Investing in Technology and AI – a long term trend, or passing fad?
Janus Henderson Investors and IPP Financial Advisers recently held a webinar on investing in Technology and AI. I had the pleasure of being asked to be one of the speakers, as the Founder of the Expat Advisory Group and Partner of IPP Financial Advisers, along with Andy Cox, Equity Investment Specialist, and Ken Tan as moderator – both of Janus Henderson Investors. Below is a quick summary on some key takeaways. Also, no such titled webinar would be complete without a GEN AI summary – have a look at this at the bottom, pretty interesting…
Setting the scene – Tech is all around us:
Technology is much more than just a stock market sector we may have associated it with many years ago. We all use technology companies probably more than we realise. Pretty much everyone all day every day does. From the alarm on our smart phone, to the reminders on Alexa (Amazon), and taking an Uber to work (using Google Maps to navigate). From there we turn on our computers (Apple, Samsung, HP, Dell etc) and use Windows (Microsoft) and then any number of various work day items/actions including – PDFs (Adobe), DocuSign, CRMs with Salesforce or Oracle, meetings on Zoom (and where people viewed the webinar), and advertising on YouTube (Google) or Facebook and Instagram (Meta). Most of our files and data are kept online on Dropbox, or similar. The cloud is huge now, and of course the dominant players are Google, Azure (Microsoft) and AWS (Amazon). Perhaps you’ve landed on this article via Linkedin (Microsoft). We buy our coffee/lunch using digital payments (Visa, Mastercard, AMEX, PayPal) and even order meals through digital apps. Also much of our shopping is now online via Amazon, Lazada (Alibaba) etc. It doesn’t end there – we work out in the gym or go running whilst listening to music (on Spotify), checking our heart rate and calorie count using our smartwatch (Garmin) and then it’s “Netflix and chill”. For some, we play computer games on a Nintendo Switch or PS5 (Sony). Some are into gaming PCs which have expensive NVIDIA GPUs and super fast Intel or AMD processors. Others prefer to unwind with a book, or perhaps an Amazon Kindle! This just scrapes the surface, and hasn’t even looked into the fact that everything from household appliances, to cars, personal electronics, and even medical devices all use semi-conductor chips. Technology actually covers many sectors. It isn’t just Tesla (automobiles), Meta and Alphabet (advertising), X or Twitter (news agency) and so on, but technology, AI, semiconductors, are all integral in every single sector, not just healthcare as aforementioned, but energy, logistics, manufacturing, basically everything. Every company in every industry is trying to innovate (or at least should be!). So tech really is all around us. A stark example of this was this summer’s Crowdstrike “software update” which caused a massive IT outage that ended up affecting millions of Windows users and even grounding flights around the world. Public transport in numerous US cities, including New York and Washington DC were disrupted. Hospitals and clinics couldn’t manage appointments, Sky News couldn’t broadcast, and the online banking system and payment services had problems. Even 911 emergency services were impacted in Alaska, New Hampshire and Indiana. Scary isn’t it? One cyber security company doing an upgrade caused so much disruption. Scarier yet, is that the number of affected Windows users was estimated at less than 1% of the global total!
Key points:
Tech stocks have a lot of volatility, but historically outperform the markets. Consensus was that would continue, but with numerous drawdowns which could be good entry opportunities. There will be sell-offs but right now fundamentals haven’t changed, so for longer term investors, it remains attractive.
AI specifically is “very early innings” still. Many see it as the 4th wave. The 1st being the PC, then the 2nd wave being the internet (or “dot com”), the 3rd being the smartphone or mobile internet, and now AI as the 4th. To give some context, you could say that where we are today with AI is akin to the launch of the iPhone 1. There’s a long way to go. We’re at the build phase. Companies are investing in GPUs and, language models etc. Now it is all about “training” – powerful GPUs designed for intensive AI model training at a large scale. Next will be “inference” – the next stage for AI requiring specialised hardware for real-time decision-making outside of just GPU’s and CPU’s. AI is developing right now, it’s then all about integration and monetization. There is so much innovation, cost-reduction, and improved productivity ahead of us.
There will be winners and losers as we go on in time. The same was apparent with each wave. Notable mobile phone examples would be Nokia’s dominance, followed by Blackberry’s. They are not major players anymore. Chip maker Intel vs Nvidia – how the two companies have had very different fortunes in recent years. So as always, have participation, but not don’t put all your eggs in one basket.
The perennial discussion – passive versus active? There are pros and cons to both. Starting with active strategies, there are many that simply underperform the index. However, there are some that outperform. The key is trying to find and use the latter ones, and also have exposure to different parts of technology. Passive investing usually is lower cost, but some active strategies may still give better net returns. It will also come down to diversification as well. You might well think that the S&P500 is far more diversified than a managed fund – but it isn’t always actually 500 companies you’re diversified into due to weighting and performance attribution. There have been periods within the past 2 years where the S&P500 has been up a lot, but an equal weighted version was actually flat or even negative. According to Nasdaq, the “Magnificent 7” accounted for about 35% of the S&P500 in July 2024. If you look at the 10 largest companies it’s even more pronounced. Note further that Alphabet has two share classes in there and Berkshire Hathaway (also has A and B shares) is included and had roughly 50% of its portfolio in Apple, which of course is itself the largest company by market capitalisation.
Quality companies have a long term track record of outperformance also. So one example of potentially improving portfolio outcomes when investing in technology, is to overlay for tech companies that are also high quality. Usurpingly, recent top performing stocks like NVIDIA and TSMC are both high quality. Recent years’ top performers like Alphabet and Microsoft are both top quality too. All four are of course also tech companies. It is clear that various companies in all sectors need to innovate to survive and thrive, but inherent in quality metrics, is innovation itself and the presence of a sustainable competitive advantage. Thus the two in combination, quality and technology related, could be a winning formula. For a reminder of what Quality Investing means to me, please click here (embed https://www.pryor-ifa.net/quality-investing )
GEN AI Summary - VITAL insights from the IPP x JHI Technology Webinar
Vast Integration: Tech's Daily Dominance
Technology's integration into every facet of daily life, from the moment we wake up to how we work, commute, and unwind, underscores not only its omnipresence but also its growth potential as an investment avenue. This omnipresence is illustrated through examples like using smartphones for alarms, Uber for commuting, and platforms like Netflix for entertainment. Technology's role extends far beyond traditional sectors, permeating various aspects of life and business, making investments in technology crucial for a diversified portfolio.
Investment Evolution: The Shifting Tech Landscape
The narrative around tech investments has shifted dramatically. Once viewed as volatile additions to a portfolio, technology stocks are now deemed essential due to the sector's central role in both economic and social spheres. This shift is partly attributed to the innovations such as generative AI, which promises new opportunities within the tech sector. By drawing parallels with the early days of the smartphone revolution, the webinar posits that we are on the brink of a new era in technology, reinforcing the importance of tech investments in achieving portfolio growth and diversification.
Top-Tier Picks: Quality Over Quantity in Tech
It was emphasized during the webinar the importance of focusing on quality investments within the tech sector. It advocates for investing in companies with solid fundamentals—profitability, strong leadership, competitive advantages, and high gross margins. Such companies, exemplified by giants like Apple and Microsoft have demonstrated long-term growth through various market cycles and conditions, illustrating the long-term value of investing in firms with robust business models. The discussion challenges the notion that investing in tech equates to embracing risk, highlighting how quality tech companies can offer stability and growth.
AI Tomorrow: The Unfolding Tech Frontier
Unsurprisingly, generative AI's potential to revolutionize industries and spur new investment opportunities took center stage in the webinar. The comparison of AI's current developmental stage to the early days of smartphones suggests that investors are at the forefront of a significant technological wave. The conversation underscores the belief that early investments in AI and related technologies could yield substantial returns as these innovations mature and become more integrated into various sectors. This point particularly highlights the transformative power of AI, not just as a technological advancement but as a harbinger of new markets and business models.
Leading Actively: Mastering the Tech Market Moves
The debate between active and passive investment strategies in the tech sector underscores the nuanced landscape of technology investments. Active management, as discussed, allows investors to navigate the rapidly changing tech landscape more adeptly, identifying emerging trends and quality companies that may deliver superior returns. Given the rapid innovation and the emergence of new sub-sectors within tech, an active management approach may more effectively capitalize on these developments compared to passive strategies that might miss out on nuanced opportunities.
Disclaimer - The views expressed here are solely those of the author in his private capacity and not necessarily to the author's employer, organization, committee or other group or individual. All forms of investments carry risk, including risk of losing all the invested amount. Such activities may not be suitable for everyone.
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