Few portfolio managers have escaped the global stock market sell-off, but tech has been plagued more than most. For example, the Nasdaq index, often used as a barometer of the sector’s health, is down 27% this year, compared to a 14% decline for the S&P 500.

The reason to still invest in this space is to get exposure to clear structural trends capable of delivering above-average investment returns over years. The technology sector is chock-full of companies with large and sustainable competitive advantages, pricing power and strong cash flows in markets where there are long runways for future growth.

Companies like Apple (AAPL:NASDAQ), Microsoft (MSFT:NASDAQ), Advanced Micro Devices (AMD:NASDAQ) and Mastercard (MA:NYSE) have these qualities in spades. They have also generated high and sustainable returns on capital over years, arguably the most important point of all for compounding gains for investors.

These are just some of the companies that Mike Seidenberg has been buying this year, the new lead manager at the Allianz Technology Trust (ATT). He took the lead role in July, replacing Walter Price after he’d run the trust for 15 years.

PORTFOLIO RESHAPED

What followed was a portfolio review that has resulted in the £912 million trust steering itself along a more value-oriented path. ‘We went through every stock, name by name, asking if the investment case still stands up,’ Seidenberg said. He had become concerned about the macroeconomic backcloth and rising interest rate environment, and what that might do to cost of capital calculations.

Investors cannot escape the impact of rising interest rates, regardless of the structural trends supporting technology companies. Rising rates lead to an increased cost of capital which, given the often younger, less mature business models of technology firms relative to non-technology companies, can dawn as a painful reality.

Stakes in more than a dozen stocks were trimmed, in some cases considerably, including Tesla (TSLA:NASDAQ), albeit for different reasons. The electric car firm had been in the portfolio for years but a combination of multiple stake top-ups and the stock’s strong run saw the trust trim its stake. Tesla stock has soared about 570% since the start of 2021, accounting for share splits.

Seidenberg continues to believe that Tesla has a ‘really great runway’ of growth potential but it had become ‘too overweight’ in the portfolio, especially given the loose cannon nature of Elon Musk. ‘I’m OK with [him buying] Twitter as long as he doesn’t spend too much time on it,’ said Seidenberg.

These sales have been matched by corresponding purchases. Examples include Bumble (BMBL:NASDAQ), the female-focused dating app, and Aspen Technology (AZPN:NASDAQ), the developer of software for the oil industry. The team have also been adding to several companies which have been posting strong results during the recent market downturn.

These have encompassed new stakes in cybersecurity firm Fortinet (FTNT:NASDAQ) plus Visa (V:NYSE) and Amazon (AMZN:NASDAQ).

REFRESHING TAKE ON TECH

The process was designed to give the portfolio a level of stability it might have lacked before but without departing from its historic remit. One of the major differences between Allianz Technology and its Dow Jones Global Technology index benchmark is the trust’s typically larger weighting to mid-cap technology companies.

This overweight reflects the greater growth potential Seidenberg and his team see in smaller, more nimble companies, and it also reflects the huge weighting the benchmark has to mega-cap technology companies, given their enormous market caps.

‘This means that Allianz Technology offers investors a refreshing take on global technology investing, allowing them access to the sector without increasing their often large pre-existing exposure to the household technology names which are often a feature of many global or US-centric funds,’ says Kepler analyst David Johnson.

Today innovation in technology is transforming virtually every industry. From electric cars loaded with electronics to online shopping, how we consume entertainment using cloud computing to providing solutions to keep us safe from crooks and other internet threats.

That we are relying on technology to solve many of the world’s biggest problems; climate change, how we feed and power the world in the years to come, and medical breakthroughs that will allow future generations to live longer, happier lives, means technology exposure should be an essential  investment theme to consider.

While Allianz Technology has not been immune to the 2022 sell-off, it still retains a long-term track record of outperformance, beating both its benchmark and its closest peer – Polar Capital Technology Trust (PCT) – over the last five years, up 98% versus 68% respectively.

Yet there is no getting away from 2022’s poor performance, with Allianz Technology shares 35% lower than where they began the year. Kepler points out that this now means that the trust’s discount to net assets has widened to 14.2%, near to its widest levels over the last five years. ‘Prior to 2022 Allianz Technology had not traded at a sustained double-digit discount since 2015,’ says Johnson.

Demand for core themes like cybersecurity, artificial intelligence and machine learning, cloud computing, increased connectivity, e-commerce and healthcare breakthroughs hasn’t gone away, but for the time being, tech funds may find ordinary investors reluctant participants until stock market performance improves.

DISCLAIMER: The author of this article (Steven Frazer) owns shares in Allianz Technology Trust and Polar Capital Technology Trust.

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