If you’re reading The Motley Fool then you’ll already know technology shares have powered markets upwards worldwide this year.
The big tech giants have ballooned so much that FAANGM stocks – Facebook Inc (NASDAQ: FB), Amazon.com Inc (NASDAQ: AMZN), Apple Inc (NASDAQ: AAPL), Netflix Inc (NASDAQ: NFLX), Alphabet Inc (NASDAQ: GOOGL) and Microsoft Corporation (NASDAQ: MSFT) – now make up 25% of the total market capitalisation of the S&P 500 Index (INDEXSP: .INX).
This has meant many investors have bought up tech shares.
Even if you didn’t directly buy any, the mere fact that their values have gone up so much means they now take up a far bigger proportion of your portfolio than before. Without you doing anything.
The theory is a low interest rate environment favours growth businesses like these over more mature industries.
Anxiety to diversify
But looking at your portfolio, you might feel nervous about having so many eggs in the technology basket. After all, an old investment adage is to diversify.
Should you sell some off to rebalance the portfolio? Should you buy some non-tech sectors to rebalance? Should you hold on, because tech is the way of the future?
The Motley Fool this week asked some professional fund managers what a retail investor should do if they fear they have too much tech.
Multiple fundies told The Motley Fool that technology is a broad sector, so whether you should be worried depends on the individual companies you hold.
“Rather than clustering tech stocks all in one basket, investors also need to consider what stage of the business cycle they find each of their individual tech investments,” said Cyan Investment Management portfolio manager Dean Fergie.
“Many tech stocks are commercially proven and profitable, [while] others are little more than concepts that are sucking up investor cash before their technology or business models are commercially proven.”
Nucleus Wealth head of investments Damien Klassen agreed that not all tech shares are equal and you can easily diversify within the sector.
“I’d be worried about having too much exposure to a particular business model. But tech shares come in all shapes and sizes, manufacturers, service companies, intermediaries, intellectual property owners, etc,” he told The Motley Fool.
“Show concern about your portfolio if you have too many growth and expensive stocks. But, tech shares aren’t all expensive. For every Advanced Micro Devices Inc (NASDAQ: AMD) trading on 90 times last year’s earnings, there is an Intel Corporation (NASDAQ: INTC) trading on 9 times. Depending on your risk levels, you probably want to incorporate both types.”
Remember your risk appetite
Prime Value portfolio manager Richard Ivers said that it was important to refer back to the reason you’re investing in the first place and the resulting risk appetite.
“Go back to fundamentals and understand why you own them and whether the investment case still stacks up,” he said.
“Tech is a very broad sector with some very high quality companies with resilient earnings – for example, software companies – and others that are early stage and quite speculative. Ensure your investments match your risk profile.”
Klassen said that the customer sector of each tech company could be a way to achieve diversification.
“Tech spans the world – advertising revenue, consumer goods, finance, real estate, job ads and more. Almost every economic sector has both traditional companies and tech companies,” he said.
“Be concerned about having too much exposure to one type of profit driver or economic sector.”
Selling down and looking for the next winner
Frazis Capital Partners portfolio manager Michael Frazis told The Motley Fool last month that his fund was up about 60% in the year of COVID-19.
This success was largely driven by technology shares. His clients have seen the Afterpay share price shoot up 22 times since Frazis bought in, Appen Ltd (ASX: APX) 9 times, and Xero Limited (ASX: XRO) 5 times.
But in a memo to his clients this week, Frazis warned we could be at a “rare turning point”.
“We are dramatically reducing what little we have left invested in 40x revenue businesses,” he said.
“Longer term yields have begun to rise, tech valuations are at record highs, and we believe a period of serious multiple compression has already begun.”
Frazis said that his fund would now turn to the life sciences sector.
“We are focused on the next set of opportunities in the $1 billion to $20 billion market cap range growing at more than 100% [per year],” he said.
“Many companies in the life sciences are coming off epidemically depressed revenues, are cyclically defensive, and have growth rates as high as any in tech.”
Klassen told The Motley Fool that technology is such a huge part of the world that it’s not outrageous to have more in your portfolio this decade than the last.
But be sensible.
“Tech is a desirable exposure, but not so desirable or rare that you should ignore the tenets of good portfolio construction.”
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Tony Yoo owns shares of AFTERPAY T FPO, Alphabet (A shares), Amazon, Appen Ltd, Temple & Webster Group Ltd, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Amazon, Apple, Facebook, Microsoft, and Netflix. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Appen Ltd, Temple & Webster Group Ltd, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Intel and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Apple, Facebook, Netflix, and Temple & Webster Group Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.