One of the bravest things one can do is hold on to a technology stock despite the sector’s notorious reputation for burning some investors.
Indeed, Allianz Technology Trust’s Walter Price said it is often too difficult to try to time the market and this can lead to some expensive mistakes.
Markets have been led by fast-growing technology companies over the past decade – predominantly in the information technology, internet-related space – as they have generatd extremely strong returns.
As the below chart shows, the MSCI ACWI Information Technology index has delivered a total return of 425.70 per cent over the past decade, in sterling terms, compared with a 320.88 per cent rise for the MSCI ACWI Technology Hardware & Equipment index.
In comparison, the broad MSCI AC World index – where the IT sector represents 20.23 per cent of the index composition – has returned 191.27 per cent.
Performance of indices over 10yrs
Source: FE Analytics
However, the strong growth in markets has led some investors to question whether the boom in technology stocks is sustainable over the long term.
Price (pictured), who oversees the £514.8m, four FE Crown-rated Allianz Technology Trust, said while his team is able to accurately predict some industry trends it is not very good at timing valuation cycles.
“As long as the companies are continuing to grow at our forecasted rate, we’ve basically continued to hold our position,” he said
“We haven’t really sold them down just because they’ve got more expensive and the rationale is that these companies are actually undervalued.
“They’re building the infrastructure of the world for the next 20 or 30 years and they may seem expensive on a price-to-sales ratio but on a long-term view these are going to be annuities.”
Indeed, the Allianz manager said such companies will be “embedded in the infrastructure of the world” and generating cash and profits for the next couple of decades.
Prince said: “I’m kind of reluctant – because the valuation has gotten a little ahead of itself – to cut back on a position.
“I know I’m going to be kicking myself just like I was with Amazon. I never really got the full position back; I took it back up but not to the level it was a couple of years ago.
“I should’ve just ridden through the little bit of slowdown we saw in that company.”
Indeed, that experience has led Allianz Technology Trust to hold on to positions in companies such as card payment processing company Square, where he has seen strong returns but is not yet willing to divest.
High valuations have also been seen in a number of new initial public offerings (IPOs) in the sector, although this can be a double-edged sword for investors, according to Price.
“The IPO market is hot,” he explained. “The most expensive stocks are the recent IPOs; they are more expensive than the other stocks. I’m scratching my head at that.
“It hasn’t prevented me from buying a few new companies but I’ve had to hold my nose on the valuation and add another year to the returns time frame to get the numbers to work.”
Price said US cloud vendor Pivotal was an example of a recently-listed company that had struggled to live up to its valuation.
Performance of stock since IPO
Source: Nasdaq
The manager explained: “The first quarter was great and the stock did fine. Then in the second quarter it only grew by 30 per cent and was supposed to grow by 50 per cent.
“The stock got hammered. It was down 20-30 per cent in a day.”
Price said investors need to be careful, noting that there are not many companies able to grow at the high double-digit levels many analysts expect the stocks to deliver.
More recently, the manager has been taking exposure out of the semi-conductor sector, which has been instrumental in driving the demand for and growth of web-based services over the past decade.
Semi-conductor companies and other hardware businesses remain under pressure, he noted, due to their exposure to China and the increasingly troubling language coming from the Donald Trump administration.
“We‘ve taken down our position in some of those key companies on the industrial side of the revolution,” he said.
“The industrial side almost by necessity had a lot of business in China and so that business is slowing. The new business we think will occur outside of China hasn’t really started yet or is just starting.
“We think those will be good stocks to come back to or build positions in as we get into 2019.”
New plants to be built outside of China will likely offset some of the risk associated with the country as trade discussions continue, but some share prices have come under pressure, according to the manager.
Indeed, Price remains bullish on the software service area as companies are likely to continue moving towards cloud services, given the savings and other advantages of becoming fully digital.
He concluded: “Companies are not going to give up those benefits but they increasingly see and are realising in some cases they’re going to continue on that path, so we feel pretty good about our positioning for the next year or so.
“We would have to have a pretty bad recession to derail some of the fundamentals of our companies.”
Since Price took over Allianz Technology Trust in April 2007, it has delivered a total return of 589.58 per cent compared with a gain of 304.62 per cent for the average IT Tech, Media & Telecomm sector trust.
Performance of trust vs sector under Price
Source: FE Analytics
The trust is currently trading at a premium to net asset value of 1.5 per cent, is not geared and has ongoing charges (including performance fees) of 1.15 per cent, according to data from the Association of Investment Companies.