The rise of the Semiconductor: Why investing in semiconductor companies could enhance your portfolio
Semiconductors play a crucial yet often overlooked role in driving advancements in AI, automotive technology and everyday devices. This article discusses why semiconductors are central to modern technology and how Allianz Technology Trust strategically invests in this dynamic sector to capitalise on its growth potential.
Key takeaways
- Semiconductors underpin computing and are playing a vital role in the technological revolution currently underway in so many areas, yet the sector is often overlooked.
- The pivotal role of semiconductors explains why it is one of the secular trends upon which Allianz Technology Trust plc focuses when investing for growth in technology.
- Given the complex nature of the sector, we think it is vital to invest via a portfolio managed by professionals with expertise in the semiconductor industry.
Civil aviation has changed dramatically since the 1960s, yet airliners look much the same as they did in the early years of the jet age. True airplane makers make use of new composite materials in the airframe and modern aircrafts are packed full of computers and software. However, the real revolution in civil aviation has taken place in the engines, which have become far more powerful and efficient, thanks to advances in technology.
It's a similar story in mobile phones. The first Apple iPhone, released in 2007, looks almost identical to the modern version. Yet smartphones today are incomparably more powerful than the early models. Again, it is in the ‘engines’ of those phones, the computer chips, where the most astonishing technological innovation has occurred – which is why Allianz Technology Trust (ATT) carefully targets some of the semiconductor companies that supply them.
Looking under the bonnet
And yet, while Apple and Samsung are household names because of their dominance of smartphones and other mobile devices, fewer people have heard of the companies that make the computer chips that power these devices. That is surprising given that semiconductors underpin computing and are playing a vital role in the technological revolution currently underway in so many areas.
Semiconductor chips, for example, are supporting the advance of artificial intelligence (AI). The vital nature of their role was highlighted in June, when Nvidia – a leading technology company that designs and manufactures high-performance chips – became the world’s most valuable company after its share price climbed to an all-time high, reflecting Nvidia’s position as a key supplier of the chips required for AI.1
But it’s not just in the futuristic world of AI that semiconductors are pivotal tech industry investments. As chips become increasingly powerful, their role in our everyday life has also expanded. The use of semiconductors in cars, for example, has exploded over the past 10 years, and they now power functions such as safety, communications and connectivity. On average, you’ll find anywhere from 1000 to 3000 semiconductor chips in a modern car,2 and their use is expected to grow even more as hybrid and electric vehicles become more common on our roads.
What are semiconductors used for?
Semiconductors can also be found all over the average home. Ovens, microwaves, washing machines, dryers, smart thermostats, personal computers and TVs are just some of the items that rely on them. And, again, demand for these chips has exploded in recent years as increasing numbers of devices become reliant upon them.
The increasing importance of semiconductors explains why it is one of the secular trends upon which Allianz Technology Trust plc focuses when investing for growth in the technology sector. However, this is a complex and surprisingly broad sector, so good stock selection is of paramount importance and helps provide exposure to diversified tech investments.
The industry ranges from highly specialised businesses that for example concentrate on producing chips for medical-device makers to manufacturers of all-purpose chips that are widely used.. The latter are operating in a highly competitive market and may not have any advantages that bring pricing power. Prices will simply ebb and flow in line with the global economic cycle and subsequent demand.
Semiconductor companies provide a diverse range of portfolio opportunities
The breadth of the industry allows the portfolio managers of Allianz Technology Trust to adopt a flexible approach to the types of semiconductor companies that are targeted. The investment universe ranges from the biggest semiconductor companies to smaller niche operators.
This allows for the creation of a flexible and diversified portfolio of semiconductor companies. There may be times, for example, when sector weighting is skewed to mainstream chip suppliers and others when there is more of a focus on specialised chipmakers. The managers also look at companies that are not directly involved in chipmaking, such as businesses that design the chips or supply power-management solutions to chipmakers.
The stock-picking process also involves taking account of other factors. For example, there are times in the economic cycle when some perform well, and others underperform.
Market forces also influence decision-making. When there is a semiconductor shortage, for example, chipmakers can price their goods more aggressively, whereas during periods of excess capacity they may have to cut prices. Those market forces will be reflected in their share price. So, there are many factors to be aware of when investing in the companies that are driving one of the key influences over the technological transformation of economies and societies across the world. That is why we believe it is so important to invest in a portfolio managed by professionals with an expert knowledge of the semiconductor industry and its associated investment opportunities.
