Investing in technology and how its growth shapes our everyday lives
Technology powers our daily lives, from smartphones to digital payments. But what about the companies behind these innovations, the ones creating the vital components and software? Drawing lessons from history, this article underscores the importance of strategic investments in mid- and large-cap tech companies, as demonstrated by Allianz Technology Trust’s tried and tested approach.
Key takeaways
- Technology has transformed societies and economies, and the pace of change is continuing with advances in sectors such as artificial intelligence holding huge promise.
- That begs the question of how do investors exploit these powerful, disruptive forces? The tried-and-tested investing for growth formula at Allianz Technology Trust plc focuses on investing in medium-sized to large technology companies.
- That strategy has served our investors well over the past 20 years, although investors should remember that past performance is no guarantee of future results.
Mobile phones are such an essential part of the modern world that it is easy to take them for granted and to forget how different life was before they arrived. The world’s first widely-purchased smartphone, the Apple iPhone, for example, emerged just seventeen years ago, in 2007. Today, most people could not envisage life without one.
From managing your finances and making digital payments to shopping online, booking a holiday or watching a film on the go, the incredible technology in these hand-held computers has had a huge impact on society. It’s a similar story with the many smart devices that now populate our homes.
The effect has been particularly profound in the fast-growing developing economies, where surging mobile penetration has transformed banking and commerce, agriculture, education, women’s empowerment, and governance. Billions of people who previously could not even open a bank account can now access business start-up loans and other financial services through their smartphones. In Africa, for example, mobile technologies helped generate 8.1% of GDP across sub-Saharan Africa in 2022, amounting to US$170 billion of economic value added.1
Innovation in technology is accelerating
Growth in technology is also continuing, with advances in artificial intelligence (AI) and computing power promising further transformations to smartphones and other devices. AI will power phones to instantly translate conversations, make restaurant bookings, alert you to the presence of a friend in town and show the most direct route to where they are staying.
Meanwhile, AI-driven smart-home technologies will simplify daily tasks, adapting to an individual’s routines and preferences, and delivering personalised support, and will be invaluable especially for the elderly or disabled.
Reaping the benefits of investing in technology
The question for investors is how to tap into the transformative impact of these reliable, rapidly advancing and increasingly ubiquitous technologies. Fortunately, history provides a guide, and a key lesson is that the seemingly obvious route to investments in technology often proves a costly road to nowhere.
The development of the motor car, for example, was one of the most significant advances of the last century, bringing previously unimaginable mobility to billions across the globe and providing a critical block in the foundations of modern economies. Yet as Warren Buffett – arguably the world’s most successful investor – has mused, making money out of automakers has proven incredibly tough.
He explains that while at least 2000 companies entered the US auto business in the early part of the 20th century, “because it clearly had this incredible future”, by 2009 just three of these same businesses were left – and of those three, two then went bankrupt.2 So, investing directly in car manufacturers would not have been a successful strategy. However, many companies that were either directly or indirectly involved in the auto industry have profited enormously from its growth and continue to do so. So, investors who targeted those businesses, rather than the carmakers directly, could have done very well.
Mid and large-cap investing: a source of opportunities
It's a similar story when it comes to investing in technology. For example, Allianz Technology Trust’s (ATT) view is that the sweet spot for long-term investing growth is often found in mid-cap stocks and large-cap companies, even though it’s the mega-caps that generally capture the headlines.
Just as with the auto industry, there are a myriad of companies and sectors benefiting from the growth of smartphones and other technologies. They include businesses that supply the critical software that enables smartphones and smart home devices, as well as those that supply the components required to make them.
Companies in these ancillary activities often have better earnings potential than those that supply the goods to the end user. That could be because they possess a key technological edge, provide a unique service, or are protected from competitors by high barriers to entry. And again, among these suppliers, it might not be the corporate behemoths that will deliver the best returns. Take the semiconductor equipment space, where producers of specialised equipment tend to be found in that mid- to large-cap investments neighbourhood.
Clearly, we are living through an age of unprecedented technological innovation, which will continue to transform societies. But identifying the companies that will profit most from this change requires an ability to think tangentially and the skills and knowledge developed from decades of investing in the sector something that we believe can be found in a technology investment trust.
