AXA Framlington Global Technology Fund
Economic gloom and geopolitical mayhem won’t deter the megatrends driving the tech sector
- Tech stocks have suffered as sentiment turned risk off and investors moved away from growth
- Positive earnings data demonstrates the underlying strength of our holdings
- We believe the long-term drivers of growth and profitability in the tech sector will continue beyond the current market disruption
Living through interesting times
It has been a tumultuous start to the year for investors. Rising inflation and the monetary tightening from central banks in response have reduced the allure of growth stocks, while geopolitical events and a general sense of economic gloom have dampened investor appetite for risk.
This has weighed on the tech sector in particular, and as a result, the AXA Framlington Global Technology Fund has, in common with peers, been down over 2022 so far. Over the year to date, the Fund has returned -24.7%, while the benchmark MSCI World Information Technology index return has been -21.6% (Source: Factset/Morningstar as at 30 June 2022, in sterling terms, A GBP share class, net of fees and with dividends reinvested).
Sustained drawdowns obviously encourage us to look again at our assumptions and re-assess: does the investment case for tech still stand up?
We think it does.
Strong fundamentals contradict the negative sentiment
Higher inflation and rising rates are playing on the minds of growth investors. However, returns during the previous rate-tightening cycle suggest that tech is resistant to some of the forces that impact other growth stocks. Between 17 December 2015 and 20 December 2018, the Fed tightened rates by 2.5 percentage points. Over that period, the MSCI AC World Technology index outperformed the MSCI AC World index by 29% (including income, US$/GBP basis, source: Bloomberg).
It’s also worth noting that despite the turn in investor sentiment, many tech companies remain in robust health. Of the companies which we invest in within the Global Technology Fund that have reported first quarter results for 2022, 75% have delivered better than expected revenues and earnings, suggesting that these businesses continue to grow faster than what was expected of them.
Balancing short-term uncertainty against long-term secular growth
Our positive long-term view of the sector is embedded in AXA Investment Managers’ larger analysis of clear megatrends that are driving certain economic, corporate, social and technological themes. These themes all have two fundamental drivers in common – demographic shifts, and – most pertinently for this fund – technological changes and accelerating capabilities.
Put very simply, the adoption of technology in our everyday lives is only going to increase. This will drive innovation and market share, relative to traditional industries, creating new opportunities throughout the sector.
Over the long-term, we believe that technology companies are likely to expand more quickly than inflation. Themes we are exposed to include the shift from physical cash to electronic payments, online security, and IT companies that help businesses adopt a digital ethos for their customers and employees.
Diverse opportunities driven by market expansion and innovation
With these long-term trends in mind, we think the market disruption is opening up some interesting opportunities. While the bottom of the market is hard to call, and we are therefore acting with caution, market conditions introduce the prospect of adding to our favoured holdings or opening positions in stocks we might previously have seen as attractive but overvalued.
Key sectors we are looking at include the following:
Already in high demand before the pandemic, semiconductors benefited from increased adoption of digital technology for work and entertainment during lockdown. Low supply since then – caused by disruption to manufacturing, transport, and infrastructure over the pandemic – has created further scarcity.
Some of our best-performing stocks over the past 12 months have been in the semiconductors space. These include onsemi (a supplier of analogue chips used in applications such as power management in a variety of end-markets including automotive and industrial) and Cadence Design Systems (a provider of Electronic Design Automation (EDA) software tools used in the semiconductor design process).
Market leaders with brand loyalty and pricing power
As a knock-on effect of the semiconductor shortage, some popular products have become hard to come by – anyone who’s tried to buy a MacBook Pro M1 Max over the past year will have experienced this. But consumers have shown that they are prepared to wait rather than compromise, particularly those with specialised and higher-spec needs.
This is in part due to brand loyalty to Apple, and to the ubiquity of its suite of products in certain creative and design industries. Increasingly demanding video capabilities in 4K and 8K definition are only going to require more powerful chips and capabilities to fulfil the growing and insatiable need for high-quality online content generation.
The lifting of travel restrictions related to Covid will help payment companies that enable cross-border transactions, such as Visa. We also hold a position in FIS, who provide payment services for hotels, restaurants, and other venues that are seeing business increase as people get out and about again.
Digital advertising continues to grow, albeit at a slower pace as economic headwinds prevail. The conflict in the Ukraine has also impacted this aspect of discretionary spending.
However, advertising via online channels has been demonstrated to be successful. When marketing budgets improve, the likes of Alphabet (the company behind brands such as Google and YouTube) and Meta Platforms (Facebook, Instagram and WhatsApp) are likely to benefit from a pick-up in spending.
One prominent theme in the Fund is cybersecurity, which continues to benefit from a strong need for companies and governments to help protect themselves, their employees and customers from multiple threats. Companies like Palo Alto Networks have demonstrated good growth as their customers understand the ongoing need to defend their assets from malicious cyber activity.
The need for companies to modernise and digitalise their businesses continues. We have been seeing good results from companies involved in many different aspects of this, from consulting businesses such as Endava and providers of software services such as ServiceNow and Salesforce.
During what might continue to be a volatile period, it is important to remain focused on our investment philosophy. For 15 years we have been well served by investing in companies that address a long-term opportunity rather than chasing niches or fads. We continue to believe in our thematic approach to identifying opportunities with long duration and significant growth potential.
Companies shown are for illustrative purposes only as of 30/06/2022 and may no longer be in the portfolio later. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Source: Factset/Morningstar as at 30 June 2022, in sterling terms, A GBP share class, net of fees and with dividends reinvested. The Fund’s official benchmark is the MSCI World Information Technology Index, provided for comparison purposes.
Past performance is not a reliable indicator of future results.
The value of investments may fall as well as rise and you may not get back the full amount invested.
Single Sector Risk: as this Fund is invested in a single sector, the Fund's value will be more closely aligned with the performance of that sector and it may be subject to greater fluctuations in value than more diversified funds.
Currency Risk: the Fund holds investments denominated in currencies other than the base currency of the Fund. As a result, exchange rate movements may cause the value of investments (and any income received from them) to fall or rise affecting the Fund's value.
Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.
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