Four ways to invest in technology

Information technology is one of the most exciting sectors – and packed full of innovative companies whose products will influence the coming decades. Global giants such as Apple and Microsoft sit alongside smaller, growing businesses that are dreaming up the next generation of must-have gadgets.

The chances are that you may not have even come across some of the latter, especially if the bulk of their focus is on creating the tech that makes everything else work. But what stocks are most attractive and how can you get exposure?

The attractions of technology

Technology rules our world these days. Virtually everything – from the mobile phones in our hands to hospital surgeries – is reliant on these advances. The most ground-breaking developments can revolutionise sectors and transform fledgling firms into multi-billion dollar corporate giants. It means that canny investors who put their faith and money into such businesses at an early stage can be on course to enjoy bumper returns.

Here we look at four ways to access the technology sector.

Option one: Buying the big guns

The first way to play the technology story is by investing in the sector’s biggest names – or an investment fund that embraces such companies. Technology stocks are among the biggest businesses in the world.

Apple currently tops the pile with a market cap of just over $3trn, followed by Microsoft with $2.5trn and Alphabet, the parent company of Google, with $1.5trn*. And then there’s a whole raft of firms that use technology heavily within their propositions, such as Amazon, Tesla, and Meta Platforms (Facebook)*.

The Capital Group New Perspective fund invests in many of these large, multinational firms that are able to benefit from transformational changes in the global economy. Its 10 largest stock holdings include Microsoft and Meta, as well as Broadcom, the US designer and supplier of semiconductor and infrastructure software**. The fund also has a unique structure, with nine managers each running a portion of the portfolio in their own way. Their combined ideas are then blended together.

Elsewhere, the team behind the Morgan Stanley Global Brands fund believes high quality companies with dominant market positions can provide attractive long-term returns.
We really like the high level of concentration of this fund, which has only 25-30 holdings and more than a quarter of its assets in information technology firms**.

Option two: Buying the latest trends

There’s always something new and exciting in the IT world and the current buzz centres around Chat GPT, the artificial intelligence solution that interacts in a conversational way.

However, it’s important to remember that this is just one application that uses AI, according to the latest update from the Sanlam Global Artificial Intelligence fund. “What is already becoming clear, just a few months after the global launch of ChatGPT, is that generative AI can transform productivity in the workplace and across economies more generally,” it stated.

The increasing number of companies engaging with AI has illustrated the fact there’s not enough computer capacity to satisfy demand. “It was on the back of this realisation that NVIDIA was able to deliver truly epic numbers – revenue estimates for the coming quarter were $7bn but have been revised up to $11bn,” it added.

The fund, which is managed by Chris Ford, invests in businesses that are engaged in the main activities associated with AI, including research & development. It analyses thousands of financial statements for keywords and phrases indicating companies are incorporating AI into their business models.

Option three: Buying who benefits from disruption

Another fund worth considering is GAM Star Disruptive Growth, which searches for companies that are to benefit from the disruption caused by upcoming waves of technological change. Mark Hawtin, the experienced manager at the helm of this portfolio, buys businesses that have technology at the core of their operations.

Mark also believes disruptive growth still offers interesting opportunities, even though we’re heading towards into a softening economy. In a recent update, he emphasised that historic evidence shows that the most disruptive of businesses end up growing through downturns. “We often cite the case of Amazon and Salesforce in 2008 /2009 that grew through that downturn without really any change to their growth profile,” he said.

Although this period didn’t stop their share prices from taking a hit, it also represented a tremendous buying opportunity. “If you’d bought those companies back then, you would have made tens of times your money in the ensuing 10 years, and this is very much how we’re looking at the market at the moment,” he said.

Option four: Buying tomorrow’s winners

Another fund we like is IFSL Marlborough Global Innovation, which is a concentrated portfolio of fast-growing, innovative companies. It also has significant exposure to technology. In fact, more than 40% of the portfolio is invested in this sector, according to the most recent factsheet**.

The stated aim of the fund, which is managed by Guy Feld and Richard Hallett, is to increase the value of holdings through capital growth over a period of at least five years. It’s packed full of interesting companies with which you may not be familiar. For example, one of the largest positions is in Altair Engineering**. This US-based firm provides software and cloud solutions for areas such as simulation, higher performance computing, and data analytics.

The fund is also invested in Idox, which builds software for government and industry to work better – and comply with regulations**. While the fund can invest globally, 40% of assets are in the UK and just over 30% in North America. It also has exposure to Japan, Australia, emerging Asia, and the Middle East, among others**.

*Source: companiesmarketcap.com, 6 July 2023
**Source: fund factsheet, 31 May 2023