What would you call it if you gave a party and just about everybody came?
Maybe, the Tech Rally of 2019.
After a tough 2018 when riskier or “high beta” stocks got nailed in the fourth quarter, tech has had a revival this year that is startling in both its magnitude and its breadth. The average tech-stock fund tracked by Morningstar was up 22% for the year at the middle of last week, compared with a 16% climb in the S&P 500 (.SPX). Only seven tech funds in Morningstar’s database were trailing the broad market, but the mean actively managed tech fund was still 5.6 percentage points behind the surge in the S&P 500 Information Tech subindex.
“Information technology was the S&P 500’s best-performing sector during the first half of 2019,” Morningstar analyst Robby Greenhold says. “The sector’s gain accounted for almost a third of the S&P 500’s rise.”
The most distinctive thing about tech funds so far this year is how difficult it has been to do badly. Only one fund is in the red, the $8.2 million Upright Growth fund (UPUPX), and four funds tracked by Morningstar are up more than 30%. The only funds doing better are those—notably gold funds and more recently long-dated bond and real-estate funds—which play on the uncertainty that President Trump’s market-moving outbursts brought this summer.
All sorts of different tech-investing strategies are working. What follows is a look at the portfolios of some of the top performers.
No. 1 this year is Fidelity Select IT Services fund (FBSOX), up 37%. The $4 billion fund has little of the dot-com flash associated with the FAANG stocks (Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOG)). The big idea at Select IT Services right now is payments—companies that automate or digitize the movement of money, either from consumers to stores or between institutions. Most of the fund’s investments are in familiar names from before the days when tech dominated the stock market.
The top four holdings as of June 30 were all payments plays, and accounted for 43% of the FBSOX portfolio: Visa (V), Mastercard (MA), PayPal (PYPL) and Worldpay Inc., which was acquired by Fidelity National Information Services in July.
“The global migration from cash to electronic payment methods has continued, creating a rising-tide environment for a number of payment-related companies,” fund co-manager Zach Turner says. “There has also been significant consolidation.”
The top five contributors to the fund’s gain, Mr. Turner says, have all been payments-related stocks such as Visa, Mastercard, PayPal and First Data Corp. The fund added to its positions in Visa and Mastercard in the second quarter. After Worldpay and First Data were acquired the fund added to its positions in the acquirers, Fidelity National Information Services and Fiserv.
Right behind the Fidelity fund are mutual funds still working the consumer-internet themes powered by the FAANGs. BlackRock Technology Opportunities fund (BGSAX), for example, was up 31% as of last week with a portfolio that has Chinese internet leaders Tencent (TCEHY) and Alibaba (BABA) as well as Alphabet and Amazon in its top five holdings. Facebook and Apple are in the top 10.
Another top tech fund is Firsthand Alternative Energy (ALTEX), considered a tech fund by many because semiconductors are so important to solar power and power-grid management. This fund’s top two holdings are chip-related companies, Power Integrations (POWI) (up more than 40% this year as of last week) and Cree (CREE). But Firsthand has had a weaker track record than most of its top peers, and Morningstar rates the fund one star out of five.
A common element among many of the top actively managed tech funds—except Firsthand—is a large holding in Microsoft (MSFT), whose cloud computing business has driven its stock up more than 30% this year, Morningstar’s Mr. Greengold says. Putnam Global Technology (PGTAX) has 19% of its holdings in Microsoft.
Passively managed tech funds have seen even bigger returns than their actively managed brethren.
Exchange-traded funds focused on U.S. tech stocks were up an average of 21.8% for the year as of Aug. 21, says Stacey Brorup, a research assistant at ETF.com. Chip and software stocks helped lead the way. Chip returns were nearly double those of U.S. internet companies for the same period.
The top-performing tech ETF so far this year, with a gain of roughly 50%, is Invesco DWA Technology Momentum ETF (PTF), whose strategy is to make concentrated bets on 30 or more companies that have recently been near the top of the tech-heavy Nasdaq index (.IXIC). Its biggest holding, Enphase Energy (ENPH), which makes equipment to convert solar power to alternating current from direct current, has doubled since early May.
The tech disconnect
It’s not certain how much longer the tech rally can run, ETF.com chief executive Dave Nadig says.
“The next 12 months will largely be about the disconnect between tech and the rest of the market,” says Mr. Nadig, who argues that so far tech has been less exposed to trade tensions than other stocks. “This can’t last forever, and with the additional tariffs coming on, I think we’re set up for a rough patch. That’s part of why we see so much volatility in the sector.”
CFRA Research strategist Sam Stovall is still relatively bullish on tech stocks, which the New York-based firm rates “overweight,” but is watching the sector and wondering how long this rally can last. That said, tech stocks’ 12% valuation premium to the rest of the market is equal to its median for the past 21 years, he adds.
“We have an ‘overweight’ ranking on tech and are wondering about the same thing,” Mr. Stovall says. “The chart shows tech remaining strong versus the S&P 500, but the strength has waned over the past year.”
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