The technology sector’s wild ride these past few months serves as a harsh reminder for financial advisors and their clients that these investments carry a high level of risk – and a winning investment today could quickly turn into tomorrow’s biggest loser.
Tech stocks have attracted keen interest among investors, thanks to emerging technologies such as blockchain and artificial intelligence (AI), which present new investment opportunities, as well as a slew of established mega-capitalization stocks that continue to reach new heights.
“There are always opportunities in technology,” says Jordan McNamee, analyst with Cambridge Global Asset Management, a division of Toronto-based CI Investments Inc. “[But clients] shouldn’t be investing in the technology sector if [they] can’t deal with volatility.”
In March, prices of several major tech stocks tumbled when media outlets revealed that political consulting firm Cambridge Analytica had collected personal information on tens of millions of users of social media giant Facebook Inc.’s platform – without their knowledge or consent – and that those data were used to influence voter opinion leading up to the 2016 U.S. presidential election. That revelation triggered widespread backlash: some Facebook users boycotted the platform due to fear about the security of their personal data.
As details of the scandal emerged, Facebook’s stock plunged by 17% to US$152.22 on March 27 from US$184.06 on March 12. Other tech stocks also experienced hefty declines in the wake of the news, as data security is an issue affecting many companies in the tech sector. The stock of Alphabet Inc., which owns Google, declined by 14% over the same period, while Twitter Inc.’s stock plunged by 21%.
“[The scandal] really shows the power of data – how they can be used for bad and for good,” says Maria Pacella, senior vice president of private equity with Vancouver-based PenderFund Capital Management Ltd. and portfolio co-manager of Pender Technology Inflection Fund. “In a lot of cases, [data] go to the core of [tech firms’] business models.”
Although Facebook’s, Alphabet’s and Twitter’s stock regained at least a portion of those losses in the following weeks, the sharp declines demonstrated the tech sector’s vulnerability to sudden shocks and swings.
“You really do need to invest long-term in tech companies because you will see this shorter-term volatility,” Pacella says.
The Facebook scandal came on the heels of a much more volatile ride in another part of the tech sector. The prices for cryptocurrencies – bitcoin, in particular – have turned sharply downward in the first few months of 2018 after bitcoin surged to almost US$20,000 in December 2017.
As of March 31, bitcoin’s price had dropped by 64% since its December peak, to US$6,926.02. For investors who bought the cryptocurrency at or near that peak, that drop was a reality check.
Despite these recent bouts of volatility, fund portfolio managers say the tech sector is ripe with opportunity for investors. In fact, a slew of new investment funds have emerged in recent months that provide unitholders with exposure to various elements of this bustling sector.
One example is Fidelity Global Innovators Class fund, which was launched in November 2017. That fund invests in equities issued by companies that have the potential to be disruptive innovators.
Mark Schmehl, portfolio manager with Fidelity Investments Canada ULC and portfolio co-manager of the Fidelity fund, says he considers cryptocurrencies such as bitcoin far too risky for the average retail investor, although he sees attractive investment opportunities related to the broader trend toward electronic currencies, as well as the blockchain technology underlying them.
“There are real movements toward moving money online in an electronic form,” Schmehl says. “Bitcoin was the first one; I would argue that it’s not the best one. The way we interact with money and investing is going to change tremendously over the next 10 years. So, I’ve been investing heavily in this space across [the] funds [I manage].”
Schmehl’s funds have exposure to that theme through cryptocurrency exchanges such as Toronto-based Coinsquare Ltd.; “cryptocurrency mining” companies such as CryptoGlobal Inc., also of Toronto; and companies active in blockchain technology, such as Vancouver-based BTL Group Ltd.
Robotics is another industry with significant growth potential, says Steven Hawkins, president and co-CEO of Toronto-based Horizons ETFs Management (Canada) Inc. In November 2017, Horizons partnered with Dallas-based ROBO Global LLC to launch Horizons Robotics and Automation Index ETF, which provides exposure to companies offering robotics and automation-related products and services.
“Robotics and automation are part of everything that we do on a daily basis now, and we see that becoming only more prominent and prevalent in everything we do,” Hawkins says. “From a pure growth perspective, this [industry] has so much opportunity.”
The rapidly growing realms of big data and AI also carry plenty of opportunity for investors as organizations continue to uncover new ways of utilizing the vast pools of data.
“Any solution that can help capture, store, search, analyze, share and secure data is really interesting,” says Pacella. “We think there’s a lot of opportunity.”
Although the Facebook scandal demonstrates the risks surrounding big data, the opportunities still outweigh the risks, adds McNamee: “The pullback in the [Facebook] stock, I think, is an overreaction.”
Facebook’s ability to target ads narrowly by using data has helped the firm tap into the massive – and rapidly growing – digital advertising market effectively, McNamee adds.
But advisors must warn clients keen on investing in tech about the likelihood of volatility, McNamee warns: “There are tons of risks.”