Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Fund manager update: AXA Framlington Global Technology Fund

  • 12 January 2022 (5 min read)

Equity markets are experiencing a volatile start to 2022 as concerns over the new strain of Covid-19 (Omicron), fears around inflation and pending interest rate hikes weigh on investors’ sentiment.  Hence we are experiencing a period of “risk-off” leading to profit taking in equities, especially growth centric stocks, in a repeat of what we experienced in the first half of 2021.

In short, the rotation is being driven by expectations that there will be rate rises this year.  This shouldn’t be a surprise given the US economy is in good health and rates are at artificially low levels, put in place for the pandemic.

When the subject of rate rises started to get attention in Feb 2021, we saw the start of a significant rotation from growth into value; most of the rotation took place in Feb/Mar and there has been another wave since Nov and accelerating since the start of 2022.

Clearly there are views that higher interest rates will be negative for the broader economy and therefore also for companies with a growth mindset.  Despite this backdrop, the S&P500 Infotech index climbed 33% in 2021 surpassing the 27% gain for the S&P500 itself.  In fact, on a quarterly basis, the S&P500 Info Tech index outperformed the S&P500 Index in all but the first quarter of 2021.

So whilst the rotation has felt brutal at times, and some stocks (especially unprofitable high valuation names, which we have little exposure to) have really suffered, the broader sector has held up well supported by strong fundamentals, strong financial results and a healthy outlook for spending on the sector.  The main issue for our investment approach has been that the uncertainty drives more capital into the mega cap tech names to which we are under-indexed – our performance in 2021 relative to our peer group was good but we and almost all our peers underperformed the global tech benchmark index (MSCI World IT index) in 2021.

With regards to the ultimate impact from rate rises (as opposed to the spectre of eventual rate rises), I would argue that post Global Financial Crisis, the Fed have been very mindful of the impact that rate rises has on the economy, and actually when implemented it has been because they have a high level of confidence that the economic strength can withstand them.  It is important for the Fed to get rates back up to a more normalised level as soon as they can, so they will again have that lever to use when the economy next needs it.

They’ve been willing to pause tightening if there are signs that it could derail economic expansion; for example at the start of the last upward rate cycle in 2016, there was just the one rate rise in 2016 when initial expectations had been there would be two or three.   I would expect the Fed to continue in this manner when they do commence the next upward rate cycle.

Looking back to see the impact the last rate cycle had from late 2015 through summer 2019; the S&P500 rose 46% during this time and the S&P Info Tech index rose 96%.

Looking out to 2022, in many ways it feels very similar to how it did at the beginning of 2021.  We still face uncertainties around Covid19, the spectre of inflation lingers and it remains to be seen if this is transitory or something more structural, whilst the likelihood for interest rates to be lifted from their current levels is almost a certainty at some point. Therefore, it is hard to suggest that 2022 will be any less volatile than 2021.

Nevertheless, we note that our investments within the Fund have continued to report robust growth and generate healthy amounts of cash and present strong balance sheets. Demand for new technology from enterprises and consumers continues to be supportive.  We believe that the fund is well positioned to benefit from the continued adoption of several innovations, such as all parts of the proliferation of semiconductors into more end markets and the digital transformation of business processes.

In terms of set up for 2022, we believe the drivers supporting further growth in the tech sector are in place and as we progress through the year, growth will become more normalised versus the tough year on year comparisons that many of our companies faced in 2021 (especially the second half).  Recent estimates from Gartner suggest that spending on IT in 2022 will be 5.1% higher than 2021, which is very healthy growth given that 2021 already delivered a significant uplift on 2020 (and 2019).  From a valuation perspective, the S&P500 Info Tech index forward P/E ended 2021 roughly where it started the year, suggesting the 33% returns mentioned above was all driven by earnings growth rather than valuation expansion.

However, whilst we are waiting for rate rises, I think volatility will persist, until we have evidence from companies that they continue to deliver growth despite a rising rate environment, so market timing remains a challenge and hence I feel more surety that our long term investment approach is appropriate focusing on high quality businesses with long term drivers supporting their growth rather than attempting to trade in and out of stocks  on a short term basis.

Given the US centricity of the fund and the focus around US rate rises, the S&P500 and the S&P500 Information Technology Index have been used in these comments; these are not the comparative benchmarks for the fund, and are for illustrative purposes only. All Performance figures referenced are sourced from Bloomberg.

EQUITIES

Global Technology

At the heart of this evolution are innovative companies driving change across the entire economy – including how we work, shop, build relationships and find information.

Find out more

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Equities

Getting past the growing pains of global technology

  • by Jeremy Gleeson
  • 15 June 2022 (5 min read)
Quick Take

Quick take with Jeremy Gleeson - March 2022

  • by Jeremy Gleeson
  • 14 March 2022 (7 min read)
Equities

Global Technology strategy - February 2022

  • by Jeremy Gleeson
  • 10 March 2022 (5 min read)

    Disclaimer

    Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This promotional communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.
    The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available.  Please note that the management company reserves the right, at any time, to no longer market the product(s) mentioned in this communication in the European Union country by notification to its authority of supervision in accordance with European passport rules. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors. In the event of dissatisfaction with the products or services, you have the right to make a complaint either with the marketer or directly with the management company (more information on our complaints policy is available in English https://www.axa-im.com/important-information/comments-and-complaints). You also have the right to take legal or extra-judicial action at any time if you reside in one of the countries of the European Union. The European online dispute resolution platform allows you to enter a complaint form (https://ec.europa.eu/consumers/odr/main/index.cfm?event=main.home.chooseLanguage) and informs you, depending on your jurisdiction, about your means of redress (https://ec.europa.eu/consumers/odr/main/?event=main.adr.show2).

    Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. References to league tables and awards are not an indicator of future performance or places in league tables or awards and should not be construed as an endorsement of any AXA IM company or their products or services. Please refer to the websites of the sponsors/issuers for information regarding the criteria on which the awards/ratings are based. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment.  Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding.

    Information concerning portfolio holdings and sector allocation is subject to change and, unless otherwise noted herein, is representative of the target portfolio for the investment strategy described herein and does not reflect an actual account . The performance information shown herein reflects the performance of a composite of accounts that does not necessarily reflect the performance that any particular account investing in the same or similar securities may have had during the period.  Actual portfolios may differ as a result of client-imposed investment restrictions, the timing of client investments and market, economic and individual company considerations.  The holdings shown herein should not be considered a recommendation or solicitation to buy or sell any particular security, do not represent all of the securities purchased, sold or recommended for any particular advisory client, and in the aggregate may represent only a small percentage of an account’s portfolio holdings. 
    Representative Accounts have been selected based on objective, non-performance based criteria, including, but not limited to the size and the overall duration of the management of the account, the type of investment strategies and the asset selection procedures in place.  Therefore, the results portrayed relate only to such accounts and are not indicative of the future performance of such accounts or other accounts, products and/or services described herein.  In addition, these results may be similar to the applicable GIPS composite results, but they are not identical and are not being presented as such.  Account performance will vary based upon the inception date of the account, restrictions on the account, along with other factors, and may not equal the performance of the representative accounts presented herein.  The performance results for representative accounts are gross of all fees and do reflect the reinvestment of dividends or other earnings.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. 

    Are you an IFA or other Professional Investor ?

    Are you a financial advisor, institutional, or other professional investor?

    This section is for professional investors only. You need to confirm that you have the required investment knowledge and experience to view this content. This includes understanding the risks associated with investment products, and any other required qualifications according to the rules of your jurisdiction.