Investing in technology – a digital transformation?

It’s estimated that around $3.6 trillion was spent on information and technology (IT) in 2020, and that’s expected to increase by roughly 6% in 2021. This shouldn’t come as much of surprise as coronavirus has led to a surge in demand for all things tech.

In a matter of months, coronavirus accelerated the digital transformation trend by several years. Companies have either adopted existing technology or developed and trialled new technology to allow them to continue to trade despite the virus.

As a result, we’ve seen several trends emerging in the technology sector. These trends could offer investors some interesting opportunities.

This article isn’t personal advice. Investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment or course of action is right for you, seek financial advice.

Working from home

When the virus took hold in March last year, offices were forced to close, meaning businesses had to quickly adapt to remote working.

Companies that offered remote working services naturally saw increased demand. Zoom and Microsoft, for example, provide video platforms that meant business meetings and interviews could carry on virtually. Cloud-based security companies also benefited as remote working raises the risk of security threats. Cyber protection services were in high demand to help safeguard internal systems and client information.

Companies offering communication and entertainment services, like Disney and Netflix, also saw more demand for their services as people spent more time at home.

There are questions about how sustainable all this new demand is though. We might see a greater focus on working from home going forward due to its success for so many so far. But as more people start returning to offices and spend less time at home, demand for these services could also dry up.

E-commerce

As shops were shut down, people have shifted their purchases online to meet their shopping needs. Unsurprisingly, food delivery services have been busier. More people than ever have managed to order, pay for and receive goods from the safety and comfort of their own homes.

Companies that already had a strong online presence have done well during lockdowns, like Amazon and Alibaba. Increases in online transactions also provided an opportunity for digital payment providers, like Paypal and Visa Inc, to benefit from the shift to cashless payments.

Buying more online rather than in person could remain popular after the pandemic eases. But it could also be hindered slightly in the short term as we come out of lockdowns. UK household savings rose to record highs last year, as restrictions limited spending opportunities. As businesses reopen, people are likely to spend these savings on things they haven’t been able to, like going to the cinema or eating in a restaurant rather than ordering a takeaway online.

Digital health

Over the past year, the healthcare sector has had to rapidly change in a difficult environment, including the transformation of digital health technologies. More administrative healthcare processes, like switching doctors, ordering prescriptions and routine check-ups have transitioned online.

Artificial intelligence (AI) and robotics technologies have also been introduced to help streamline parts of the healthcare sector. They’ve been used to sanitise buildings and eliminate hospital viruses with ultraviolet beams, while also assisting in the development of vaccines and treatments.

Patients have started to see the value in digital health. But there are still concerns about using it for some, particularly around the security of confidential information online.

How’s the tech sector performed?

Over the past 12 months, the FTSE World Technology index has performed well, returning 56.0%* compared to the broader global stock market’s gain of 39.9%. This has been boosted by the surge in demand for online and internet-based services.

But the strong performance isn’t just a flash in the pan type event. The sector’s done well over the long term too. Over the last 10 years, the FTSE World Technology index has grown 557.3%, compared with the broader global stock market which grew 200.5%.

Remember though, past performance isn’t a guide to future returns, and there are no guarantees this will continue.

10 year performance of the techonolgy sector vs the global stock market

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021

Different sectors perform well at different times. The technology sector can be volatile, at times it’ll fall behind and performance will struggle. The dot-com boom and bust is a perfect example.

More recently, while technology stocks rallied in 2020, they’ve not performed as well as the broader global stock market in 2021 although this is a short time period to consider. Growing inflation expectations have led to fears of interest rate hikes in future. This can be harmful for stocks that are expected to grow a lot in the future as the present value of their future profits are worth less today.

There are other risks too.

New or early stage technology companies tend to fall by the wayside, either through high start-up costs or from competition from larger rivals and high barriers to entering the market.

Investing in specialist areas, like technology, has its risks and we think it should only form a small part of any portfolio. Investors should take a long-term view, by long term we mean at least five years.

Any investment you make should also be as part of a well-diversified investment portfolio.

Diversification – the investor’s tool we all need to talk about

Investment ideas for investing in technology

Investing in funds and investment trusts isn’t right for everyone. Investors should only invest if the investment’s objectives are aligned with their own and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund or investment trust before they invest and make sure any new investment forms part of a diversified portfolio.

• AXA Framlington Global Technology Fund

  Jeremy Gleeson, lead manager of the AXA Framlington Global Technology Fund, invests in companies that research, design and develop technology across all sectors. Around 87% of the fund is invested in the United States, where he typically targets companies with quality management and high growth potential. This can include investments in higher-risk smaller companies.

  The manager believes a long-term view is key to success. The fund has grown 466.3%* over the past 10 years, versus the IA Technology and Telecoms index’s 397.0% gain. Although this is not an indication of how it’ll perform in the future.

  The managers avoid higher-risk start-up or ‘blue sky’ companies, as they believe these are largely unprofitable and tend to disappoint in the early stages. The investments in emerging markets could offer potential higher returns, but also increase risk.

  	Mar 16/ 17	Mar 17/ 18	Mar 18/ 19	Mar 19/ 20	Mar 20/ 21
  AXA Framlington Global Technology	46.8%	15.6%	25.3%	6.7%	54.7%
  IA Technology and Telecoms	40.1%	8.9%	18.7%	6.2%	59.7%

  Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021

  FIND OUT MORE ABOUT AXA FRAMLINGTON GLOBAL TECHNOLOGY INCLUDING CHARGES

  AXA FRAMLINGTON GLOBAL TECHNOLOGY KEY INVESTOR INFORMATION

  
  
• Allianz Technology Trust

  Allianz Technology Trust is an investment trust that invests in companies all around the world that hold a competitive advantage in their industry, address global trends or help improve existing technology. The managers mainly invest in larger technology companies but have the flexibility to invest in higher-risk small and medium-sized companies too.

  The trust has done well over the long term, returning 674.4%* over the past 10 years. Remember though, past performance is not a guide to future returns.

  Investments in emerging markets, the flexibility to invest in derivatives and use of gearing (borrowing to invest) increases risk.

  	Mar 16/ 17	Mar 17/ 18	Mar 18/ 19	Mar 19/ 20	Mar 20/ 21
  Allianz Technology Trust PLC	58.8%	29.8%	26.4%	11.0%	59.6%
  IA Technology and Telecoms	40.1%	8.9%	18.7%	6.2%	59.7%

  Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021

  FIND OUT MORE ABOUT ALLIANZ TECHNOLOGY TRUST PLC INCLUDING CHARGES

  ALLIANZ TECHNOLOGY TRUST PLC KEY INFORMATION DOCUMENT

  
  
• Polar Capital Technology Trust

  Polar Capital Technology Trust is another investment trust option. Managers Ben Rogoff and Nick Evans have a combined 46 years’ experience as technology specialists. Their aim is to deliver long-term growth by investing in next generation technology leaders, they feel have above average growth potential.

  The trust’s long-term performance has been strong. While there have been periods of volatility, the trust has returned 503.0%* over the past 10 years. As always though, past performance isn’t a guide to future returns.

  The managers mainly invest in larger companies but have the flexibility to invest in the higher-risk small to medium-sized companies as well. They also avoid early-stage or blue-sky companies. Instead they prefer to focus on high-quality companies in a strong financial position and with experienced management teams.

  Their investments in emerging markets, flexibility to invest in derivatives and use of gearing (borrowing to invest) increases risk.

  	Mar 16/ 17	Mar 17/ 18	Mar 18/ 19	Mar 19/ 20	Mar 20/ 21
  Polar Capital Technology Trust	61.5%	16.7%	15.4%	24.7%	40.2%
  IA Technology and Telecoms	40.1%	8.9%	18.7%	6.2%	59.7%

  Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021

  FIND OUT MORE ABOUT POLAR CAPITAL TECHNOLOGY TRUST PLC INCLUDING CHARGES

  POLAR CAPITAL TECHNOLOGY TRUST PLC KEY INFORMATION DOCUMENT

  
  

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