A global fund manager has advised investors to look beyond the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) and Microsoft when looking to make a portfolio allocation to the technology sector.
To this end, Janus Henderson Investors said individuals should acknowledge the inherent nature of the technology sector.
“The beauty of the technology sector for an active investor is while technology trends can be very long term, they never stand still in terms of technology or winning franchises,” the manager said.
“Apple was once a plucky start-up taking on the deep blue behemoth of IBM with the famous 1984-themed Superbowl ad, but today it is Fortnite’s developer, Epic Games, parodying that ad to complain about the dominance of the Apple ecosystem.
“Assuming that the technology winners of today stay the winners of the tomorrow does not have history on its side.”
Janus Henderson Investors used the popularity of electronic payment facilities as an example of an area where previously unknown technology stocks have flourished.
“The shift from cash to plastic and the required back-end payment rails that [trend] required gave birth to Visa and Mastercard. The advent of e-commerce and then mobile payments fostered new winners such as Paypal, which recently surpassed the market capitalisation of Bank of America,” it noted.
However, it warned investors against thinking any stock in the sector will succeed based on innovation alone and company fundamentals needed to be assessed before any share purchases are made.
“These long-term winners do not grow on trees and yet markets and insatiable investor appetite for niche thematic funds would have you believe that there are countless next-generation FAANG companies in the making,” it said.
“We disagree and as long-term experienced technology investors, we believe this reflects investor overconfidence and excessive optimism.”
Instead, it suggested individuals navigate the “hype cycle” and adhere to valuation disciplines that incorporate the real profits and cash flows of the corporations being considered