Traditional technology stocks can offer more attractive valuations and greater yields than the popular internet companies that have dominated the sector more recently, according to Fidelity International’s Dan Roberts.
Blue chip technology stocks have been some of the best performers over the past couple of years, but have slowed more recently, fuelling concerns over a potential bubble in markets.
The S&P 500 Information Technology sector has risen by 101.3 per cent over three years compared with a 69.23 per cent rise in the broad blue chip index.
Performance of S&P 500 vs S&P 500 Information Technology over 3yrs
Source: FE Analytics
However, Roberts, manager of the £842m, four crown-rated Fidelity Global Dividend fund, said while attention has been focused on the fast-growing technology giants, other income opportunities may have been overlooked.
He said: “When it comes to technology stocks, it is undoubtedly the rapidly growing and fashionable ‘FAANG’ stocks which have attracted the most attention in recent years.
“Companies such as Facebook, Amazon, Apple, Netflix and Google have grown exponentially, adding over $250bn of market cap so far this year. Remarkably, this is broadly comparable to the annual GDP of Chile.
“These headline performance figures may be impressive, but the fact that many of these tech companies don’t tend to pay a dividend means that the wider sector can often be overlooked or under-represented in global equity income portfolios.”
Information technology stocks represent 11.6 per cent of the fund’s total net assets, although this represents an underweight position in the portfolio.
However, Roberts said the sector “has proven to be a relatively fertile hunting ground” although it has been focused on ‘old’ tech stocks.
He explained: “This area looks less exciting than the new wave of tech giants but provides a more interesting opportunity set for valuation-aware dividend investors.
“As more mature businesses within the sector, they have ‘grown up’ to dominate their fields and display a number of attractive attributes: well-established, diversified businesses, recurring revenue streams with plenty of cash on the balance sheet, proven track records, and a strong history of paying consistent dividends.”
The manager (pictured) said as prospective growth rates for old tech stocks have fallen, valuations have become more attractive.
“This is in stark contrast to the FAANG stocks where it is questionable whether there is sufficient earnings support in the underlying businesses to warrant current valuations,” he added.
The FAANG stocks are among the fund’s most prominent underweight positions, representing a 0 per cent weighting in the portfolio.
Instead, Roberts uses a bottom-up approach to identify and invest in companies offering a healthy yield underpinned by a growing level of income. The manager places greater emphasis on the sustainability of the dividend and whether the current share price provides an adequate margin of safety, according to the asset manager.
“At the individual company level, Microsoft is a good example of an old tech company which offers investment potential,” he said.
“Microsoft has been a significant holding in the fund since launch – a period where it has continued to successfully transform its business to the new world of cloud and subscription.”
He added: “That said, it still enjoys a very strong market position in the PC industry where the Windows operating system and Microsoft Office continue to generate enormous profits for the company.
“This is clearly a more mature industry but it provides strong recurring revenues; while individuals may switch to cheaper or free products for their home computers, the cost to businesses of switching remain high.”
Roberts said that US semi-conductor manufacturer KLA-Tencor was another example of a “relatively ‘boring’ company that offers exciting return prospects”.
He explained: “It is a world leader in its space and is therefore ideally positioned to benefit from strong demand - more advanced semiconductor technology demands due from smartphones and tablets, for example, means a greater need to invest in KLA’s products. It is also entering a new product cycle which supports its nearer-term outlook.
“At the time of purchase in October 2016, it offered many of the characteristics that we look for in a stock - an attractive valuation, a healthy balance sheet with strong cash conversion and an excellent track record of capital allocation.
“Like Microsoft, the strength of KLA’s underlying business - steered by a capable management team - means it is well positioned to sustainably grow both its earnings and dividend payments to shareholders over time.”
The Fidelity Global Dividend fund has been overseen by Roberts since launch in 2012. Since then, it has delivered a return of 118.17 per cent compared with a 102.99 per cent rise in the MSCI AC World benchmark and an 84.44 per cent gain for the average IA Global Equity Income sector peer.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
The fund has a concentrated portfolio that currently consists of 53 stocks, with its largest sector positions including consumer staples, industrials, financials and healthcare as well as technology.
The manager is described the FE Invest team as a “patient investor who is ready to back his investment conditions against the market” with a long-term approach to valuation.
“We believe this fund is a no-brainer for cautious investors searching for a global source of dividends,” the FE Invest team noted.
The fund is also a member of the FE Adviser Fund Index (AFI) Balanced and Cautious portfolios, chosen by a panel of UK financial advisers.
It has a historic yield of 2.79 per cent and an ongoing charges figure (OCF) of 0.97 per cent.