Ceri Jones examines the prospects for specialist funds that invest in tech, healthcare and commodities.
The switch away from traditional industries towards new and disruptive technologies has boosted several specialist sectors, including tech, healthcare and renewable energy, but many of these stocks are now on lofty valuations. Amazon (NASDAQ:AMZN) trades at close to three figure price/earnings multiples but even mature tech companies have enjoyed re-ratings that may seem excessive given their growth potential. Apple (NASDAQ:AAPL), for example, is on a price/earnings multiple of around 38.
How to invest in tech
Lust for all things tech is not limited to the US mega-caps transforming e-commerce, armchair entertainment and working from home. Recent tech-related IPOs have doubled or even trebled in price, such as DoorDash (NYSE:DASH), a food delivery app; Airbnb (NASDAQ:ABNB), the online rental marketplace; and C3.ai (NYSE:AI), a software company helping businesses create artificial intelligence applications. Investors might prefer to switch to more traditional areas such as semiconductors, communications equipment, large-cap internet businesses, e-commerce and digital advertising, which are less toppy.
While valuations may alarm some investors, a regulatory clampdown on the tech giants is less likely following the US election result, according to HyunHo Sohn, portfolio manager of the Fidelity Global Technology fund. While president-elect Joe Biden has promised to tax and regulate big tech more aggressively, his lack of a majority in the US Senate will prove problematic.
He says: “Current US laws make it difficult for the federal government to build a case against any of the big tech companies on antitrust grounds, although some measures, such as reform of Section 230, carry significant bipartisan support, and a split government is not necessarily an obstacle in these areas.” Section 230 is a legal protection that prevents social networks being sued for illegal or offensive content created by their users.
Polar Capital Technology Trust (LSE:PCT) and Allianz Technology Trust (LSE:ATT) are well-regarded, with the usual high exposures to ubiquitous stocks such as Alphabet (NASDAQ:GOOGL), Amazon and Apple. Scottish Mortgage (LSE:SMT), run by Baillie Gifford and a member of interactive investor’s Super 60 list, is also appealing.
For targeted exposure to specific sub-sectors, and to diversify away from the ubiquitous tech names, there are numerous ETFs such as Rize Cybersecurity Data Privacy (LSE:CYBP), Lyxor MCSI Disruptive Technology and First Trust Cloud Computing (LSE:FSKY).
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Credit card and financial exchanges businesses also benefited from the pandemic and boast strong competitive moats, economies of scale and pricing power. Again, to diversify away from the big tech firms, there are financial funds such as Jupiter Financial Opportunities. Another option is Rathbone Global Opportunities, which is more generalist, but has a high weighting to the payment business chain.
China’s technology buildout could offer attractive returns as emerging market stocks are trading at lower valuations than developed markets. China is enjoying a strong economic recovery, solid consumer growth and political posturing has waned.
Dan Lascano, one of Alliance Trust’s stock pickers, particularly likes Alibaba (NYSE:BABA), which has grown revenue at 34% year-on-year. “The chief financial officer spoke on 30 September disclosing new profitability targets for its cloud and logistics businesses above street expectations. We agree and see significant upside from current levels,” says Lascano.
The outlook for the healthcare sector
In a year when the pandemic turned the world upside down, healthcare stocks also soared. As well as exciting developments around Covid-19 testing, supplies, therapeutics and vaccines, the pandemic’s disruption in 2020 delayed more than 28 million elective surgeries across the globe.
“The speed of the recovery and a return to normal is likely the biggest upside surprise in our view,” says Alex Gold, portfolio manager of the Fidelity Global Health Care fund. “In 2020, we saw that after a delay to elective procedures in the second quarter, patients returned rapidly to hospitals ‒ particularly in the US. We believe that as a global vaccine is rolled out, we will see a rapid return to normal demand for healthcare products given their inherent importance to well-being.”
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However, a post-pandemic world is one with a significantly higher debt burden, both for corporates and governments. This will create pressure on hospital capex budgets, which could be a risk for companies selling high-value capital equipment, but it will also heighten the need for innovative solutions that reduce costs to the healthcare system.
In pharma and biotech, the ability to identify companies with game-changing drug trials is difficult for professionals let alone private investors. There are also concerns regarding the longer-term growth of companies that have material patent cliffs ahead.
Is this the start of a new commodities supercycle?
Commodities are an excellent non-stock-specific way to play recovering markets, and hedge against inflation. Demand is likely to be robust in the coming decade owing to supportive central bank stimulus, a weaker dollar and a shortage of supply as energy firms and miners have cut exploration budgets. For example, copper prices recently hit a seven-year high, as Chinese demand for electric cars soared. Electric vehicles need three or four times more copper than a combustion engine car, more if you count the charging infrastructure.
Goldman Sachs, which has called the start of a new commodities supercycle, has forecast a return in 2021 of about 27% on the S&P/Goldman Sachs Commodity Index (GSCI), with a 19.2% return for precious metals, 40.1% for energy, and 3% for industrial metals. The bank’s targets for gold and silver are $2,300 and $30 an ounce, respectively, as solar installations are boosting demand for silver. In mining, consider BlackRock World Mining (LSE:BRWM) or the smaller BlackRock Energy and Resources Income (LSE:BERI) investment trust. A basket of commodities is also easy to access via ETFs such as Invesco LGIM Commodity Composite (LSE:LGCF) or L&G Longer Dated All Commodities (LSE:CMFP) funds.
“Commodities cover a broad spectrum but the one investors are most likely to include in their portfolios is gold,” says Scott Thompson, investment analyst of manager selection services, at Morningstar. “Gold prices remain high having had a strong run-up. However, central bank stimulus is likely to extend for a lengthy period and the inflation/devaluation of currencies that this brings should aid gold prices.
“Gold retains some properties of a safe-haven asset, but comes with higher levels of volatility and increased levels of retail speculation may exacerbate this. The price run-up may suggest that unlimited fiscal stimulus is priced in, and if central banks are unable to coax growth and inflation out of their economies, as they have in recent times, then the reflation trade may never materialise.”
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New disruptive technology has also pushed up the S&P Global Clean Energy Index by more than 100% in 2020, compared with the S&P Global Oil Index, which tracks 120 companies in oil and gas exploration and production, which fell 27% over the same period (to mid-December). The sector includes not only infrastructure projects, such as solar panels and wind farms, but waste management and sustainable agriculture, forestry and water. The top-performing ethical fund over 10 years is Royal London Sustainable Leaders, which has risen 200%. The fund is one of interactive investor’s ACE 40 options.
“The most crucial driver has been the dramatic improvement in the competitiveness of clean energy technologies, to the point where they require little or no subsidy to compete with fossil fuels,” says Alex Tedder, chief investment officer of global and US equities at Schroders.
“Investments to displace combustion engine vehicles and fossil-fuel power generation are ramping rapidly, and the next five years will be a critical inflection point. The automotive sector is set for very rapid change, with accelerated adoption of electric vehicles, taking penetration up towards 50% of global new car sales in 10 years, and eventually close to 100%. More broadly, the transition to a green economy will offer tremendous opportunities as investment builds and adoption rates surprise on the upside.”
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