This article was produced in collaboration with Franklin Templeton. All views expressed in the article are the independent opinion of DollarsAndSense.sg.
Technology has infiltrated countless aspects of our daily lives today. Most prominently, many of us would be familiar with the brands, products and services of these five global technology companies – Facebook, Apple, Amazon, Netflix and Google (Alphabet).
For investors, these technology giants form the famous group of FAANG stocks listed in the US. Together, they have a combined market capitalisation of over US$3 trillion, which is more than 4 times the size of all 741 listed companies on the Singapore Exchange (SGX) as of end 2018.
While these are the biggest and most famous technology companies in the world today, they are, by no means, the only technology companies we can or should be investing in. The fact is that:
# 1 There are many other renowned technology companies also at the forefront of their industry, including Microsoft, Alibaba, Mastercard, Oracle, Salesforce, Tencent, Paypal, Proterra, HP and many others.
# 2 All business sectors, including transport, career-related, retail, entertainment, financial, education and many more, will be impacted by digital innovation. This means the brick-and-mortar incumbents either have to embrace technology or be disrupted by new businesses.
# 3 The next age of digital transformation is upon us. More companies are leveraging on growth themes in artificial intelligence, cloud computing, the internet of things (IoT) and e-commerce. These are the companies we should also keep tabs on.
Why Invest in Technology Companies?
On the back of uncertainties in interest rate hikes by the US Federal Reserve as well as the risk of a trade war and escalating US technology-related tariffs, the markets experienced heightened volatility in the tail-end of 2018.
Nevertheless, the outlook for technology companies is still healthy, bolstered by enterprise spending in digital solutions to ensure they remain relevant, stable consumer spending in smartphones and PCs, as well as growing interest in media and gaming.
Besides being a part of our everyday lives, technology companies have also become more profitable. Over the past 20 years, the average earning per share (EPS) of technology companies listed in the S&P 500 Index has more than tripled. This shows that technology companies have managed to fulfil its potential by boosting its earnings.
Source: Franklin Templeton
Depicted in the chart below, companies in the information technology sector on the S&P 500 Index have healthier cash positions and are not burdened with much debt. In a rising interest rate environment, while companies in other sectors may be discouraged from borrowing funds to grow their business, technology companies will still have the financial muscle to do so.
Source: Franklin Templeton
How Do We Start Investing in Technology?
There are three main ways we can invest in the technology wave – 1) on our own, 2) investing in technology ETFs and 3) investing in technology funds.
Investing in technology companies on our own can be quite challenging, especially if we do not have sufficient knowledge to select the right companies, or lack the time and expertise to monitor the performance of our portfolio. Furthermore, we may not be able to diversify our portfolio if we do not have a large amount of capital to invest in the first place.
Sure, we could stick to investing in the tried-and-tested blue-chip technology stocks, but these companies have already enjoyed significant price appreciation in the recent years. In addition, we won’t be able to judge whether we should be selling them off, we won’t be able to add new companies into our portfolio and we may not be sufficiently well-diversified.
Investing via a technology ETF may solve some of these problems. However, the technology sector is volatile and fast-paced, with companies being able to take great strides or face setbacks in a relatively short time span. Further, technology companies also bear the brunt of new or changing regulations.
This is where professional active fund managers have the advantage of having access to more information and being able to react quicker. Fund managers are able to gain insights on the prospects of companies by being on the ground interacting with industry insiders as well as building a deep understanding of the technology industry over decades, and are able to rebalance their portfolio to navigate risks or capture new opportunities. ETFs are not able to move as quickly, being passively managed and rebalanced only on a quarterly or semi-annual basis.
Another drawback of ETFs is that they typically comprise stocks based on their market capitalisation and past performance, rather than future growth prospects. This means ETFs tend to be exposed to large companies that may have already seen their best periods of growth. Active managers are benchmarked against indexes, which means they are incentivised to look beyond FAANG stocks and invest in companies that have the potential to outperform.
One such fund manager is Franklin Templeton, who manages the Franklin Technology Fund. Created in April 2000, this fund has a long track record and has shown staying power. It has also been awarded the “Best Equity Sector Information Tech Fund over 10 Years” by Thomson Reuters Lipper Award 2018, and received a Morningstar rating of 5 Stars 97% of the time since July 2016.
With a fund size of US$2.5 billion, its assets under management (AUM) has more than doubled since 2017. This highlights an increased investment interest in the fund.
Compared to the index, the Franklin Technology Fund has been able to outperform across multiple time periods and remained resilient even through the volatility in 2018.
Source: © 2019 Morningstar, Inc. All rights reserved.
One of the reasons for the fund’s competitive past performance against the index is that it’s broadly diversified. The fund’s top 10 holdings only account for 36.14% of the portfolio with the remainder spread across 68 other companies whereas the top 10 holdings account for more than 51% of the MSCI World Information Technology Index.
Source: Franklin Templeton
The fund also invests in high-quality, undervalued, emerging leaders that embrace themes such as e-commerce, artificial intelligence and machine learning, Internet of Things, cloud computing services, and technology-driven financial products and services (fintech) while being underweight in enterprise hardware, telecom equipment, consumer electronics and legacy services and systems.
Those who are interested to find out more about the Franklin Technology Fund can do so on the Franklin Templeton website. Those who want to invest can do so with a minimum of just $1,000 via these online platforms: Phillip Capital, FSMOne, or dollarDEX.
Please visit Franklin Templeton website for the Fund’s key risks.
1. Fund’s After 5% Sales Charge Annualised Performance: 13.57% (Jan-Feb 2019), -3.67% (2018), 33.00% (2017), 3.67% (Since Inception)
Past performance is not an indicator or a guarantee of future performance. Performance data as of 28 February 2019, source: © 2019 Morningstar, Inc. All rights reserved. Fund performance data is for Franklin Technology Fund A (acc) USD, shown in NAV-NAV, in share class currency, include reinvested dividends and are net of management fees. Other commissions, taxes and other relevant costs paid by the investor are not included in the calculations. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, your performance may also be affected by currency fluctuations. Indices are unmanaged and one cannot invest directly in an index.
2. Source: Franklin Templeton, as of 28 February 2019.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
Franklin Technology Fund is a sub-fund of Franklin Templeton Investment Funds (“FTIF”), a Luxembourg registered SICAV.
This article is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it.Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested.
Investors may wish to seek advice from a financial adviser before making a commitment to invest in shares of the Fund. In the event an investor chooses not to seek advice from a financial adviser, he/she should consider whether the Fund is suitable for him/her.
Please visit Franklin Templeton website for Prospectus and Product Highlights Sheet.