“In the current environment the large cap end of the market continues to be dominated arguably by expensive growth stocks, and these growth stocks tend to be more negatively impacted by rising interest rates, because their cash flows are further out into the future… compared to higher yielding stocks.”
From a portfolio perspective it is important to ensure an appropriate degree of diversification, adds George Dent, equity fund manager at Walter Scott.
“While we pay no heed to benchmark sector weightings, we do spend considerable time looking at underlying drivers to ensure suitable diversification of these at a portfolio level. We therefore believe large technology stocks have a place in such a portfolio.
"There are some brilliant businesses within the US technology sector that meet all of the criteria for a high-quality business.”
Future prospects
It would be easy to dismiss investing in tech stocks now, given that we are seeing an unwinding of bubble-like valuations exhibited in parts of the sector in recent years, says Andrew Holliman, lead manager of the Polar Capital North American Fund.
“However, we believe the US has, does and will continue to be the home of some of the best businesses in the world, which either hail from the technology sector or are dependent on harnessing technology.
“Many of these companies have a number of admirable fundamental characteristics, such as strong competitive positions, growth opportunities and excellent management.
“In addition, typically low capital requirements and well above average profit margins mean that many of the more mature technology businesses have hugely appealing financial characteristics such as robust cash flows and strong balance sheets.”
While technology stocks are traditionally viewed as a homogenous set of companies, Paul Vincent, a portfolio manager at Ninety One responsible for its American Franchise strategy, says that within the sector the underlying economic drivers vary greatly between stocks offering different long-term growth prospects.
“For example, Cadence and Autodesk both have similar business models, offering specialised, mission critical software solutions for their respective industries. However, both companies have quite distinctive underlying growth drivers.
“Cadence is driven significantly by R&D spend within semiconductor development, which continues to grow at attractive rates, whereas Autodesk benefits primarily from the digitalisation of the architectural design and construction processes.”
Although tech stocks are unlikely to get the valuations they did during the pandemic-driven market backdrop anytime soon, Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, adds that long-term economic growth will likely be driven from productivity rather than population growth.
