Technology’s use during the COVID 19 pandemic demonstrated to fund managers how valuable and applicable innovation can be to hold in a portfolio. Transitioning from offices to working from home and market volatility put the spotlight on many organisations to become more efficient and streamlined, whilst thinking about how to use technology to maximise profits.
The technology sector benefited from fantastic growth during the pandemic, with investments in the best performing Tech funds growing by over 30% during 2020 and returns before and after regularly hitting over 20% pa. But more recently the sector has suffered setbacks that has led investors to question the industry’s growth potential moving forward.
I believe that rather than embracing herd mentality and running for the door (locking in losses), a more balanced approach is to consider the fundamentals. The best opportunities arise in times of uncertainty and investing in technology means providing funding for companies that can provide disruptive solutions, funding companies that can help make things faster, cheaper, and more efficient. Technology has probably one of the strongest balance sheets out of all sectors. This is reflected by higher net cash as a percentage of market cap (indicating lower debt levels) and lower Enterprise Value versus Free Cash Flow ratio (indicating that a company can quickly recover research and development costs).
Avoiding micro-managing and taking a long-term view to investing also enables a more balanced approach to decision making when it comes to your investment portfolio. For instance, one example would be the Polar Capital Global Technology fund, which continues to offer fantastic long-term growth even allowing for recent dips in performance …
The tech sector troubles have also impacted on other investment funds holding technology. It’s important to have a grasp of how a fund’s underlying holdings impact on performance. Let’s take a look under the bonnet of an American fund as an example of this …
Bailey Gifford American Fund
This fund invests in any size of company based in the US and typically has a sizeable exposure to technology, Netflix being one of them. With the company’s main source of revenue coming from its massive amount of subscribers, Netflix was a cherished top-10 holding in the fund until earlier this year. But a slump in subscribers wiped off more than a third off Netflix’s market value … the question is what caused the fall in subscribers? The increased demand for Netflix during the pandemic was followed by an increase in competition as the streaming market matured, with competitors like Disney+ rising in popularity. Add to that the post covid growing cost-of-living crisis, subsequently forcing some customers to cancel their membership and in Quarter One 2022 the streaming giant suffered its first fall in subscriber numbers in a decade – not helped by having to let go of 700,000 customers after suspending its service in Russia following its invasion of Ukraine! So, as you can see, a combination of events can and does lead to a fund manager rethinking the weighting of companies like Netflix held within their portfolio.
Again, taking a more balanced and longer-term view of performance reveals the Bailey Gifford American fund’s extremely strong growth …
Investing in the stock market may feel counterintuitive when economists are warning of a UK recession. But with inflation running at a 40-year high, fleeing to cash is unlikely to be a wise move. Reducing your exposure to equities could prove costly in the long run.
Although stock market downturns are alarming, analysis shows that over the past two decades you would have been far better off staying invested than moving your money into cash. This is despite the last 20 years witnessing major economic shocks such as the global financial crisis and the coronavirus pandemic.
Time and again, the stock market recovered from its dips and went on to deliver impressive returns over the long term. In contrast, cash delivered almost no real growth as interest rates were no match for the eroding impact of inflation.
Diversification and patience is key
Having a well-diversified portfolio will provide the best potential for a successful outcome when it comes to investment returns. Giving your portfolio time and avoiding knee jerk reactions to market dips will ensure that your portfolio is well positioned to take advantage of growth opportunities.
Having an understanding of how politics, inflation and world events impact on different sectors and taking a long-term view should assist in your decision process.
If you have a pension or investment and are wondering whether your portfolio is sufficiently diversified, please contact us and we will assess it’s potential to offer you the returns and/or income you are aiming for. This service is free of charge and without obligation.
Speed Financial Solutions are a highly qualified and fully regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
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This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
12 September 2022