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Janus Henderson: Keep a sharp eye on the horizon

Brad Slingerlend and Denny Fish, portfolio managers on the US-based Global Technology team, discuss why it may be beneficial to focus on the long-term themes that have a strong chance of driving tech sector performance for years to come.

The trajectory of the technology sector has been pivotal to the upswing in global equities this year, first driving January’s market gains and later weighing on broader share prices, due to a possible increase in regulatory scrutiny. While the volatility that accompanied the latter development might raise the heart rate of generalist investors, we believe that the best way to navigate bouts of turbulence is to maintain a disciplined focus on sector fundamentals. These fundamentals remain strong for the technology sector, especially for companies associated with the themes that we believe will dominate the tech landscape for years to come.

A mismatch of earnings expectations

As illustrated by recent earnings reports, a specific set of high-profile themes continue to build momentum. The cloud, the Internet of Things* and the enhanced data analytics made possible by artificial intelligence (AI) are forces that, in our view, will reshape how businesses and consumers interact with technology. The complementary nature of these themes should help propel a virtuous circle, creating more opportunity for the Software as a Service (SaaS), semiconductor and analytics companies delivering the next generation of technology products.

Gauging the sources of volatility

Focus on a long-term investment horizon should also help to soften the bouts of short-term volatility inherent in financial markets. It is, however, necessary to differentiate between ‘noise’ and other factors that have the potential to alter and investment thesis. March’s volatility was largely driven by the rising spectre of regulatory risk weighing on Internet stocks. While we believe the risks are manageable, we expect that the dispersion of outcomes for many of these companies has widened. Thus, investors should weigh the near-term risks associated with advertising-based business models against other promising tech segments, such as subscription-driven cloud services.
We accept that regulatory risk is out there, more so in Europe than in the US. While we do not expect online privacy to be a major focus of the Trump administration, it is possible that Congress may enact legislation akin to Europe’s General Data Protection Regulation (GDPR), which goes into effect in late May. The competitive global landscape is also a source of potential risk. There is the chance that the US administration – through regulations or tit-for-tat trade skirmishes – could place additional burdens on US tech companies. Such eventualities could open the door for Chinese tech firms to take away market share from their more established US peers.

Identifying risks, seeking diversification

The sector’s recent path reinforces our view on the merits of actively managing technology exposure. The ability to underweight names perceived as having an elevated level of risk – regulatory or otherwise – is a propitious tool to have at one’s disposal, as is the ability to gain exposure to companies smaller than those in large-cap tech benchmarks. Allocations on private companies and firms outside the sector are also levers investors can pull to lower correlations to the broader technology market when conditions merit such steps.

 

*Internet of Things – the interconnection via the internet of computing devices embedded in everyday objects, enabling them to send and receive data.  

 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any sectors, indices, funds and securities mentioned within this article do not constitute or form any part of any offer or solicitation to buy or sell them.

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