- The UK and Europe have few tech giants, but you can look further down the cap scale
- Consider Asia or global tech funds with a broader remit
- Be mindful of concentration risk
It’s hard to stay clear of the US when thinking about tech investing. Almost all the sector’s giants are listed there, and the MSCI World Information Technology index has 88 per cent of assets in the country.
The US tech sector boasts some impressive companies that have delivered spectacular returns in the past, but their size and popularity also mean they are prone to becoming expensive. It’s hard to know whether to trust the Nasdaq’s recent rally, for example.
But from Europe to Asia, there are funds that can help investors gain exposure to the sector in less obvious ways.
UK and Europe
As James Yardley, senior research analyst at Chelsea Financial Services, puts it: “Europe and the UK are severely lacking in tech opportunities.” As at May 2023, the FTSE All-Share index had a meagre 1.1 per cent exposure to the sector, and with Cambridge-based chip giant Arm set to list in the US, this does not look as though it is about to change any time soon. The MSCI Europe ex-UK index has a higher level, with 10 per cent exposure, but is still well behind the 28 per cent of the S&P 500.
However, it partly depends on how you define a technology company. For example, you could argue that Ocado’s (OCDO) robotic warehouse makes it a tech business, Yardley notes.
Nick Train, manager of the Finsbury Growth & Income Trust (FGT), recently argued that portfolio managers must find ways to offer clients exposure to “the secular growth and, often, exceptional profitability of companies that are winning with technology”. In the UK, he notes, such winners are rare, but not non-existent. The trust has a circa 40 per cent exposure to five companies – Experian (EXPN), Hargreaves Lansdown (HL.), London Stock Exchange (LSEG), Relx (REL) and Sage (SGE) – that while nominally operating in other sectors, have a strong tech basis, and are well positioned to use artificial intelligence to improve their products.
On a similar note, the Close FTSE Fund (GB00B87JKQ15) tracks the FTSE Focus Index, which comprises companies listed on the London Stock Exchange that are “involved in the innovative technologies that are shaping the future”. About two-thirds of them are not strictly tech companies, making the fund “a bit of a strange beast”, according to Laith Khalaf, AJ Bell head of investment analysis.
“While the UK is devoid of any technology leviathans like the US, there are opportunities further down the cap scale,” Khalaf adds. “The MSCI UK Small Cap index has around 7 per cent exposure to the technology sector, which is small by US standards but considerably more than the sub-1 per cent representation in the FTSE 100.”
Herald Investment Trust (HRI), which invests in global smaller quoted companies in the telecommunications, multimedia and technology sectors, has a 41.6 per cent exposure to the UK, and some of its top holdings include UK-listed Diploma (DPLM), Next 15 (NFG), Idox (IDOX) and YouGov (YOU). Among the UK-focused trusts investing in smaller companies, abrdn UK Smaller Companies Growth (AUSC) and Henderson Smaller Companies (HSL) have a comparatively bigger exposure to tech at 13.8 per cent and 12.7 per cent, respectively.
The biggest tech company listed in continental Europe is ASML (NL:ASML), which produces lithography machines for making semiconductors, and which Yardley notes is “a favourite” among fund managers. Funds with solid exposure to the sector include Allianz Europe Equity Growth (LU0604763499) and CT European Select (GB00B8BC5H23), at 24.5 per cent and 18.3 per cent, respectively, both of which have ASML as their biggest holding, as well as BlackRock European Dynamic (GB00BCZRNN30). On the investment trust front, both European Opportunities Trust (EOT) and BlackRock Greater Europe (BRGE) have a decent tech overweight.
For investors who are happy to consider the riskier world of growth capital, Molten Ventures (GROW) focuses on European tech companies, and Augmentum Fintech (AUGM) on fintech companies, a number of which are UK-based.
Khalaf also cautions that while some ETFs track specific regional technology markets, including Europe, they can hold some punchy positions in individual stocks and need to be handled with care. This is one of the risks of investing in tech via markets where there aren’t many companies to choose from.
Asia
The most promising tech companies outside the US are listed in Asia, with names such as semiconductor giant Taiwan Semiconductor Manufacturing (TW:2330) in Taiwan, Samsung (KR:005930) in Korea, and Alibaba (HK:9988) and Tencent (HK:700) in China.
Mark Preskett, senior portfolio manager at Morningstar Investment Management Europe, likes Korea, whose national index has a higher exposure to information technology (30 per cent) than even the S&P 500. “A key advantage for us is the significant valuation discount you receive for investing in Korean technology relative to US technology,” he says. “Apple is trading at a 30 times price/earnings multiple while Samsung is on 11 times earnings – so nearly one-third the valuation for a firm which has a more diverse product offering.” Funds he likes in the space include Barings Korea (GB00B9M3RQ49) and Franklin FTSE Korea UCITS ETF (FLRK).
Japan is an artificial intelligence and automation hub, with companies such as Fanuc (JP:6954) and Keyence (JP:6861). AXA Framlington Japan (GB00B7FSWP64) has a 21.3 per cent exposure to the tech sector, against FTSE World Japan index's 11.1 per cent.
For a broader country exposure, Schroder AsiaPacific Fund (SDP) at the end of May had Samsung, TMSC and Tencent as its three top holdings and 32.1 per cent allocated to the sector. The two biggest emerging markets investment trusts, Templeton Emerging Markets (TEM) and JPMorgan Emerging Markets (JMG), are overweight in tech.
A slightly unconventional, low-cost option is Legal & General Future World ESG Emerging Markets Index Fund (GB00BL6C2119), a tracker which invests according to a range of environmental, social and governance (ESG) criteria. Looking at ESG funds can generally be a way of finding ones with a higher tech exposure, as sectors that are considered less ‘clean’ are screened out or have their allocation reduced.
All in all, “beyond picking individual stocks, it’s difficult to gain exposure to these areas using funds, which tend to invest globally, therefore including a very heavy slug of American firms,” as Khalaf notes. If you accept this but would prefer a global fund that is less skewed towards the US, the Fidelity Global Technology Fund (LU1033663649) has a 62.9 per cent allocation to the US against MSCI ACWI Information Technology Index's 80.1 per cent, in favour of Europe, emerging markets and the UK.
