Investing in tech might bring companies such as Facebook and Google to mind, but Fidelity Personal Investing’s Toby Sims says there are other interesting opportunities to gain exposure to the sector. 
Tech stocks – and so-called FAANGs (or Facebook, Amazon, Apple, Netflix and Google parent Alphabet) – have led the market rally over recent years and become mainstay holdings of many portfolios.
The FAANGs and other mega-cap tech stocks have grown to represent large parts of the index. Facebook, Amazon, Apple, Microsoft, Alphabet and Tesla now account for 49 per cent of the Nasdaq 100’s total value, while the first five of those companies have been behind one-quarter of the S&P 500’s rise since the March lows (Tesla is not part of this index).
Fidelity’s Sims said: “Though tech is by all accounts here to stay, there is no guarantee that these stocks are too. Even if you can’t imagine a future without them, it’s companies’ valuations that matter most to investors.
“And with many ploughing their money into the same big-name stocks, often there’s little scrutiny over whether these firms’ fundamentals justify their sky-high prices - and it’s also allowing plenty of other opportunities in the tech space to go under the radar.”
Below, Sims highlights three themes that would allow investors to broaden their tech exposure from US mega-cap tech stocks.
Robotics
The adoption of sophisticated robots and automation is seen as an instrument of profound societal and business change, which has only accelerated during the coronavirus pandemic. The robotics & automation sector is expected to be worth $353bn by 2024.
Sims said: “No longer confined to advanced economies or the factory floor, it’s long been accepted that robotics is only going to become more prevalent in our lives going forward. Several funds focus specifically on this sector, aiming to capture the growth of companies driving the charge into an automated future.”
He highlighted Pictet Robotics as one of the obvious ways to take exposure to this theme. Managed by Peter Lingen and John Gladwyn, the $6.6bn fund is one of the largest in the space and has a strong track record, making a total return of almost 180 per cent since launch in October 2015.
Performance of fund vs sector and index since launch
Source: FE Analytics
But a specialist fund isn’t the only way to add exposure to robotics. Sims pointed out that Matthew Brett’s £3.3bn Baillie Gifford Japanese fund considers robotics to be an important long-term tech theme as Japan is at the forefront of the robotics revolution.
On robotics, Brett said: “It feels a bit like the internet did 15 years ago, where it’s relatively easy to see that robotics could be more significant than it is today.
“But we’re still at the early stages, moving away from robots being used to make cars in developed countries into the whole matrix of opportunity in new industries and moving outside of the developed countries.”
Artificial intelligence
One of the other major tech trends in play today is the growth of artificial intelligence (AI). Like robotics, this is another technology with the potential to lead to widespread changes across society.
Sims highlighted Chris Ford’s £487m Smith & Williamson Artificial Intelligence fund as an option for including this in a portfolio — in more way than one.
Performance of fund vs sector since launch
Source: FE Analytics
“The fund practices what it preaches. Its managers rely upon a bespoke AI-driven screening process to identify companies which make use of AI in their business models (their tool literally scans company documents to identify keywords and ‘markers’ of AI use), and then draw on their own expertise to whittle down the data-driven shortlist to a small selection of companies best suited to their concentrated portfolio,” the Fidelity strategist explained.
“The fund has a global reach and is fairly sector-agnostic, meaning it has the utmost freedom to scour all markets to seek out the best AI-driven opportunities around the world.”
He added that this approach leads to “a truly globally diversified portfolio” where large US tech names such as Alphabet and Tesla sit next to the likes of online food delivery company Ocado and German software firm SAP.
ESG
Sims conceded that environmental, social, and governance (ESG) investing is less overtly technology-orientated than robotics or AI, but added that it might appeal to those looking for alternative tech companies to the bigger names in the space.
He added that ESG funds tend to be “inherently forward thinking”, which means they are more likely to be invested in companies that are developing solutions to today’s problems and building towards a sustainable future.
The Fidelity analyst highlighted funds such as Baillie Gifford Positive Change, which aims to “deliver positive change by contributing towards a more sustainable and inclusive world”. It has also been one of the strongest performing global equity strategies this year.
Performance of fund vs sector and index since launch
Source: FE Analytics
“The fund’s webpage has a tool which calculates the positive impact your investment has had — input the amount you’ve invested, and the calculator will tell you, among other things, how many tonnes of CO2 emissions you’ve avoided, how many people you’ve delivered mobile and digital services to, and how many you’ve enabled to ‘send, save and spend money on healthcare services’,” he added.
However, Sims stressed the need for investors to check ESG funds’ top holdings before they invest as some can still hold companies that might not be completely aligned with an individual’s personal values.