Facebook, Amazon.com and Alphabet (formerly Google) are changing the world in which we live and have garnered enormous market valuations, but they are not the only holdings of the technology funds that have turned in the best performances for the last three years. Instead, these funds are loaded with semiconductor stocks such as Broadcom, NXP Semiconductors and Skyworks Solutions, which have risen between two to four times during the period.

The lure of tech companies is that they trade in new inventions and innovation, creating their own demand and upending established industries. Facebook and Twitter have changed how people connect and information is disseminated. Alphabet’s search engine, Google, is the starting point when trawling the internet for information. Amazon has driven the shift to online shopping. And, Apple accounted for over 90% of global smartphone profits last year. On the other hand, tech stocks are susceptible to overvaluation and have to continue taking risks with new products to avoid obsolescence.

The MSCI World Information Technology Index has returned 37.2% over the last three years, easily beating the broader MSCI World Index’s 10.8%. In Singapore dollar terms, that translates into a total return of 49.9% over the same period, or an annualised return of 14.4%. Among the 14 “Sector Equity Technology” funds available for sale in Singapore (out of 148 worldwide), there is a strong tilt towards tech-related software and services giants such as Facebook, Alphabet and Amazon. Only four of the funds lean towards hardware businesses making computer parts, communication equipment and semiconductors. Yet, of the three actively managed tech funds in Singapore that have outperformed the MSCI World IT Index over the last three years, two are hardware-oriented funds.

Leading the pack with an annualised return of 17.3% is the $36 million Threadneedle (Lux) Global Technology AU fund, which has threefifths of its portfolio — the highest among tech funds — allocated to hardware. Almost half of the fund is concentrated in semiconductor makers such as Broadcom, Skyworks Solutions and Lam Research. These stocks are long-term holdings and have returned 344.1%, 193.6% and 70.1% respectively over three years.

The other fund that has delivered index-beating returns with a tilt towards hardware is the $1.3 billion Fidelity Global Technology A-EUR fund, which has posted an annualised return of 16.6% over three years. However, unlike the Threadneedle fund, the Fidelity fund is only 20% invested in semiconductors. The rest of its hardware exposure is spread across consumer- facing giants such as Apple and Samsung Electronics.

This year, the fund has benefited from a 24.5% bounce in shares in Applied Materials that it bought at end-February, according to data from Morningstar Direct. The world’s biggest maker of machinery used to manufacture semiconductors released bullish sales guidance 2½ weeks ago on the back of customers ramping up production of new-generation chips and displays. The fund’s other purchases in February included hard disk drive maker Western Digital, which has lost 2.9% since then. Overall, the fund has 5.4% invested in data storage — the highest among all the funds — a sector threatened by the rise in cloud computing and slowing personal computer sales.

The only actively managed fund focused more on software and services-related tech stocks that has beaten the index over the last three years is the $1.3 billion Franklin Technology A Acc USD fund. A strategy of actively seeking returns outside of its benchmark has generated high and consistent annualised returns of 15.8% for the fund. “In the internet software and services space, our off-index position in e-commerce platform provider Demandware was the top contributor amid outsized April gains, followed by an overweighted stake in Facebook,” says John Scandalios, manager of the Franklin fund, in a monthly update to unitholders.

Other bets that paid off for the fund include technology-focused real estate investment trusts. These include wireless communication tower owner American Tower and Equinix, the world’s largest provider of data centre and internet exchanges. The latter has been a strong performer over one year, up 37.7%. The fund also does not shy away from hardware bets that include NXP Semiconductors, up 208.9% over three years.

The fund with the highest exposure (almost 64%) to the software and services-linked segment of the tech sector is the $153 million Parvest Equity World Technology C C fund. Its holdings include business analytics software company Tableau Software and networking website Linked In. The fund purchased shares in LinkedIn during the February rout. The stock has risen 9.7% since then, after beating first-quarter earnings expectations and boosting its full-year outlook.

Cheap channels to Henderson fund
The largest of the tech funds is the $2.8 billion Henderson Horizon Global Technology A2 fund. Some 16% of the fund is invested in Alphabet and Facebook. Overall, nearly a quarter of the fund is invested in internet-linked stocks, which are seen to draw a rising portion of advertising spending away from traditional print and TV. “Facebook and Alphabet are long-term holdings in the Henderson Global Technology Strategy and fourth-quarter earnings provided further evidence of the trend of advertising dollars moving online,” says Alison Porter, manager of the Henderson Horizon fund, in an April 4 commentary.

There are multiple channels to gain exposure to the Henderson Horizon fund, some at cheaper cost, hence providing better returns. For instance, the $68 million Henderson Global Technology feeder fund has an expense ratio of just 1.84% versus the main Henderson Horizon fund’s 1.88%. As a result of being approved under the CPF Investment Scheme, the smaller fund has a front load capped at 3%. However, the Henderson Global fund will be delisted from the CPFIS effective July 1.

Henderson Global Investors, the firm that manages the Henderson Horizon fund, also sub-manages the $121 million Eastspring Inv Global Technology A fund, into which the $116 million Eastspring Inv UT Global Technology fund feeds. The latter offers an expense ratio of just 1.72%. The Eastspring Inv UT fund is also approved under the CPFIS and thus has a front-load cap of 3%.

Taiwan as a tech proxy
The three Taiwan equity funds available for sale in Singapore are another way to gain exposure to hardware-biased tech. Annualised returns over the past three years have generally been poor for the $182 million Fidelity Taiwan A-USD fund, the $4 million HSBC GIF Taiwan Equity AD fund and the $14 million LionGlobal Taiwan SGD fund. However, the Taiwan Stock Exchange Capitalization Weighted Stock Index rallied recently over the semiconductor industry’s brighter prospect.

This article appeared in the Personal Wealth of Issue 731 (June 6) of The Edge Singapore.