure to these to ensure that they capture the upside as both technological improvements and consumer behaviour brings different technologies into favour.
One obvious example is workforce collaboration, which was quietly building steam as companies became gradually more flexible and remote going into 2020. However, the catalytic effect of the pandemic on the subsector, as its services came into immediate and sustained demand, meant that it was one of the most significant contributors to the trust’s returns in 2020. The fact that the trust already owned key subsector stocks, including Zoom, going into the pandemic was a clear demonstration of how stock selection within these identified themes can also boost returns.
By investing across different market caps and different subsectors, ATT’s management team ensures it can capture the upside of the evolving technological landscape. At the same time, careful stock selection has enabled the team to outperform its sector average, by identifying the future market leaders in these areas.
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