Brewin Dolphin's Hood: Investors should prepare to ride out tech volatility
Expect 'frothiness' in tech share prices
Heightened regulatory risk, the relentless outperformance of growth stocks across varying market conditions and an increasing number of retail investors buying and selling shares mean investors should prepare themselves for "frothiness" in technology share prices, according to Brewin Dolphin's David Hood.
However, the head of central investment solutions still believes the tech sector will fare well over the long term, and therefore holds an overweight via several US equity funds across Brewin Dolphin's model portfolios.
"What has been interesting is the growth momentum we have seen. Not only did growth outperform in Q1, it outperformed in Q2.
"Those two periods had very different characteristics; one with a strong sell off, and one with a strong rebound. So, there are things to be wary of," he explained.
"The other factor to be slightly mindful of is potential frothiness in the growth sectors. We have read about more and more retail investors trading in stocks over the past two quarters, as opportunities for gambling have diminished and people have turned to taking punts on stocks."
That said, Hood remains positive on the tech sector, having maintained his overweight since before the coronavirus crisis.
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"At the start of the year, we were positive on the macro outlook," he said. "We observed that presidents rarely lose a second term, unless there is a recession beforehand.
"There wasn't an immediate catalyst for a recession; the jobs market was tight, unemployment was low, then Covid-19 kindly offered a reach into a recession.
"That has obviously turned politics upside down in the US. And now we see that Joe Biden is ahead in polls and the Democrats are even in line to take the Senate, which is a really interesting change we have witnessed over the last six months.
"Reading it cold, we think there is the potential for that to be slightly negative for US markets in terms of the potential for regulation of large tech firms, or higher taxation for corporates or individuals.
"But in spite of that, we think that the US offers firms that are really unique relative to anywhere in terms of their growth prospects."
The head of central investment solutions said his US weighting has been "very beneficial" for the performance of the portfolios, in particular their exposure to the £4.1bn Baillie Gifford American fund which, year to date, has returned 69% according to data from FE fundinfo, making it the second-best performing fund in the IA North America sector.
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"It has a very high US growth exposure," Hood reasoned. "Some of its top holdings are Tesla, Amazon, Shopify, WayFair and Netflix - the types of businesses that everyone has been making heavy use of generally over the last six months or so.
"Within our MI Select Managers North American fund, we have let that position run towards the higher end of the vehicle's tolerance to account for a large proportion, but nevertheless we have been rebalancing from time to time into value strategies.
"We cannot ignore the momentum but we have to keep portfolios balanced."
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