Technology in a COVID-19 world and beyond

This is not a new trend

In the past couple of years, we have noted an increased focus on technology when we talk with fund managers. The tidal wave of new technologies is not just an important factor for managers of technology funds but rather an essential consideration for managers of all investment strategies, impacting the ways in which they invest, the types of companies they invest in and the way that broader investment markets behave.

Technology in the wake of a pandemic

With the emergence of a global pandemic, these themes have accelerated in ways we would never have anticipated and the recognition of this has been seen recently with technology sectors continuing to outperform this year. There will inevitably be ‘winners’ and ‘losers’ in a post COVID world and what has become clear is that winners and losers will need to be considered over different timeframes and that the impact of the pandemic may be more nuanced and therefore require more fundamental stock analysis than broad brush sector positioning. In practice, this means that in the near time there are very clear and understandable dispersions in the performance of corporates. After all, it is information technology companies that have eased the path of life under lockdown with solutions for the new “work from home” culture and the requirement for continued “social distancing” which has accelerated the move to online services.

Not all technology firms are winners

That said, not all tech is flourishing in the midst of the pandemic. Technology companies which rely on physical interaction with customers for the fulfilment of services have faced a more challenging backdrop and uncertain future (this includes many pre-IPO businesses such as flexible shared office space provider, WeWork). These are so called “tech companies” operating in traditional consumer services and therefore still vulnerable to a collapse in consumer demand. History tells us that incumbent technology firms also need to be aware of the risk from ever-changing technological advancements. Note the cautionary tales of pioneering internet players Alta Vista (eventually acquired by Yahoo) and Netscape (acquired by AOL), both responsible for important developments in the internet, both eclipsed by the arrival of Google and Internet Explorer, respectively. This highlights the importance of having good fund managers picking the right stocks.

New industries versus old industries

You may think that these discussions would preclude managers of strategies with a naturally lower weighting to technology sectors (e.g. the UK equity market). It doesn’t. In fact, this is a market where not only can you find innovative businesses plugged into the inevitable technological changes in our lives, but it is also a market where many older industries feature prominently (e.g. oil majors, mining and traditional financials) and it is really important to understand where they are positioning themselves against the tidal wave of technological change. Those businesses which do not adapt will be left behind as the global consumer increasingly moves towards the adoption of online products and services.

What does this mean for investors?

Well, there are both direct and indirect ways in which you can gain exposure to these themes. There are the outright technology stocks, which have delivered market leading performance this year and as a collective have become a much more significant part of global markets (particularly the US equity market). However, fund managers should also be analysing those companies outside of the technology sector where there are opportunities to profit from technological advances within more traditional industries which will enable them to gain market share and industry advantage.

It is equally important to know that your fund managers are asking the difficult questions to the management of all businesses that are at risk of value destruction from these disruptive forces. This may see some businesses and industries that were hitherto considered steady growing businesses with defensive qualities lose their market leadership.

Risks to the technology sector

At the same time, investors should remember that the rally that we have seen in technology stocks may not continue unabated. There may be periods of short-term volatility prompted by a shift in market sentiment based on valuations or a change in the regulatory outlook for large tech corporations. Therefore, we must consider these risk factors when determining a suitable level of exposure to the sector. The milestone hit by Apple last week when the company’s market cap reached $2trn, gives an indication of the lofty valuations attached to some of these companies, particularly the FAANG companies (Facebook, Apple, Amazon, Netflix and Google) in the US. These tech giants now play a significant part in driving the direction of US equity markets.

The Five Wealth approach

At Five Wealth we take account of these structural trends and consider the shorter-term risks to valuations. Whilst we don’t try to “time the market”, we do seek to ensure our clients have exposure to these themes at a level which is appropriate to an individual’s risk tolerance and in keeping with their overall investment objectives. At the same time, we challenge the fund managers of the underlying strategies in your portfolio to ensure they are taking the necessary steps to avoid the casualties of this seismic shift in our way of life. Having had many of these conversations in recent weeks and months, we believe that the fund managers we recommend are asking the right questions and making considered changes to their portfolios that reflect these factors.

If you have any questions or would like to discuss this in more detail, please do contact your adviser.

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance

Find out more about the author

August 27, 2020 Post by Roisin Duffy
Back to news and insights