The infrastructure of everything

The last year confirmed and consolidated one of the most significant trends in human history. As individual households across the world were forced to physically distance from one another, technology became the means by which they connected.

In 2020, 99% of people aged 16 to 44 used the internet regularly in the UK. Technology, from access to online grocery shopping through to video consultations with personal physicians, has gone from being a nice-to-have to a need-to-have. From an investment perspective, it is hard to simply class technology as a sector when it forms a vital part of so much of our lives.

As our use of technology has widened and deepened, so too has the diversity of businesses meeting our technological needs and innovating to create future solutions. As such, a comprehensive technology allocation cannot be achieved through a handful of big-name stocks, but instead encompasses a staggering array of subsectors, which are whole industries in themselves.

Strength in breadth

Of course, not all the technology subsectors are on the same trajectory. Indeed, as different needs become more pertinent at different times, the respective subsectors become both more relevant and more innovative.

An archetypal example is the collaboration in work and work from anywhere theme. While many companies were slowly introducing a more flexible working culture ahead of 2020, the adoption of this theme was catalysed by the global pandemic, introducing a pattern of work that most sociologists and economists agree will not be reversed once conditions ‘normalise’. Those investors with exposure to the market leaders in this theme – notably Zoom – benefited significantly from this shift.

A less widely discussed example, but one that was equally accelerated by the global pandemic, is retail-related technologies. These take the form of targeted advertising and improved payment systems, solutions which enabled businesses beleaguered by the closing of physical locations to both improve service to online customers and efficiently identify and sell to new customers.

Investing in technology trends

Allianz Technology Trust (ATT) applies the expertise of a team of Silicon Valley-based technology investors to seeking out the current and future leaders in subsectors like these. The trust’s management team believes that technology is fundamentally a ‘winner’s game’, due to the sector’s ongoing innovation and resulting creation of new sub-sectors..

Their ability to identify the leaders of different subsectors, and to nimbly add to positions in these when relevant, was demonstrated by the two case studies above. In the early months of the pandemic, as the world adapted to new ways of living, the team had Zoom Communications and PayPal inc in their top ten holdings, each a leader in the respective themes discussed here.

However, long-term success in technology investing requires flexibility. As the vaccine rollout has progressed in the US, UK and, to a lesser extent, Europe, the likelihood of us travelling further afield has increased. To reflect this, the managers of ATT have built a significant position in Expedia, a market leader when it comes to online travel shopping. Meanwhile, as we have settled into remote working and shopping, they have reduced down their positions in Zoom and PayPal, taking the profits from their share price surges in 2020.

Looking to the future

While spotting these shorter-term trends is key to successfully tapping into the opportunity in technology, there is also substantially more room to run for many of the world’s technologies. Investors with expertise in this area, like the team behind ATT, seek to be ahead of the curve when it comes to the uptake of technology.

For many of us, certain technologies seem to have reached their maturity. Cloud technology is an example, with the widespread adoption of cloud-based file storage among our employers, suppliers and networks giving us the impression that this market has reached something approaching maturity.

In reality, a technology like this has significantly more in the pipeline in terms of both transfer of increasing amounts of data to the cloud and then innovations that could be applied to that data once it is there. It is estimated that at present less than 20% of applicable workloads have transferred to the cloud. A key focus for the managers of ATT is cloud ‘2.0’, which primarily refers to applying artificial intelligence (AI) to cloud-based data. This allows end users of the cloud to not just store their data, but also to extract valuable information from it. For example, in an educational setting, teachers could use this data to assess how long students spend on different topics, identifying which subjects require more focus in the classroom.

Although many potential applications for cloud 2.0 have already been identified, the technology itself is still in an early phase of development, with venture capitalists in particular focused on this area. However, by identifying an innovation like this early on, the team behind ATT are more likely to capture it within the portfolio ahead of its mainstream adoption.

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