It’s been a bad year for tech stocks, which have fallen harder than the broad market in 2022. The Dow Jones US Technology Index has fallen -29.7% year-to-date, whereas the Dow Jones Industrial Average is down -5.9% year-to-date (bearing in mind that tech makes up nearly 20% of the Dow).
However, despite tech falling, from what was a pretty dizzy height, the underlying trends that are driving society only support the growth of the technology sector, when compared to the traditional industries, and should over the long-term outperform the broader market. Technology is transforming the whole economy, and businesses, customers and governments are open to change, adopting new technologies faster than at any time in history.
That’s why it might be worth looking at funds that can give an investor exposure, across a broad portfolio of companies, to take advantage of the underlying investment trends.
One such fund is the Polar Capital Technology Trust plc [LON:PCT], managed by Ben Rogoff who has been running the fund since 2006. Rogoff joined Polar Capital in 2003 and has 27-years of industry experience.
The fund is benchmarked against the Dow Jones World Technology Index (total return, Sterling-adjusted, with the removal of relevant withholding taxes), but it’s not a tracker fund, as Rogoff will look for uncorrelated companies, and the performance of the portfolio can vary from the benchmark performance, at times considerably. Rogoff said in the fund’s report: “Investments are selected for their potential shareholder returns, not on the basis of technology for its own sake.”
Rogoff and his team undertake rigorous fundamental analysis and focus on management quality; the identification of new growth markets; the globalisation of major technology trends; and exploiting international valuation anomalies and sector volatility.
Rogoff explained: “Technology may be defined as the application of scientific knowledge for practical purposes and technology companies are defined accordingly. While this offers a very broad and dynamic investing universe and covers many different companies, the portfolio is focused on companies which use technology, or which develop and supply technological solutions as a core part of their business models.”
The fund aims to maximise capital growth for shareholders through investment in a broadly diversified portfolio of technology stocks around the world. The Polar Capital Technology Trust invests in a portfolio comprised primarily of international quoted equities which is diversified across both regions and sectors within the overall investment objective to reduce investment risk.
Rogoff continued: “This includes areas as diverse as information, media, communications, environmental, healthcare, finance, e-commerce and renewable energy, as well as the more obvious applications such as computing and associated industries. [We] have agreed a set of parameters which seek to ensure that investment risk is spread and diversified. [We] believe that this provides the necessary flexibility for the [investment team] to pursue the investment objective, given the dynamic and rapid changes in the field of technology, while maintaining a spread of investments.”
Nevertheless, financial results of technology companies have started to reflect the difficult macro-economic and geopolitical backdrop, with fewer companies exceeding revenue and earnings forecasts so far in the third quarter than in prior periods. Revenues are under pressure, but many tech names are continuing to deliver better than expected earnings. This suggests that management teams are taking a constructive approach to managing costs and protecting their margins.
Small-cap outperform the giants
Rogoff commented in the last published fund review at the end of August: “The technology sector underperformed the broader market in August, the Dow Jones World Technology Index declining -0.8%. Large-cap technology stocks modestly underperformed their small and mid-cap peers during the selloff; the Russell 1000 Technology Index (large cap) and Russell 2000 Technology Index (small cap) declining -1.4% and -1.1% respectively.”
He continued: “However, there was a much greater dispersion of returns between technology subsectors: the Philadelphia Semiconductor Index (SOX) returned -5.4% (having enjoyed a strong bounce from early July lows early in the month), while the NASDAQ Internet Index and Bloomberg Americas Software Index returned +2.6% and -1.5% respectively.”
Rogoff said that growth in the tech sector has held up reasonably well but warned that software companies were noting that they were facing greater deal scrutiny, longer sales cycles and deal compression. He warned that the fund’s guidance for the rest of the year was cautious on the back of ongoing macroeconomic security.
He also said that company updates that had been filed during the summer were leading to more negative revisions and that the sector was facing a challenging environment – just like the rest of the economy. In the semiconductors and hardware sub-sectors, companies were cutting guidance as they cut inventories, and the first signs of weakness in the data centre sub-sector was starting to emerge.
Transport and industrial
However, Rogoff noted that in transport and the industrial sectors demand remained strong but warned that in AI and chip manufacture national security concerns have meant that producers are facing licencing and export control restrictions in the US due to their potential military applications. The team believes that the sector remains exceptionally well-capitalised, and it has seen companies paying closer attention to their cost bases as the economy transitions from a period of abundant capital and customer demand to one more constrained on both fronts. Rogoff said the pickup in private equity deal making suggests many multiples have already reached a reasonable level, although he would like to see strategic M&A as confirmation.
The fund’s top-five holdings were at the end of August:
- Microsoft [NASDAQ:MSFT] 11.1%
- Apple [NASDAQ:AAPL] 9.9%
- Alphabet [NASDAQ:GOOGL] 7.3%
- Advanced Micro Devices [NASDAQ:AMD] 2.8%
- Taiwan Semiconductor Manufacturing Company Limited [NYSE:TSM] 2.4%
The fund has GBP2.7bn assets under management, and opened trading today (25th November) at 1,930p. The fund has offered a year-to-date return of -29.3% and a one-year return of -27.8% with the company’s shares ranging between 1,764p to 2,796p. The fund has offered 10% outperformance of its benchmark to end-August.