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Varied exposure to Big Tech

The FAANGs and their peers are risky bets – but investors can gain exposure indirectly
April 25, 2019

The phrase ‘Big Tech’ conjures a sense of homogeneity; one that arguably belies the uniqueness of each of America’s publicly listed technology giants. Between them, the so-called ‘FAANG’ stocks – Facebook (US:FB), Apple (US:AAPL), Amazon (US:AMZN), Netflix (US:NFLX) and Alphabet (US:GOOGL) – and their colossal peers span industries from social media, to online retail, to subscription-based TV. And the sector is only becoming larger and more multifaceted as new players enter the fray. Disney’s (US:DIS) plan to launch its own streaming platform offers a case in point.

Such variety creates a plethora of opportunities for those seeking to buy into big tech. But it also makes for a complex investment universe. And that’s before considering the intensifying political, social, economic and internal pressures facing these companies today.

Greater scrutiny

America’s tech titans made a name for themselves as fast-growing, disruptive innovators. However, further disruption may now be kept in check due to heightened regulatory scrutiny. While Facebook has endured headline-grabbing privacy issues, Alphabet – Google's parent entity – was fined €50m (£43m) in France in January 2019 under the European Union’s new data protection rules (GDPR). The search-engine giant has, additionally, been penalised by the EU for breaching antitrust regulations. And in April 2019, the UK government issued its Online Harms white paper – proposing “ambitious plans for a system of accountability and oversight for tech companies, moving far beyond self-regulation”.

Slowing down?

We have also seen hints of slower growth in certain markets – something brought to the fore by Apple’s shock first-quarter revenue warning. The group cited lower-than-expected iPhone sales, “economic deceleration” in China and fewer iPhone upgrades than it had anticipated.

Promising themes

Notwithstanding its challenges, Big Tech still constitutes very positive trends in younger, rapidly-developing markets – as exemplified by Apple’s services offering, which enjoyed record revenues of $10.9bn (£8.4bn) for the three months to December 2018 (up by 19 per cent year over year). As another earnings season gets under way, all eyes are likely to be on these more positive themes.

 

 

Big Tech direct

Some may simply prefer to buy the shares directly – although such an approach is, of course, high risk. To hold US stocks, UK residents must fill in a 'W-8BEN' form. This enables investors to save up to 30 per cent tax on income from their respective shares. But there will also be a foreign-exchange charge on trades, and – even if the shares are held in an individual savings account (Isa) – they won't necessarily have the same tax benefits.

Diversification

Funds and trusts can offer greater diversification than straight-up share ownership. The level of diversification does, of course, depend on multiple factors.

By way of illustration, Baillie Gifford’s Scottish Mortgage Investment Trust (SMT) – a global equity fund – invests in multiple sectors, but has a high allocation towards technology. Amazon, Netflix and e-commerce specialist Alibaba (US:BABA) sat among its top 10 constituents as at 31 March 2019. And its annual share price performance to the same date came in at 16.5 per cent, against the benchmark’s 10.7 per cent. That said, as the standard warning goes, past performance is by no means a guide to future performance.

Meanwhile, The Polar Capital Technology Trust (PCT)*, managed by Ben Rogoff, “aims to maximise long-term capital growth through investing in a diversified portfolio of technology companies around the world”. The fund’s cumulative share price performance sat below its benchmark on a one-year basis as at March, but outperformed over two and five years. The Allianz Technology Trust (ATT)*, run by Walter Price, constitutes another tech-focused strategy. It has outpaced its benchmark over one, three and five years.

 

Indirect investment

Beyond diversification, funds and fund-like vehicles can enable investors to gain exposure to the more encouraging, faster-growing parts of big tech companies indirectly, through ownership of other stocks.

For example, Microsoft’s (US:MSFT) ‘Azure’ cloud-computing division is arguably its most exciting and high-potential offering. And fund manager Jeremy Gleeson notes that the AXA Framlington Global Technology Fund (GB00B4W52V57) has been able to access this business without owning Microsoft in its entirety.

The fund’s holdings include Arista Networks (US:ANET) – a provider of cloud-networking software, which supplies equipment to Microsoft for Azure. It also has shares in Proofpoint (US:PFPT) and Mimecast (US:MIME), both of which are helping to secure Microsoft’s ‘Outlook 365’ cloud-based email customers against cyber threats.

Another holding, Red Hat (US:RHT), is the world’s leading provider of enterprise open-source software solutions, and is benefiting from companies coming off their own data centres and moving onto the cloud – whether that’s Microsoft’s platform, or other peers’. That said, IBM (US:IBM) announced its acquisition of Red Hat last October, in a deal valuing the latter at around $34bn. This is expected to complete in the second half of 2019.

 

UK plays

Some might prefer to invest in UK-listed companies that have exposure to, or that could benefit from, positive trends in US big tech. The content market comprises one such arena.

Netflix’s first-quarter numbers – released earlier this month – offered encouraging glimmers. The streaming giant enjoyed record paid net adds (new subscribers) of 9.6m, up 16 per cent. But it also guided towards an 8 per cent decline in year-on-year net adds in the second quarter, coming in at 5m.

On top of this, would-be shareholders may balk at the prospect of intensifying competition. Aside from Disney, Apple has also announced its own subscription-video platform – although, in fairness, Netflix said it was “excited to compete” with both, and that it didn’t expect these to “materially affect” its expansion, partly because of their different offerings.

In any case, those yet to be convinced could look elsewhere. Netflix itself noted that “the clear beneficiaries will be content creators and consumers who will reap the rewards of many companies vying to provide a great video experience for audiences”. And that’s where IC buy tip Entertainment One (ETO) – whose content library stood at $2bn at last count – could reap rewards. As more streaming channels emerge, the group’s transition away from third-party distribution and towards production should stand it in good stead.

 

 

*IC Top 100 Fund