Large American technology companies could be the next defensive sector to own in your portfolio due the growing need for their products, according to the industry experts. 
While the market seems to have recovered following the EU referendum, the UK remains in wait-and-see mode and uncertainty has left many holding defensive stocks such as pharmaceuticals and the big tobacco companies.
Meanwhile, the Federal Reserve’s indecision on whether or not to raise interest rates, coupled with the Bank of England’s slashing of them, has also left investors looking to take a more cautious approach.
Technology stocks, such as Google owner Alphabet, Amazon.com, Microsoft, and Apple and eBay, have all risen steadily so far in 2016.
Performance of stocks in 2016
Source: Google Finance
All are global facing, have grown to become some of the largest companies in the world, and (currently) look as though they are unlikely to face much of a challenge to their ‘quasi-monopoly’ status.
Indeed, at the end of July the top five companies in the world by market capitalisation were all US tech name – the first time this has happened in history even including the dot com bubble of the early 2000’s.
With this in mind, FE Trustnet asks five highly regarded industry commentators and fund managers whether the US technology sector could be the next ‘safe-haven’ for investors.
Legg Mason – “These are quality businesses run by capable management teams”
Margaret Vitrano, portfolio manager of the Legg Mason ClearBridge US Large Cap Growth fund, says these companies could be considered “counter-cyclical” and therefore defensive in nature.
“These technology companies all share the ability to organically generate billions of dollars in free cash flow, which provides them options that other U.S. companies within technology and other sectors may not possess.”
“Using M&A as a competitive advantage, such as Microsoft acquiring LinkedIn, is a good example of how this cash flow is put to use.”
“Their market leadership in terms of installed customer bases – Office and Windows for Microsoft, YouTube and search for Alphabet, e-commerce/Prime for Amazon.com and the iOS ecosystem for Apple – also creates wide moats around their businesses that should allow them to perform consistently through varying market conditions”.
However, Vitrano also says that the companies offer growth, making them unique to a lot of the traditional defensive holdings, which are usually considered to be ex-growth.
“Their growth is further enhanced by their position as platform companies that often make them the partner of choice for smaller companies,” she said.
Psigma Investment Management – “Tech companies have become consumer staples”
Daniel Adams, senior investment analyst at Psigma Investment Management, says the big technology companies have become increasingly like consumer staples due to the growing ‘necessity’ of their products.
“Tech can be divided into two you’ve got the high growth area which gets a lot of press in terms of the Ubers and the like, but in terms of the areas you’re talking about - Apple, Microsoft, and Alphabet - these are well established businesses now,” he said.
He says they should be considered defensive “because they have got extremely strong balance sheets and they’re almost like consumer staples in a way because people are so reliant on [their products].”
“They’re extremely cash generative, have limited debt, and most of them are starting to pay a yield now,” he says, highlighting that Apple, for example, has a dividend yield of about two per cent and has scope to increase this if they wish
“And in an income starved world I think that’s pretty attractive and given how much cash flow they’re generating each quarter I think that makes them fairly resilient.”
Sanlam FOUR – “US technology companies fit the [defensive company] bill”
Colin McQueen, co-manager of the Sanlam FOUR Stable Global Equity fund, agrees that technology companies can be seen as defensive, as long as they fit into certain criteria.
“For us we’re really looking for non-cyclical companies that can generate growing amounts of free cash come rain or shine with as little variation as possible across economic cycles,” he said.
“You want to have a recurring revenue stream and as little cyclicality as possible - the more predictable a business is the more confidence we can have.”
“The other thing you need is quite a strong return on capital. We’ve tended to find over time that the businesses that make higher returns on capital with relatively low reinvestment requirements performed best.”
“I think a lot of technology companies have those two characteristics to greater or lesser degrees,” he says, but warns that the valuation has to be right before a company can be seen as defensive.
“We think you need to have a reasonable valuation case to be considered a defensive company because we’ve seen lots of cases in the past where very high valuations for great businesses can come under pressure.”
Performance of eBay in 2016
Source: Google Finance
He highlights Microsoft, as mentioned above, and e-commerce giant eBay, as two he currently holds in his portfolio, that fit the bill as defensive holdings within the US tech space.
Kames – “Technology companies still are cyclical stocks”
Jonathan Parsons, investment manager in Kames’ North American equities team, says the companies mentioned (Apple, Alphabet, Microsoft and Amazon.com) all have quasi-monopoly status in their respective platforms.
However, looking at them as defensive stocks, he says “I’d categorise Apple and Microsoft as currently relatively defensive, strong stable cash generating businesses.”
For the others, he says that “absent continued innovation on their platforms, user engagement is likely to deteriorate – in this scenario their monopoly status would erode negatively impacting cash flows and other defensive characteristics.
“The tides of technology change over time so in the context of the broader market I expect all of them to trade as cyclical stocks.”
Premier Asset Management – “Some US stocks could be classed as quasi-monopolies, but by no means all”
Another warning investors to take note of the high valuations in the sector, and warning that not all tech companies are made equal, is Premier’s Simon Evan-Cook.
While some have defensive qualities, he says, even the best companies has a price where it becomes too expensive and therefore a poor, non-defensive investment,
However, he highlights Google as a “quasi-monopoly”, as it would take any potential rival company to the online search engine a lot of capital to set up with little guarantee of success.
“Not many have the resources to attempt it, and of those, not many would take the risk of trying. This gives Google something like a “natural monopoly”, and means they can generate higher margins than if they operated in a market where they were just one of 40 similarly-popular search engines.”
The likes of Amazon, Apple and Microsoft, he says, all have similar attributes, making them “more durable as businesses, and therefore giving them a defensive element as an investment as they have a better chance of surviving a recession”.
However, despite their size, he says they are still vulnerable to “Black Swans”, where a new technology quickly renders their service obsolete (like Kodak or Nokia).
“Or to political or regulatory shock, whereby regulators force change to encourage competition, or crack down on cross-border tax advantages,” he adds.
