Have You Got Enough Tech Stocks in Your Portfolio?

Want to future proof your investment portfolio? Invest in technology stocks to ensure you don't get left behind

Emma Wall 14 March, 2017 | 1:28PM
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Being underweight technology stocks is a problem, according to Neptune’s Ali Unwin. In five to 10 years’ time investors will need to have tech exposure for growth – and income.

“If you want to future proof your portfolio, you need tech stocks,” says Unwin. “The future is already here – innovation is not about science fiction flying boats, we are living in a new industrial revolution.”

A century ago, a business needed its own power supply in order to compete in industry. Then, a central grid made it possible for all businesses to access power. Connectivity levelled the playing field and made anyone with an idea able to innovate. Unwin likens that revolution to the impact of Cloud computing on today’s entrepreneurs and business owners. The Cloud is, in essence, giving each computer a significantly bigger and more powerful engine.

“People can do more for a lot cheaper. One of the beneficiaries is artificial intelligence – you can teach a computer to self-learn much more quickly,” he said. “Artificial intelligence already drives Google search, which learns to tailor results to the user, and identifies credit card fraud through learning the spending habits of the cardholder.”

Winners Keep on Winning

Many of today’s tech stocks are immune to the boom and bust habits of high return stocks of old, according to Unwin. Typically, sectors protect themselves from becoming monopolies as success attracts competition. When competitors enter a market they chip away at the market leader’s returns, levelling the playing field.

But the tech launches of the last 15 years have defied that pattern, building up protective moats around their businesses such as a strong and loyal client base, unique data sets or a pattern of acquisitions. Companies such as Facebook (FB) and Amazon (AMZN).

“Returns for highest return companies are growing more quickly than any other group. Network effects, strong intellectual property and technological standards build strong moats around a business,” says Unwin.

Because of these characteristics, high growth tech stocks in the past synonymous with risk, offer cash flow stability.

Mark Phelps, manager of the AllianceBernstein Concentrated Global Equity fund pick stocks with a growth bias through a value perspective. He looks for stocks whose earnings can grow 10% a year, for five years in a row. Three tech stocks pass this stringent test; Alibaba (BABA), Google (GOOG) and Tencent (00700).

“I went to the Snapchat IPO meeting recently, and heard the founder talk. He said that of all the tech companies the one whose success he would most like to emulate was Tencent,” said Phelps. “It was great to hear. For me, Snap was not worth an investment, but Tencent has all the characteristics I look for: lack of competition, shareholder rights, growth, profitability, liquidity and at a fair valuation.”

What is a Tech Stock?

Another reason why investors should consider upping their exposure to technology stocks is in time, they will come to represent all sectors.

Stocks that you may not necessarily think of as tech are disrupting all types of business; hey may sit inside the retail and commerce sector, they may sit inside consumer services; but actually are experiencing huge growth opportunities because of the way they are digitalising business.

“Amazon, for example, is not considered a tech company,” Polar Capital’s Ben Rogoff told Morningstar last year. “It's a retailer. So, that's why it's our largest active bet in both of our portfolios because it isn't in the benchmark.

“And very recently, eBay (EBAY) went into the benchmark – an incredible 20 years since launch. It took that long for the index people to get around to reclassifying it. LinkedIn is not considered a tech company but has reinvented the recruitment market. TripAdvisor is not considered a tech company but it's reinventing the travel market.”

Investors should add Uber, Deliveroo and Ocado to that list – to name a few. So with tech stocks taking over every corner of the stock market, do you have enough tech stocks in your portfolio?

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar