Sector Watch: Investors are piling into tech shares and funds

Investors are piling in at a time when the US tech index – the Nasdaq – has hit its highest ever level. Apple’s share price has also climbed to a new peak.

Despite regulatory concerns, the US tech sector has seen some of the strongest performance in the month of May.

According to data from FE Trustnet, among Investment Association fund sectors, Technology and Communications posted the second-best performance in May, with the sector returning investors 7.84 per cent.

This was beaten only by the North American Smaller Companies sector, a grouping that encompasses many tech firms, which returned 8.38 per cent. Also in the top ten performers were tech heavy fund sectors of North American and Global equities, returning 5.44 per cent and 3.58 per cent respectively.

Individually, the best performing funds had a heavy tech bias. Baillie Gifford Global Discovery, which has 34 per cent of its portfolio in the tech sector, returned investors 13.8 per cent in May. Next up was Baillie Gifford American, a fund with a quarter of its portfolio in tech, returning 12.63 per cent. The third best performing fund was Marlborough’s Techinvest Technology, returning 11.94 per cent.

US tech index hits record high

The strong performance of the tech sector has helped drive US equity markets higher. The Nasdaq Composite hit a new record on Monday (5 June), closing at 7,588.32. Apple shares too reached an all-time high, lifting its market cap towards $1 trillion. Amazon, Netflix and Microsoft also saw strong performance in May.

At the same time, over the past week (29 June to 4 June), the Technology Select Sector SPDR ETF has returned investors 2.68 per cent compared to just 1 per cent for the general SPDR S&P 500 ETF.

Despite wobbles following Facebook data sharing revelations, large tech firms have outpaced the broader to US market since the start of the year. As the chart below shows, FAANG stocks have surged in relative performance.

Source: WSJ's Daily Shot

This performance is a world away from the bearish sentiment that surrounded the tech sector following the Cambridge Analytica. Not that risk has gone away completely. The idea of ‘breaking up big tech’ is gaining political interest, if not large support. In May of this year a widely publicised political campaign was launched urging the Federal Trade Commission to break Facebook, Instagram and WhatsApp into smaller, competing firms.

None of this, however, seems to have deterred investors. In particular, investors appear to see the tech sector as safe place to be during the US and China’s escalating trade war. With many large US tech firms are already banned from operating in China, the sector is seen as somewhat immune from the fallout.

Most vulnerable to a trade war is Apple, which relies on China for its production process. Although that didn’t stop its share from hitting an all-time high on Monday. Investors remain unphased by a trade war risk, most likely due to the company strong earnings results posted in May.

How long this strong performance will continue is anyone’s guess, but for now at least, the tech fright appears to be over.

This the first of our regular ‘Sector Watch’ series where we will be highlighting sectors that have seen recent strong performance and explaining why.

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