Long-term investors are in a prime position to benefit from advancements in technology, the prominent companies that dominate the sector today, and the emerging themes shaping tomorrow’s market.
Key Insights:
- The technology sector features some of the largest companies in the world, many of which are well-known household names.
- The rapid growth of artificial intelligence (AI) has propelled the sector forward, benefiting both companies that promote AI tools and the chip manufacturers that create the necessary hardware.
- While U.S. equities lead the charge, concerns about a potential “bubble” exist; however, the current earnings landscape differs significantly from the Dotcom boom and bust of the late 1990s and early 2000s.
- A long-term thematic approach to technology investments may be ideal for those looking to gain exposure to expanding areas like cybersecurity and robotics while maintaining diversification.
The Importance of the Technology Sector
Today, the technology sector occupies a dominant position in investment portfolios. It’s not surprising that technology-related expenses are becoming a more substantial part of consumer and business budgets. The influence of technology is pervasive, affecting communication, transportation, shopping, and entertainment. From a business standpoint, tech is integral to supply chains through automation, robotics, cloud computing, cybersecurity, and AI.
At Nutmeg, we offer globally diversified portfolios that include varying levels of technology exposure based on your preferred investment style and risk tolerance. Our Technological Innovation portfolio, part of our Thematic Investing range, emphasizes long-term technological trends, though it is available only to investors at risk levels five and above.
Key Technology Companies for Investors
The “magnificent seven”—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—provides an excellent starting point. These firms dominate the U.S. equity market, collectively accounting for over one-third of the S&P 500 index. While these companies include non-technology entities (for example, Alphabet and Tesla are classified under Consumer Discretionary, and Amazon and Meta as Communication Services), they are often grouped together due to their immense influence.
The chart below illustrates the significance of these seven companies within the S&P 500 over the past four years, highlighting their established market presence.
How to Capitalize on Technological Innovation
Although some individual technology stocks have seen remarkable performance, investing in individual companies carries substantial risk. A safer method to capture potential future success in the tech sector is through Exchange-Traded Funds (ETFs) that track major indices. This strategy provides diversification across various companies and sectors, reducing the risk of heavy concentration in volatile tech stocks.
As with all investing, it’s advisable to adopt a long-term perspective—generally at least five years. The tech sector often exemplifies the rewards of patience. For instance, Apple was not among the top 20 U.S. stocks in the S&P 500 when it launched the iPhone in 2007, holding a market capitalization below £200 billion. By July 2023, it had become the first company to achieve a market cap of $3 trillion.
Nutmeg’s Approach to Technology Investment
Nutmeg’s globally diversified portfolios encompass technology stocks from various markets, including semiconductor suppliers like TSMC in Asia and ASML in Europe. The U.S. market remains the largest and best-positioned for accessing technology-related themes. We have a direct allocation to the Nasdaq index within our higher-risk portfolios.
In our Technological Innovation thematic portfolio, we offer exposure to multiple long-term tech themes, comprising between 10% and 20% of the overall portfolio, depending on the chosen risk level. Key areas of focus include:
- Artificial Intelligence (AI): Investment and application of AI and machine learning is set to accelerate across various sectors.
- Cloud Computing: Vital for the digital economy, cloud technologies support business growth and innovation.
- Cybersecurity: The demand for robust cybersecurity solutions is on the rise, with significant growth anticipated in the coming years.
- Robotics and Automation: Already crucial in manufacturing, robotics is expanding into service industries as well.
- Semiconductors: These chips are essential for processing information, and their importance will grow, especially with the increasing data requirements of AI technologies.
We access these sectors through various means, including sector-specific ETFs like VanEck Semiconductor and iShares Automation & Robotics, while striving to maintain a diversified approach.
We continuously analyze how advancements in technology could benefit other industries. For instance, the energy sector is evolving to meet the data center cooling demands of AI-focused companies while real estate firms utilize technology for data center management and construction.
Are We in a New Tech “Bubble”?
Not likely. Given the significant growth among a few dominant U.S. technology firms, some might see parallels to the Dotcom bubble of the late 1990s. However, the current landscape is markedly different. The top seven companies from that era, such as Microsoft and Cisco, were growing at much slower rates and did not possess the same potential for rapid innovation that today’s leading tech firms have demonstrated.
According to Karen Ward, Chief Market Strategist for EMEA at J.P. Morgan Asset Management, the earnings growth of today’s technology giants, particularly the “magnificent seven,” has been impressive, contrasting sharply with the stagnation seen during the early 2000s.
Despite this positive outlook, investors should remain cautious and recognize that past performance does not guarantee future results. Diversifying across different companies and sectors is crucial to managing risk effectively.
Conclusion
Investors today have relatively easy access to technology companies that are shaping our increasingly digital economy. A long-term investment strategy can leverage the growth of established leaders while embracing evolving themes that may lead to the next generation of successful companies.
For more information on whether Nutmeg Thematic Investing portfolios might be right for you, visit our dedicated webpage. If you’d like to learn more about various investment products, feel free to book a free consultation with one of our experts to discuss your options.