Portfolio Adviser • Portfolio Adviser May 2025 • Fund selector

David Holder, senior investment research analyst, and Ittan Ali, research manager at Square Mile Investment Consulting and Research (pictured left to right), take the temperature of the fast-paced IA Technology & Technology Innovation sector

At the end of March 2025, the Investment Association (IA) Technology and Technology Innovation sector had around 35 individual strategies totalling some £60.6bn of assets, with around a third of assets passive in nature predominantly via the exchange-traded route. To be eligible for inclusion, the IA states funds should invest at least 80% of assets in equities of technology and related sectors, including industries such as telecommunications, robotics and online retailers.

Investors have a wide range of choice within the sector. Aside from more broadly focused technology funds (both active and passive), which account for around 60% of the category by assets, the remaining 40% of the category focus on specialisation into more niche sub-sectors. These target thematic exposure to areas such as artificial intelligence (AI), cyber security, cloud computing, robotics and digitalisation, or to specific regional markets such as the US, Asia or Europe.

Many of these funds have been launched more recently as the themes play out and develop into investable strategies within what has the propensity to be a fast-moving universe. It should be noted there is also the potential for survivorship bias to be a salient feature in these sectors.

Investors who allocate to some of these niche sectors are likely to experience different investor outcomes versus those funds investing more generally in technology companies. There is the potential for less correlated returns to broader global technology strategies. For example one of the larger AI-focused passive strategies has exposure to consumer discretionary companies such as Amazon as well as advanced chip manufacturers such as Nvidia.

For those investors seeking pure-play technology exposure then the IA constituents offer the widest and most compelling options. However, investors allocating to broad global equities will still gain significant exposure to the technology sector, with information technology accounting for approximately 23% of the broad index. US-listed equities dominate global technology indices with around 70% expo- sure via names such as Apple, Nvidia and Micro- soft. Prominent non-US names include ASML and Taiwan Semiconductor.

Significant sub-sectors within global technology indices include semiconductors, hardware, systems and software.

There has been a profound shift in global economic policy since 2022, with rising inflation countered by interest rates hikes, prolonged geopolitical sagas (Ukraine/Russia, Middle East tensions) and very recently the appointment (or comeback) of a US president seemingly hellbent on challenging the global status quo for trade.

In that time, the tech sector has seen an almost undulating performance, initially down heavily in 2022 as the unwinding of interest rates increased and growth was replaced by value, before recovering strongly in 2023 and 2024 as the US economy, led by its technology behemoths, drove on.

In 2025, year to date (to end March) we have seen the sector sell off once again, impacted more by tariff uncertainties coupled with high valuations. During the past three years, the technology sector has witnessed the AI updraft with the ‘magnificent seven’ (Alphabet, Amazon, Apple, Meta, Nvidia and Tesla) collectively experiencing very strong cumu- lative performance.

The growth of these ‘hyperscalers’, with rapid and rising demand for larger datacentres, has seen their earnings grow exponentially in some cases, with valuations similarly being at peak levels. One cannot underestimate the impact of AI over this period, and going forward, too.

McKinsey & Company research notes that ‘Gen AI’ saw a spike of almost 700% in Google searches between 2022 and 2023, underpinned by a remark- able pace of technological innovation filtering across multiple sectors outside technology. New trends in AI, such as robotics, continue to emerge, while chatbots have also entered the mainstream, evolving quickly with AI learning.

The Dow Jones Global Technology index has been significantly more volatile, in terms of standard deviation over the past three years to the end of March 2025, compared with the MSCI AC World index and the IA Technology & Technology Innovation sector.

However, investors have been more than compensated in terms of cumulative performance and from a risk-adjusted perspective with an index return of 40.3% easily surpassing global equities return of 24.7% and the IA Technology & Technology Innovation sector return of 22.1% (all returns in GBP).

The IA Technology and Technology Innovation sector holds £60.6bn of assets, with the 18 passive vehicles accounting for £19.9bn as at the end of March 2025 and the 17 active strategies accounting for £40.7bn. The IA category is skewed to the largest 10 vehicles which amount to £51.8bn or around 86% of the sector’s assets. Four of the largest five holdings are active and Fidelity Global Technology is comfortably the largest fund as at the end of March 2025 with assets of £18.6bn. This is followed by the iShares S&P 500 Information Technology Sector Ucits ETF at £7.4bn with the Pictet Robotics fund third largest at £6.8bn.

Fidelity Global Technology, managed by HyunHo Sohn (pictured below), aims to achieve long-term capital growth and is currently less exposed to US versus broad technology indices at 57.9%, with developed Asia at 12.1%. The portfolio is diversified across around 100 holdings with the top three positions being Taiwan Semiconductor Manufacturing, Microsoft and Apple amongst a top 10 that accounts for 35.9% of the fund.

The iShares S&P 500 Information Technology Sector Ucits ETF seeks to track the performance of an index composed of US information technology companies as defined by the Global Industry Classification Standard. The fund is very concentrated with the top 10 stocks accounting for 75%, including substantial weightings in Apple, Microsoft and Nvidia.

Pictet Robotics is benchmarked against broad global equity markets rather than a technology index but is focused on companies that contribute to the development of robotics or benefit from these developments. From a geographic perspective the US makes up the majority of assets at 68% (March 2025) with Japan the next most prominent country at 10.7%. The top three holdings are Taiwan Semiconductor Manufacturing, Salesforce and Lam Research, with the top 10 positions accounting for around 45.7% of the fund.

Despite investing into a sector that is synonymous with innovation, only two funds within the sector have been launched during the past three years. They currently account for a relatively modest £8.3m of assets. Both are passive vehicles focused around fairly niche sub-sectors within the broader technology opportunity set.

The Invesco Artificial Intelligence Enablers Ucits ETF was launched at the end of October 2024 and aims to track the S&P Kensho Global Artificial Intelligence Enablers Screened index. Information technology makes up the bulk of the sector weighting at 86.2% with communication services next at 4.9%. The portfolio has around 30 holdings and is dominated by country exposure to the US at 75.9%, which is a little less than some global technology indices. The top three holdings are Microsoft, Alibaba and Nice.

The Invesco Cybersecurity Ucits ETF was also launched at the end of October 2024 and aims to track the S&P Kensho Global Cyber Security index. Information technology makes up the bulk of the sector weighting at 91.2% with communication services next at 5.2%. The fund has around 40 positions currently and is dominated by country exposure to the US at 70.2%, which is less than some global technology indices. The top three holdings are Trend Micro, Check Point Software and Juniper Networks.

The top six best performers over the past three years are passives and account for eight of the top 10 performers in total. The iShares S&P 500 Information Technology Sector Ucits ETF at 50.9% was comfortably the best performer, followed by the SPDR S&P US Communication Services Select Sector Ucits ETF and SSGA SPDR MSCI World Technology Ucits ETF, which returned 41.5% and 40.6%, respectively. The IA category returned an average of 22.1% by way of comparison.

The actively managed Janus Henderson Global Technology Leaders fund, managed by Graeme Clark and Alison Porter (pictured below), together with Richard Clode (pictured below), and the Fidelity Global Technology fund were seventh and eighth respectively in terms of three-year performance, returning 36.9% and 36.7%. Active managers can struggle where market leadership is very narrow as concentration and Ucits rules will limit their ability to be at market weight in the largest index constituents, with any significant outperformance of these names hindering the potential for relative performance. For example, the largest three holdings in the Dow Jones Global Technology index at the end of March 2025 were Apple, Microsoft and Nvidia, which accounted for nearly 60% of assets.

These stocks returned cumulatively 31.9%, 27.4% and 305.8% over three years. By contrast, the weighting of these stocks in the Janus Henderson Global Technology Leaders and Fidelity Global Technology funds were 20% and 10%, respectively, at the end of March 2025.