Funds Europe – Given that tech stocks make up such a significant amount of the exposure of these funds, is it still worth holding dedicated specialist technology funds?
Cripps – This is an interesting one. If you look today at the combined weight of the IT and the communication services sectors and MSCI World, it’s over 30%. Ten years ago, it was around half that much. And that’s not even accounting for the securities which are masquerading in other sectors that a lot of us would consider, at least partly, as technology firms – think Amazon and Tesla in the consumer discretionary sector.
The key driver here is that these firms are both growing in number and they’re attracting outsized valuations, which obviously is then causing them to have an outsized concentration in major indices. Yet this is absolutely not a replacement for a pure play or a focused technology fund or ETF.
What the global or the regional core indices give you very well is exposure to the mega-cap and the large-cap names, but you’re not getting exposure to the small-cap names. Also, you are not getting exposure to securities which are not currently generating the kind of revenues or the market caps from what are going to be the future trend leaders of the market.
What we have found is that many clients are taking a core-satellite approach in this market, gaining a broad-based exposure through core diversified indices and topping up this base with bolt-on specialist funds, often with a smart beta or thematic skew.
Rushe – What strikes me is how do you define a technology stock today? Is Facebook, or Meta as it is now known, a technology company now or is it an advertising company? Is it a media company? What is it exactly, and what type of an environment results in it performing better or worse? What role does traditional ‘technology’ play in its success? It’s such a difficult question, I think.
Odogwu – Yes, and I think it depends on how you view technology. When you’re looking at very thematic exposures such as cloud computing, metaverse or even blockchain, some of these companies will be too small to be included in a generic index, so a specialist fund or ETF would be a great access vehicle to some of these exposures.
The other thing you need to look at it is concentration risk, so if you look at some of the broad benchmarks like an MSCI World Tech Sector, they can be highly concentrated in some of the largest tech names, so if you want to reduce some of that concentration risk, having these satellite exposures is a good way to do that.
Fuhr – Playing on what has been said so far, one of the challenges with thematic ETFs is many of them end up having a lot of exposure to large-cap tech names in order to be diversified, and so the investor is not really getting pure-play exposure to whatever that theme is. I think it is important for investors to look at what’s inside of the ETF, so what are the sources of revenues and are you really getting exposure to disruptive technology, or is it really something else?
Paquier – Investors who choose ETFs will typically look for a diversification tool; they’re going to be looking at pooling some of the risks and making sure their exposures are diversified. It looks to me like what we’re saying is that there is also an interest in identifying those small-cap/mid-cap companies at the right time, at the right moment, to make sure that some of the tech exposures are being reduced when indices can be too concentrated.