Despite the economic turmoil, one sector has seemed immune to COVID concerns and continued to deliver remarkable gains. The performance of technology stocks has been eye-catching across the market cap spectrum and well documented in the financial press, most recently with impressive Q4 2020 earnings reported for some of the largest tech titans.
Tech-focused investment trusts continue to be one of the top holdings for many investors, and their performance backs this up. Three of the top-rated technology trusts are Allianz Technology LON:ATT (+68% over one year), Augmentum Fintech LON:AUGM (+57%) and Polar Capital Technology LON:PCT (+41%). Of the three, Polar Capital Technology is the biggest, with £3.5bn in AuM, currently trading at a discount of 6.4% versus Augmentum Fintech which trades at a premium of 27%!
But will this seemingly unstoppable sector continue to grow, are we in bubble territory, where are the new exciting areas of technology and what are the prospects for taxes and break-ups?
“How will it evolve in the future? To answer that, I will actually look back in time,” says Ben Rogoff, Technology Director and Lead Manager on the Polar Capital Technology Trust. “I like to lean on history having studied it at university and whilst I don’t think history repeats, it often rhymes. In this instance, I would draw a parallel with World War II. The end of WWII did not see a return to the pre-war world; it swept Winston Churchill from office and presaged a remarkable period of accelerated societal change. We believe the post COVID-19 world will follow a similar path with hopes of a return to normal likely to be replaced by the oft-mentioned ‘new normal’. Companies are already planning for this new reality with working from home efforts quickly morphing into working from anywhere. Technology is likely to prove central to this new reality.”
Technology will play a bigger role in our lives
Technology will play an even bigger role in our lives as we look ahead, whether that be through companies adopting new, flexible ways of working, even more services delivered online or our increased use of technology for home entertainment and leisure purposes. As more of our lives move online, this will create an even greater requirement to focus on data awareness and protection, and the implementation of enhanced cybersecurity tools and processes.
Walter Price, Portfolio Manager of the Alliance Technology Trust, thinks that we are in a period of rapid change, where technology is key to prosperity for all industries, from manufacturing to finance.
“Cloud companies, collaboration software companies, and those enabling efficient manufacturing processes such as automation, are becoming critical infrastructure in our world,” he says. “In the next five years, we expect these long-term trends to continue. We also expect the broader technology trends of 2020 to continue, such as the growth of electric vehicles. The electric vehicle market is competitive, so it is likely that only the larger incumbent auto companies, and Tesla, will do well in this area. The semiconductor industry will also benefit from its growth – given electric vehicles use about six times more than the usual car. Many of the companies in our portfolio are focused on making these components, and we think they will benefit from the growth of electric vehicles.”
UK tech industry is leading the charge
Augmentum Fintech, which compared to the other two big beasts in the technology sector has £167m in AuM, but is doing very well in performance terms, recently made an investment in open banking payments platform Volt.io, the leading provider of account-to-account payments connectivity for international merchants and payment service providers, gaining exposure to the fast growing open banking and digital payments opportunities.
Tim Levene, CEO at Augmentum, says he expects to see significant growth this year in the mainstreaming of crypto and decentralised finance (DeFi) and last month announced investment in ParaFi. “Through this partnership we will give our investors exposure to a diversified portfolio of pioneers in the DeFi and blockchain spaces,” he says.
The UK tech industry, in which fintech is leading the charge, is starting to mature and the opportunity is immense. Within the financial services sector, fintech has less than 10% market share, so there is still a great deal of growth to come.
“Fintech challengers will continue to play a crucial role in supporting economic recovery in the UK post-pandemic and we expect 2021 to be a record year for investment in UK fintech, building on the $4.1bn venture capital inflows from 2020,” says Levene. “We expect B2B, software-as-a-service and infrastructure within banking and insurance to become the subject of significant start-up and investment activity. Building on the accelerated digital adoption seen across financial services we will continue to see increasing appetite from incumbents engaging with and investing in fintechs to help solve some of their legacy challenges.”