This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
There are several main approaches to investing in technology, which remains the world’s biggest sector by market capitalization. What the differing strategies had in common in 2022 is that nothing worked.
The most diversified and generally the lowest-cost approach is a passively managed strategy that tracks a market benchmark. The technology-heavy Nasdaq-100 index is often viewed as a proxy for that sector and is the benchmark for many index ETFs and mutual funds. The BMO Nasdaq 100 Equity Index ETF, for example, lost 28% last year while charging a relatively modest management fee of 0.35%.
Within the active camp are two contrasting approaches. One emphasizes profitable large-cap companies, while the other focuses on innovative companies with high growth potential but often with little or no earnings and heavy startup costs.
Among the more conservatively managed technology funds is the Harvest Tech Achievers Growth & Income ETF, which holds 20 equally weighted large-cap stocks that have above-average return on equity, and below-average price/earnings and price earnings/growth ratios. To reduce volatility and generate premium income, Harvest writes covered calls on up to 33% of each stock holding.
The Harvest ETF, which charges a management fee of 0.85%, was recognized at the 2022 Refinitiv Lipper Fund Awards as the best sector equity fund over three and five years. That was no consolation to investors who held the fund, which ended last year with a 32.2% loss in Canadian dollars, trailing the Nasdaq-100.
Worse still was the dreadful performance of some of the most aggressively managed funds. Among them was the Emerge ARK Global Disruption Innovation ETF, whose holdings include genomics, artificial intelligence, cloud technology and autonomous technology applications.
Managed by New York-based ARK Investment Management LLC, the ETF lost 63.8% in 2022. Despite a spectacular 134.8% gain in 2020, its annualized loss is 12.2% since its inception in July 2019.
Active managers have the flexibility to manage risk in a fast-evolving market environment, said James Learmonth, senior portfolio manager with Oakville, Ont.-based Harvest Portfolios Group Inc. He manages Harvest Tech Achievers.
Given market volatility, Harvest continues to take a “relatively conservative” approach to technology investing.
“With the deteriorating macro environment that we’re seeing, we don’t want to be too aggressive getting in front of that,” Learmonth said.
Rising interest rates have taken a heavy toll on growth stocks as investors shunned unprofitable companies that are burning through cash, and discounted the value of their potential future earnings.
“The more capital you need, then the more you’re going to pay as interest rates go up,” said Lisa Langley, CEO and president of Toronto-based Emerge Canada Inc., which sponsors the Emerge ARK mutual funds and ETFs.
On the bright side, Langley said, “peak inflation is behind us” and the growth themes driving the Emerge ARK strategies remain intact. Innovation becomes even more important during periods of economic weakness, she added, as companies seek technology solutions to do more with less.
In November, BMO Investments Inc. also gave its vote of confidence to the ARK Investment firm headed by Cathie Wood, offering genomics, next-generation internet and a broad innovations mandate as BMO mutual-fund or ETF series.
Last year’s sharp declines created opportunities, said Jonathan Curtis, senior vice-president and portfolio manager with the Franklin Equity Group in San Mateo, Calif.
For long-term investors, “the risk/reward profile in the technology sector is likely the best it has been in several years,” Curtis said. Among the promising themes identified by the Franklin managers are companies that serve business customers in areas such as enterprise software, the cloud, artificial intelligence and machine learning, and cybersecurity.
Conversely, the Franklin tech team anticipates greater uncertainty in consumer-driven segments such as gaming, personal computing, e-commerce and digital advertising. “We also expect consumer discretionary spending to weaken as unemployment rises and as excess household savings that had built up during the pandemic decline amid persistently high inflation,” Curtis said.