Invesco Global Opportunities Fund has little interest in ‘Big Tech.’ Here’s why.

Rich valuations and the potential for more regulation have led this fund to shun the sector — for now

Invesco Global Opportunities Fund has little interest in ‘Big Tech.’ Here’s why.

Time to read: 3 min

It is now three years since we were overweight the information technology (IT) sector and almost two years since we had more than 5% IT exposure in Invesco Global Opportunities Fund. While the performance of “Big Tech” has gone much further than we expected — the sector has dramatically outperformed the broader market since the start of 2013 (see Figure 1) — we believe the future for many of these businesses is more uncertain than most investors anticipate. Below, we outline two main reasons why we have been more hesitant about owning Big Tech stocks in recent times, and offer some perspective on the outlook from here.

Figure 1: IT has led all sectors in returns since 2013

MSCI AC World Index sector returns

MSCI AC World Index sector returns

Source: MSCI, data from Jan. 1, 2013, to April 30, 2018. Past performance is not a guide to future returns. An investment cannot be made directly into an index.

Tech valuations are expensive

We don’t set out to avoid any given sector – rather, we are looking for fundamentally sound businesses with appealing valuations. This focus on valuation often leads us to more contrarian areas of the market, hunting in the areas that others have shunned.

Back in May 2014, this philosophy led us toward the tech sector, and we had almost 20% of the portfolio in technology stocks — versus 0% as of March 31, 2018. At that time, we felt there were concerns about these companies that led to appealing valuations. For example, the market was worried about the transition of Google users from desktop to mobile. Similarly, many investors worried about potential disruption to Microsoft’s dominant position in the enterprise segment.

But today, technology and e-commerce now account for almost a quarter of US stock market earnings.1 The Big Tech stocks are highly prized, and this sentiment is reflected in relatively rich valuations. Accordingly, our holdings reflect that view. (Google and Microsoft are not fund holdings as of March 31, 2018.)

In our view, rich valuations represent a risk. When stocks are priced for perfection, any negative surprise could have significant implications. Over the last month or two, we have witnessed modest retracements in some of the tech stocks. At present, it looks like a small blip on their longer-term performance chart, but we do worry that current valuations offer investors little protection in the event that life gets more difficult for these businesses.

Regulations may increase

We believe the future for many of these businesses is more uncertain than most investors anticipate. Recent privacy missteps by social media companies might mean that regulation of social media becomes more prominent and the misuse of personal data more heavily penalized. If we think back to the banking sector post financial crisis, or tobacco companies in the late 1990s, the market has tended to de-rate businesses when the regulatory outlook is uncertain.

At present, the tech industry appears very lightly regulated in the context of its economic and political importance (see Figure 2). There are other potential risks too. This industry currently pays very low tax, something that governments look increasingly motivated to resolve. Perhaps more fundamental is the risk that consumers vote with their feet and delete their social media accounts, for example, given recent reports of misuse of user data as well as security breaches.

Figure 2: Technology has fewer federal regulations than many other sectors

Technology has fewer federal regulations than many other sectors

Source: BofA Merrill Lynch Global Investment Strategy, McLaughlin & Sherouse (2017)

Key takeaway

Many Big Tech companies generate strong organic growth, good cash flow and have very strong balance sheets. They have also successfully challenged a variety of incumbent businesses by bringing a new, innovative approach without carrying the legacy costs that “old world” industries carry.

However, we feel that the market has priced these qualities in. We remain disciplined in our approach, trying to identify companies where their intrinsic worth has not been reflected in share prices. We will try to remain pragmatic and assess stocks in a dispassionate way.

If we can identify sound businesses when they are out of favor, it may provide us with an opportunity to pay a discounted price. We believe this gives us better odds of achieving a good result for our clients and a better chance of preserving capital. This is why we aim to maintain a strong discipline around the price we pay for (and hold) a stock.

One day, uncertainty relating to the outlook for the Big Tech companies may give us an opportunity to buy them once again. But for now, we see better uses for our clients’ capital elsewhere.

Learn more about Invesco Global Opportunities Fund.

1 Sources: BofA Merrill Lynch Global Investment Strategy, I/B/E/S, as of Jan. 23, 2018

Important information

Blog header image: ImYanis/Shutterstock.com

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Stephen Anness

Fund Manager

Based in Henley-on-Thames, Stephen Anness is Lead Manager for Invesco Perpetual’s Global Opportunities strategy. He specializes in managing concentrated global equity portfolios.

Mr. Anness has been a key part of the idea generation and stock selection process in global equity portfolios since 2009. He took over responsibility for the Global Opportunities strategy on Jan. 1, 2013. He began his investment career with Invesco Perpetual’s UK Equities team, joining the company in July 2002 as a trainee analyst. Having come through the investment team ranks, Mr. Anness started managing UK equity portfolios in 2004 and took on management of his first UK fund in 2008, before moving to the Global Equities team at the end of 2012.

Mr. Anness earned a BSc degree in economics, the Securities Institute Diploma, and the Investment Management Certificate from the CFA Society of the UK. He also studied corporate finance at the London Business School.

Andrew Hall

Fund Manager

Andrew Hall is a Fund Manager with the Invesco Global Opportunities team. Based in Henleyon- Thames, he joined the company in 2013.

Mr. Hall began his career in 2000 in equity sales at UBS Warburg. He developed relationships with UK-based institutional and hedge fund investors, including Invesco Perpetual’s UK Equities team.

In 2007, he moved to Merrill Lynch to help grow its UK equities franchise. In 2009, he took his first buy-side role as a European equities analyst at Moore Europe Capital Management. Most recently, Mr. Hall was a partner at Bramshott Capital LLP, a spinoff of Moore Europe Capital Management.

Mr. Hall earned a BSc degree in economics from Nottingham University. He holds the Investment Management Certificate from the CFA Society of the UK.

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