Owning technology stocks has never been more important as the digital economy takes hold. But gaining the right exposure is harder than it should be for Australian investors.
The ASX, dominated by bank and mining stocks, has low exposure to tech stocks. Although a rise of software floats in the past few years has created choice, the information-technology sector accounts for only 1.4% of the S&P/ASX 200 index.
Most Australian tech stocks are small or too speculative for portfolio investors. Many focus on a niche product or local markets; few are genuinely global companies exposed to key technology themes, such as cybersecurity or the Internet of Things (connected devices).
That is not to downplay the quality of some Australian tech stocks, or the opportunity. WiseTech Global, a 2016 float, has starred. The logistics software provider is well run, has good technology and an expanding global footprint. But WiseTech looks fully valued for now.
Freelancer, owner of a micro-jobs platform, is a contrarian idea after heavy falls this week. Disappointing earnings news this week, highlighted by flat revenue growth, drove Freelancer 23% lower. The former market darling has fallen by two thirds over 12 months as investors question its prospects.
For all the challenges, Freelancer has an excellent market position and the so-called “Gig Economy”, where self-employed people work on a project basis, is a boon for micro-jobs. It would not surprise to see small-cap fund managers start buying Freelancer shares; however, risks are rising and technology turnarounds are never easy.
Emerging financial-technology (fintech) star, Afterpay Touch Group, is another worth watching. Consumers use the company’s technology when they are ready to buy goods and split the payment over four equal fortnightly instalments. Afterpay quickly settles with the merchant and assumes all credit and fraud risk for the payment.
I see more merchants promoting Afterpay to customers, principally because it allows more customers, particularly those with credit issues, to buy goods.
It’s easy to avoid emerging tech stocks after they soar and hype abounds. Afterpay, due for a share-price pause or pullback, can go higher over the next 18 months.
Those seeking earlier-stage exposure to technology companies could consider Bailador Technology Investments. The well-run Listed Investment Company holds a small group of growth-stage private tech businesses.
Bailador traded at a 20% discount to its pre-tax Net Tangible Assets in June 2017, ASX data shows, even though it has achieved solid upward revaluations of several tech companies in the portfolio. I suspect low liquidity in Bailador stock is the problem.
Those seeking lower risk to tech trends could consider Asia Pacific Data Centre Group, a favoured niche listed-property trust I have written about several times for the Super Switzer Report in the past three years. Asia Pacific has an annualised three-year return of 29% and has been the subject of a takeover battle between NextDC and 360 Capital Group.
Asia Pacific Data, owner of state-of-the-art data centres, was spun out of NextDC. The trust is a more conservative way to play the cloud-computing boom compared to tech companies, but has extra risk as a property trust due to tenancy risk. (NextDC is its tenant).
However, the problem with these and other ASX-listed tech opportunities is they arguably have weaker prospects than global tech stocks on a risk-adjusted return basis.
Why buy speculative ASX-listed tech stocks when you can invest in FANG stocks (Facebook, Amazon, Netflix and Google parent Alphabet)? FANG stocks, killing it this year thanks to soaring revenue growth, are justifying their lofty valuations. Then there’s Apple Inc, Microsoft Corporation and other global tech stars.
My approach to global tech investing is twofold. First, take a fund approach rather than invest directly. Sophisticated investors might buy US tech stocks, but most should let professionals handle selections and the administrative complexity of investing offshore.
You don’t need to bet the farm on big technology winners. A diversified approach spreads risk and owning a selection of key tech stocks has delivered strong returns in recent years.
Second, gain tech exposure through ASX-listed funds or unit trusts. Australian fund managers have been slow to offer specialists global tech products for the local market. But that is changing as more Exchange Traded Funds (ETFs) and LICs come to market.
Consider these three strategies:
1. ETF approach
ETFs aim to replicate the price and yield performance of an underlying index. Achieving the “market return” is no bad thing when the NASDAQ Composite Index storms higher and reminds investors that passive investing can activate higher returns. It’s harder when markets fall and actively managed funds earn their fees.
Two ETFs, both from BetaShares, stand out. The BetaShares NASDAQ 100 ETF provides exposure to an index of the 100 largest non-financial securities listed on NASDAQ. More than half of the underlying index is in the information-tech sector.
The ETF has returned almost 25% over one year to June 2017. Currency is an important consideration given the ETF is unhedged; a rising Australian dollar is weighing on recent returns. Plenty of experts believe US equity markets have run too far, too fast.
I’d look to buy this ETF on any significant pullback or correction in the NASDAQ. It’s a simple, low-cost, diversified approach to gain exposure to the world’s best tech companies.
The BetaShares Global Cybersecurity ETF (HACK) is an interesting newcomer. HACK aims to track the yield and performance of the NASDAQ Consumer Technology Association Cybersecurity index, before fees and expenses. The index has a high weighting in cybersecurity-related companies, such as Check Point Software Technology, Symantec Corp, Cisco Systems Inc., and Palo Alto Networks Inc.
Cybersecurity is a boom market as more data is captured, stored and analysed, and as more cyber-attacks emerge. Researcher Cyber Ventures recently predicted that global spending on cybersecurity will exceed US$1 trillion over 2017-2021. Firms will spend more than US$120 billion this year alone on cybersecurity, up 35 times in little over a decade.
Chart 1: BetaShares Global Cybersecurity ETF
Source: ASX
2. LICs/ Quoted Funds
The new Evans & Partners Global Disruption Fund is a timely solution for Australian investors who want exposure to companies that benefit from industry disruption.
The LIC intends to own companies that utilise new technology to disrupt existing markets.
About four fifths of the portfolio will be in overseas companies.
The LIC has an excellent investment committee and Evans & Partners has a good reputation in global investing and in spotting disruptive companies. The Global Disruption Fund debuted at a small premium to its issue price – a good effort for an LIC IPO.
Investors are backing the Global Disruption Fund to spot ‘disrupters’ and buy them when they trade below fair value. That’s hard work. The fund has almost no record as a listed entity, so conservative investors might wait until there is more performance data. Experienced investors seeking exposure to offshore disrupters could consider a small portfolio allocation to the fund.
The Magellan Global Equities Fund (MGE) is another option. The quoted managed fund comes from one the market’s best global equities managers, but with only a third or so invested in technology companies it may not offer the specialist tech exposure investors require.
Chart 2: Magellan Global Equities Fund (MGE)
Source: ASX
3. Unit trusts
Surprisingly, few Australian unlisted managed funds specialise in the global technology sector. Several have tried over the years, but the tech crash in 2000 sapped enthusiasm for global tech stocks and Australian funds that invested in them.
The Platinum International Technology fund returned 24% over one year to June 30, 2017, but below the 31% return in its benchmark index (in Australian dollars).
About 60% of the Platinum Fund is invested in US and Asian tech stocks and key holdings include Alphabet Inc, Samsung Electronics and Tencent Holdings.
The fund comes from a well-regarded manager and has a good investment strategy. However, underperformance against its benchmark index over five years is an issue – and another reason why more investors are choosing low-cost index exposure over active funds.
Still, Platinum over the years has had a habit of reversing periods of underperformance with strong outperformance, making its fund to watch for investors who want diversified exposure to the world’s best tech companies through a unit-trust approach.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Aug 2, 2017.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
