There are three sectors that have done a lot of the heavy lifting in contributing to the performance of global equities over the past five years – consumer discretionary, healthcare and information technology. After financials, which represents 21.5 per cent of the MSCI All Country Index, these three sectors are roughly equivalent in weight at about 13 per cent each.
The appeal of each is easy to understand, though most would be aware that great themes don’t necessarily translate into great investments. The IT sector is the poster child, after all the hubris of the dotcom era crashed down at the turn of the century. The irony is that old is new again. While Apple dominates the sector at a 14 per cent index weight, the bulk of the stocks are very familiar – Microsoft, IBM, Intel, Oracle, Samsung. Unsurprisingly, Google is there too, but so are Visa and Mastercard, hardly stocks one associates with an IT revolution.
A cursory look at the sector weights in a global equity fund or exchange traded fund may be somewhat misleading if an investor is expecting higher-growth edgy IT stocks. Disclosure by some fund managers is still relatively poor and, as an aside, we encourage investors to directly advocate for more information. ETFs do generally provide a list of major holdings and often a link to the whole portfolio.
Yet sector ETFs, while intuitively appealing, can result in high weights in a few stocks where the outlook may be less attractive. This is why the mix of actively managed and index strategies can be a better outcome.
At this stage there is no locally listed global tech ETF and investors would have to execute on a global exchange. Small- and mid-cap fund managers could be an interesting addition as they often skew towards tech companies, subject to tolerance of volatility and a careful assessment of the typically high fee structure. Nasdaq provides a juiced-up tech sector weight, representing 44 per cent of that index, but once again, access to the Nasdaq indices is through global exchanges.
Can IT implode again, repeating 2000? Valuations on some stocks would suggest that there are companies where investors appear to be taking an optimistic view on their potential, especially given the sheer number of participants across the breadth of IT stocks. Yet the average price-earnings ratio for the sector is 24 times historic earnings, far from extreme. This remains one of the sectors with credible revenue growth, net cash and a powerful tailwind of innovation.
The rationale to have a meaningful weight to IT stocks is clear. A simple take on daily life tells us that IT is so pervasive and compelling it would be remiss not to invest in the sector, yet the only options are not just the device in your hand or current service provider.
It is what lies behind the visible face of IT that is truly representative of the depth of development in this area. Data management and analytics software, software-defined networking, cloud services and security are a few of the major sub-segments where the companies may be unfamiliar to most investors, yet may be the exciting opportunity.
To take that further, the impact of IT on every other sector is likely to be a game-changer. Retailers confront not only online, but how they interact with consumers, what happens to retail property or what they do with their data, all of which will be subservient to technology companies.
Banking may find that other payment methods and unaligned providers of services will break the shackles of consumers traditionally bound to a corporate relationship. The impact on entertainment and travel is obvious to anyone who has taken advantage of the services provided elsewhere. The reality is that this is a global world and the Australian equity market does not have the capacity to interact with trends likely to change our lifestyles forever.