Despite dire warnings of imminent collapse from the investment Jeremiahs early this year, the technology sector has been a star performer. In the first half of 2020 the 28% return from the £2.6bn Polar Capital Technology Trust (LSE: PCT) and the 37% from the £800m Allianz Technology Trust (LSE: ATT) helped cushion investors from the market turbulence. So why did the bears get it so wrong?
Ben Rogoff, manager of PCT, says that the tech sector, with earnings growth of around 150%, has driven all the earnings growth of world markets since 2009. As for the pandemic, he agrees with Satya Nadella, CEO of Microsoft, who says: “We’ve seen two years of digital transformation in two months.” The sector’s valuation, with a forward price/earnings multiple of 23.5, may look expensive but is not much above the market average despite its higher earnings growth.
“The magnificent six” tech stocks deliver
Ed Yardeni of Yardeni Research points out that “the magnificent six” – Apple, Microsoft, Amazon, Alphabet, Facebook and Netflix – now account for $6.5trn of market value and over 25% of the S&P 500’s market capitalisation. But only the first two are in the information technology sector, accounting for 44% of it. Since the start of 2015, forward- earnings estimates are up 95% against a drop of 2% for the rest of the S&P. Profits have been boosted not only by revenue growth but by high margins.
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It is hard to keep up with the scale and speed of digital transformation. Rogoff quotes research findings that nearly 40% of couples now meet online. Around 96% of Generation Z, born between 1995 and 2015 (26% of the US population), own a smartphone and half spend more than ten hours a day online; 70% watch more than two hours of YouTube a day, 83% watch Netflix and their average attention span is eight seconds.
More broadly, the pandemic has resulted in $52bn of additional e-commerce as the migration of spending online, hitherto occurring at a pace of 1% a year, has accelerated. The quickening trend towards remote working, education and spending is expected to persist and new areas, such as telemedicine (remote healthcare) are opening up.
Walter Price, manager of ATT, thinks there is much more to go for: half of advertising is still spent on television, radio and print. Around 42% of his portfolio is related to “the cloud”, the delivery of software and services from the internet rather than via corporate networks, a key requirement for remote working. “Technology is the way out if we are to live through pandemics,” he says.
Racing ahead of the market
Both trusts have about a third of the portfolio outside the narrowly-defined sector, balanced by relatively low exposure to Microsoft and Apple. PCT, with over 100 holdings, has more than 70% invested in the US and ATT, with 64, over 90%.
Price is far more sceptical about Chinese companies and has cut exposure there to 2%. Neither owned Wirecard, once Europe’s tech flagship. Both have more than 80% invested in firms with market values above $10bn but ATT has less exposure to the $100bn mega-caps. Both trusts boast higher growth but also higher valuations than the sector.
Rogoff invests in the high- growth phase when “companies [seem] expensive but revenue and earnings forecasts are wrong” before selling out before maturity, when stocks become value traps. This is not easy as sceptics have regularly forecast the maturity of Apple, Amazon, Facebook and Microsoft and warned about the business models of Netflix, Tesla and Ocado. They may prove equally wrong about Uber. Rogoff tells the better story but Price has outperformed him over most time periods. Both trusts should continue to be excellent investments.
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