Beyond technology: where else for growth?

In August, Nvidia announced revenues of £24.7bn for just three months, a rise of 122% on the previous year. Yet its share price dropped, and took Samsung, SK Hynix and other chipmakers with it. It is the perfect illustration of why a great company isn’t a great investment if the price is too high, and why investors may want to look beyond the familiar technology names for growth.

Fortunately, there is plenty of it about. The market’s narrow focus on a handful of high-profile technology companies (such as Nvidia) has left other growth areas neglected. Here are four funds that might be every bit as exciting as technology.

IFSL Marlborough Multi-Cap Growth

The UK has a reputation problem. It is known for its stodgy old economy companies – banks, energy companies and miners. In reality, there is a whole other side to the UK market, with fast-growing companies in exciting areas such as healthcare, financial services and infrastructure.

The IFSL Marlborough Multi-Cap Growth fund aims to uncover these growth companies in the UK, investing in the leading companies within growing industries. As such, its portfolio is eclectic, holding companies such as Volution, which makes energy-efficient ventilation systems, or pharmaceutical group Indivior, which makes drugs to treat mental health conditions*. It is also exposed to the UK construction sector, which should receive a boost from new government spending plans for housing and infrastructure. Holdings include Genuit, Grafton and Howdens*.

These growth companies are cheaper than their international equivalents because the UK has been so unloved, but sentiment is improving towards the UK market and valuations have started to improve. These growth areas may start to receive more attention from investors as a result.

FSSA Asia Focus

Asia is growing faster than any other region. The IMF estimates that its economy will expand 5.4% in 2024. That beats Europe (0.9%), the US (2.6%) and Latin America (1.9%)**. It is tapped into technology growth through the semiconductor giants such as TSMC, but also other important growth themes, many of which have been overlooked by international investors.

The FSSA Asia Focus fund, for example, is focused on some of these themes, including the growth in the Asian consumer. It’s looking for companies with good franchises and strong brands that can benefit from rising incomes and ‘premiumisation’ – the search for higher quality goods.

It is also investing in rising healthcare spending, with manager Martin Lau saying “many countries are under-invested in healthcare compared to the global average. As these economies become richer, we expect healthcare and health-related spending to rise.”

Its top holdings include Midea Group, a specialist in ‘humanizing technology’ (clever robots, in other words), or biotechnology group CSL, which specialises in vaccines and blood plasma treatments***.

Ninety One Global Environment

It has been a difficult time for environmentally-focused companies. Governments have vacillated on climate commitments, while rising inflation has raised build costs for many renewable energy companies. There was also some over-exuberance on pricing during the pandemic. The adjustment has been painful, but there are signs that this is now starting to turn.

The energy transition is a major long-term growth theme. It is estimated that around $2.4 trillion of annual spend will be needed to meet global temperature goals. There are also goals around waste management, and the circular economy. Companies tapped into these themes have a long tailwind of growth and this could be a good moment to buy in while prices are still depressed.

The Ninety One Global Environment fund is a good option for a potential recovery in this part of the market. Manager Deirdre Cooper points out that renewable energy demand is set to grow still further: “The speed of artificial-intelligence (AI) development and adoption is generating new structural growth drivers for power demand and a willingness to spend to bring reliable power online quickly. This has resulted in a large tailwind for the utilities we own that are quickly deploying low-cost renewable energy to meet expected demand from the data centres required for AI.” The fund’s top holdings include Waste Management, Nextera Energy and Spanish utility Iberdrola^.

AXA Framlington American Growth

The AXA Framlington American Growth fund is an option for investors who can’t quite bear to give up on the technology giants yet, but would like to hold a range of US growth companies alongside them. It still has exposure to a number of the familiar technology names – Nvidia but no Meta, for example – but also delves into other growth areas in the US economy.

Manager Stephen Kelly holds pet food company Freshpet***. Petcare is a fast-growing area, with more people owning pets, and spending more on them. It also holds defence group Axon Enterprise, which develops technology and weapons products and is likely to be a beneficiary of rising defence spending in response to growing geopolitical tensions. He has also recently bought Shockwave Medical, a medical devices company***. In each case, Stephen is looking to find companies with long-term growth that aren’t dependent on the health of the economy to make progress.

Investors don’t need to focus exclusively on technology to generate growth in their portfolios. There is an abundance of growth themes in the global economy, and many sit at far more attractive valuations than large-cap technology. Investors just need to explore a little further.

*Source: fund commentary, August 2024

**Source: IMF, World Economic Outlook Update, July 2024

***Source: fund factsheet, 31 May 2024

^Source: fund factsheet, 30 June 2024