26th February 2018 by Darius McDermott
Darius McDermott, managing director at Fund Calibre and Chelsea Financial Services looks at new opportunities to invest in tech.
There is an adage that, when investments boast their own acronyms, it is already too late to buy in. One market area that seems to be full of them is the technology sector, which is home to the US FANG stocks (Facebook, Amazon, Netflix and Google). According to data from Schroders*, these four companies alone have driven a whopping 42% of the S&P 500 index’s overall gains since 2014.
Now there are new tech-dominated acronyms in town, with the Chinese equivalent BATs (Baidu, Alibaba and Tencent) and, in the wider region of Asia, STATs (Samsung, Tencent, Alibaba and Taiwan Semiconductor). Both BATs and STATs have contributed significantly to the returns of their respective markets.
Given that these mega-cap tech names have seen their prices rise so much over the past 12 months, is it too late to participate in technology sector gains now? We take a look at three under-the-radar stock examples which are being used as a gateway to the global tech market.
Guy Richardson, equity analyst at Schroders, believes investors should look beyond the US and emerging markets for attractively-priced tech opportunities. For instance, he argues that too many investors focus on the likes of US electric vehicle giant Tesla, but pay little attention to the companies that provide the individual components to make the construction of electric vehicles possible – most of which are found in Europe.
A top ten holding in Rathbone Global Opportunities fund, Infineon, which is based in Europe, is the world’s biggest manufacturer of semiconductors – a component required to manage the huge voltages that will be going through the electric cars that we (or a robot) will be driving in the future.
“Europe’s semiconductor industry has vital intellectual property required by auto manufacturers globally to produce electric cars,” Guy explained. “With an estimated 5% of vehicles produced globally expected to be electric by 2020, such a business is set to play an increasingly important role in automotive supply chains around the world*.”
British American Tobacco
The largest holding in BlackRock UK Absolute Alpha and third largest holding in Threadneedle UK Extended Alpha funds, British American Tobacco, isn’t exactly the first stock that comes to mind when considering tapping into the technology market. However, as Henderson’s David Smith pointed out recently, technological advancement within the tobacco industry is a lucrative theme to be exposed to, particularly as e-cigarettes and ‘vaping’ hasn’t been as disruptive to the tobacco industry as most people expected.
“British American Tobacco is at the forefront of developing the next generation of reduced risk tobacco products called heat-not-burn (HNB). The technology heats rather than burns tobacco to release a vapour with a taste similar to that of a conventional cigarette but with significantly less toxicants. This gives the benefit over e-cigarettes of providing the same nicotine hit and flavour as a traditional cigarette,” David explained.
“Soon the product will evolve with the technology used to heat the tobacco stored within a filter, meaning the delivery mechanism will match the size and feel of a tradition cigarette. Despite this investment and growth potential, British American Tobacco’s shares have been lacklustre against a strong market in 2017 and so its valuation is attractive**.”
While Facebook is one of the expensively-valued ‘FANG’ stocks, there are other ways to tap into the rise of social media. Align Technology, a US stock which manufactures clear retainers used to straighten teeth – is set to benefit from the consumer habits of the “selfie generation”, according to James Thomson, manager of Rathbone Global Opportunities fund. It is the largest holding in his portfolio.
Alan Rowsell, who heads up the Standard Life Global Smaller Companies fund, agrees, saying the fact that more and more people have a virtual window into our lives will keep boosting the demand for vanity products.
“Align’s core market was US adults but now it is targeting teenagers,” the manager explained. “In the past, they have struggled to sell to teenagers because it was ultimately their parents making the decision. However, Align have been very clever with their marketing on social media and now the teenagers are demanding the product.
“We now have the ‘selfie generation’ – people want a better smile. Align is an interesting name and it is patent-protected technology, which is clearly a competitive advantage. It accounts for 80% plus of the aligner market.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.