Investment Highlights In 2020


Talk about a roller coaster ride of a year. For the first time in decades, almost every single person on this planet has had one thing on top of mind – Covid-19. Instead of dwelling on the negatives this year has brought – we get more than enough of this from the news – I want to focus in on one particular investment theme that has flourished during the pandemic. Technology.

Can you believe global technology equities were up almost 40% during the first 11 months of the year? We are currently in the deepest recession since World War II, yet the technology sector has behaved as if it were the internet bubble all over again. Before your thoughts start meandering back to the burst of that bubble in the 2000s, I must say that there are some differences this time. Notice how I have specifically refrained from using the most expensive words in the English language, “This time it’s different,” – John Templeton.


Technological advances

What makes this time different? Firstly, back then the markets crashed because of technology. This time the markets crashed despite tech. Second, global interest rates were rising in 2000 whereas now we have rates that are likely to stay super low for years to come.

Our technological advancements have also come a long way since the 2000s. Otherwise working from home would have been even more challenging and we probably wouldn’t have seen vaccine development/rollouts happening as fast as they have done.

So why have technology companies performed so well in this unique situation?

One reason is that interest rates have been slashed which means a high growth company’s future earnings are worth a whole lot more. Even if Apple expects to sell exactly the same number of iPhone’s in the future after rates drop, the value of the firm will increase. Apple is a decent example because Covid hasn’t materially changed the its long term sales prospects. Instead of pricing one share at 25 times earnings at the start of the year, the market is now willing to pay 37 times for its earnings. As a result, Apple shares increased by around 70% in first eleven months of 2020. Clearly, there are tons of variables affecting this share price but lower rates most certainly helped Apple become one of two companies to reach a US$2 trillion market capitalisation.

Stay at home stocks

Let’s now consider some other tech names which have not only benefited from lower rates but also Covid. This pandemic has sharply accelerated the adoption of online technologies as everyone was forced to move online for almost everything. Online adoption was already taking place long before Covid – albeit it at a slower pace – and those companies that recognised the transition early on were huge beneficiaries, pre and post Covid.

We all know who those beneficiaries are: Netflix for online video streaming, Facebook/Instagram for social media, Zoom for personal & business virtual meetings, Peloton for virtual exercise. Then of course there is Microsoft via online cloud (Azure) and virtual meetings (Teams) etc. and Alphabet (Google) via its cloud based services, Youtube video streaming and home-based products like Nest. Last but not least, there is Amazon which does just about everything, including online shopping, video streaming and possibly also manages your personal or business data in the cloud (AWS).

All of their share prices shot through the roof this year. You might have thought the “Stay at home stocks” outperformed Apple, but Apple actually outperformed many of these big Covid beneficiaries. The reality is that without understanding all variables affecting a company, trying to narrow it down to one or two factors is near impossible. Companies are bigger and more complex than ever before and there are simply too many moving parts especially when it comes to the fast moving area of tech.

Tech stocks account for 19% of global equities today and cannot be ignored. Yes, a large portion of that 19% consists of a few mega cap companies, many of which I have mentioned already. However, there is a massive pool of smaller, innovative companies that have the potential to be the next Amazon, the next Microsoft, the first US$10trn company.

Building portfolios

I would love to find one of those companies in its infancy but for an individual it’s like finding a needle in a haystack. Actually, John Bogle puts it perfectly: “Don’t look for the needle in the haystack. Just buy the haystack!”

This is what we do when it comes to building our portfolios. Our aim is to find best in class specialist portfolio managers to invest in our favourite themes such as tech.

Two of the technology funds we use are prime examples – Polar Capital Global Technology and Smith & Williamson Artificial Intelligence. Both funds are up around 50% this year and have more than doubled over 3 years. Yes, there have been structural tailwinds but the point is they have outperformed the technology indices and have achieved this using their deep sector expertise.

In summary, technology should be a key long term investment theme in anyone’s portfolio. Yet, as much as one wants to own a Netflix or Zoom to tell their friends about, it is probably not the right approach. As Warren Buffett famously said: “Risk comes from not knowing what you’re doing.” A far better investment approach is to take risk into account and diversify your tech allocation using specialised investment experts who do actually know what they are doing.

David Winckler

Associate Director – Investment Strategy