Deep Dive: Endowus Technology Portfolio

Key Highlights

• Ride the wave of technological innovation

Technology is fueling disruptive innovation, creating new possibilities and transforming our world. Take advantage of the higher long-term returns from exposure to the leading tech companies globally.

• Broader exposure to the future of technology

Gain exposure to the fastest growing tech companies and non-tech sector companies leveraging technology to transform their industries and build their competitive advantages. Gain some exposure to private tech companies before they list in public markets.

• Managed by global leaders in tech investing

A curated selection of the best-in-class tech funds in a multi-manager portfolio, with the expertise, scale and proven track records in identifying opportunities across key tech themes such as AI, robotics, digitisation, blockchain, and more. These industry leading fund managers include Blackrock, Franklin Templeton, Fidelity, Allianz.  

Learn more about how you should approach a Core-Satellite Portfolio investment strategy here.

What is the Endowus Technology Portfolio?

The Endowus Technology Portfolio is designed to give access to the most innovative companies globally that benefit from the advancement and application of technology. The idiosyncratic or non-systematic returns that is achievable from the Technology sector is high and has traditionally been a high source of alpha for investors, despite its high volatility. It sets itself apart from other traditional technology portfolios in the industry or buying a single technology fund as it provides more systematic diversification benefits.

We have gone through a rigorous due diligence process whereby we screened for all the Technology funds in the universe available for Singapore working with the leading experts in Technology investing. We have selected several best-in-class funds to be the building blocks of the Technology portfolio. The portfolio is constructed and optimised by looking at the underlying characteristics of each of the underlying funds — various quantitative measures to assess its historical risk-return profile, assess its investment philosophy and process and the people behind the investments, measure its factor biases — whether it is more growth or value, momentum or contrarian - and approach, the design and construct of the portfolio and its holdings.

When designing the portfolio, the Endowus Investment Office took into consideration to maximise the diverse sources of potential returns. One example of this is how we have included not only a focused and concentrated bet on the core technology sectors of software and hardware, but also non-traditional tech sectors. So the portfolio includes companies that are the traditional providers of products or services directly related to technology, but also companies that do not belong to the technology sector in more traditional non-tech industries, yet will leverage technology to enhance their competitive advantage within their sector and create long term shareholder value. We have also included funds that will give us exposure to private unlisted Tech companies in the growth stage to provide more diversified opportunities to generate returns.

What are the underlying funds in the Endowus Technology Portfolio?

We have selected five best-in-class funds focused on technology and innovation, managed by four globally-renowned fund houses — Allianz, BlackRock, Fidelity, and Franklin Templeton. The funds were chosen for their strong, benchmark-beating performance, as well as for their unique respective investment focuses (as summarised above). Collectively, the funds provide investors an diversified and optimised exposure to technology investing.

We work with these global leaders in technology investing to achieve the lowest way to access high quality funds. Often accessing institutional share classes or 100% rebating of trailer fees to achieve a lower net fee. We also have worked to bring in and introduce new funds or share classes of funds on the Endowus platform, which means that some of these funds can be exclusively accessible through the Endowus platform. We endeavor to continue to partner with major global and local fund managers to improve on the access to best-in-class funds at the lowest cost achievable.

Active management by top fund managers to generate higher returns with lower risk

Given the vast investment universe for technology and tech-related equities, as well as the complexity in understanding the impact of technology on their business models, we think that technology investing can be most efficiently done by leveraging the expertise of reputable fund managers to extract alpha through their unique investment approaches.

The Portfolio has been constructed to benefit from the collective wisdom of the underlying funds to generate high returns through exposure to a diverse basket of companies (as illustrated previously), and this has proven to be  successful historically compared to the market:

Why invest in Technology?

Technology outlook remains strong, even after COVID-19

The technology sector, with its strong growth over the past 20 years, has established itself as one of the key sectors in the global equity market. Between January 2000 and December 2020, the tech sector accounted for 35% of the total MSCI ACWI returns, and the MSCI ACWI/IT Index has grown by more than 700% between July 2005 and September 2021. This includes the unprecedented uplift experienced by the sector since the outbreak of the pandemic in early 2020. The rapid digital adoption has been unprecedented and the continued acceleration of its growth in all areas of our lives is clear to see. Even Endowus has been a testament to this trend. Many suggest that there has been a tectonic shift in the overall landscape of technology and digital adoption and these times of crisis also represent periods when the greatest innovations and technological advancements occur. The long term structural growth outlook for technology and innovative sectors remains high. But the question that obviously follows is whether the market is already pricing in all of this positivity towards technology and the tech companies in which we invest.

Especially for those in whom the memories of the Dot-com bubble is still alive, despite the passage of 20 years, and more recently the global financial crisis of 2008/9, it might be natural for an investor to wonder whether the tech sector is “overpriced” or “overbought”. Many would question whether it is a sensible thing to still invest in the Tech sector now. It is a question that no one can and should answer as we cannot predict the future and we will only know once it has happened and we look back on it. One thing that is clear is that those who sold during the March 2020 crisis or those who sold even at the beginning of the year with the sharp rebound well behind us and the sector and market at new highs, would look back now and consider those decisions a mistake. We are again near all-time highs and markets have generated strong returns and the Tech sector again has not disappointed. So we are faced with the exact same questions again that we cannot again answer. However, one metric that people try to find comfort in is to look at the valuations of the tech sector to see whether it is frothy.  If we look at a simplistic Price-Earnings(PE) ratio above, it seems to suggest that while we are at high or elevated levels, it is difficult to say we are in bubble territory or that we are in unsustainable levels. The reason is because the tech sector normally and historically has always traded at a premium to the market and unlike in previous cycles such as the dot.com bubble, the companies are highly profitable, showing strong growth and are some of the best managed companies in the world. This means that the fundamentals and the share price of the tech sector as a whole is not removed from each other in any meaningful way.

Technology offers diverse investment opportunities

The technology sector constitutes a large and diverse investment universe, and represents a meaningful portion of the overall market. The frequent media appearances of market-favourite names such as Alphabet (Google), Meta (Facebook), and Tencent can distract an investor from seeing the hugh and diverse opportunity sets in the the broader sector, but the Endowus Technology portfolio is intended to provide that broad diversification benefits within and beyond the traditional tech sector. Also, the underlying sub sectors have diverged in performance and allows for professional institutional investors to pick off high return opportunities within the sector. The MSCI ACWI tracks a wide range of technology sub-sectors which offer attractive opportunities as shown in the chart below.

An even more tantalising opportunity set awaits investors who not only consider listed equities, but also the private technology market that is characterised by more niche, differentiated products compared to their larger, listed counterparts. While there are about 980 private “unicorn” companies, the universe expands to approximately 497,000 private tech companies of all sizes and valuations across the world — a vast ocean compared to only about 8,000 public companies listed worldwide.  While statistics show only 70% of venture companies in this private tech space fail and go to zero, it is normally when they are at the early stage of growth. This is precisely why it is important to have professional investors, who can screen for the most desirable tech private companies. Also, leveraging the scale and brand of Blackrock and Franklin Templeton, two of the biggest Tech investors globally, allows them access to private deals that would not be available to private or retail investors. Through these funds, Endowus is providing access to some of the most desirable tech venture firms that are yet to enter the public markets.

Moreover, the proliferation of private capital is allowing companies to “delay” their IPO while strengthening their fundamentals, therefore achieving higher valuations at IPO limiting the upside in after it lists in the public market and so gaining exposure in the private markets in late stage growth ventures allows some of the upside to be captured in this portfolio early. This upwards trend in valuation is also clearly seen in recent IPOs of technology companies, which adds on to the attractiveness of investing in the tech sector, both listed and private.

Boundary of technology is blurring

The advancement of technology has resulted in widespread adoption, even in seemingly “unrelated” industries where technology previously was not actively used, such as in agriculture and education. New cutting edge technology, including artificial intelligence applications, have enabled these sectors to be more efficient and profitable.

Today, technological adoption has become a critical indicator of the success of a business, and companies across all industries are spending more in technology-related investments to improve their competitive advantage. Given this historical trajectory, as well as the ongoing advancements in technology and its growing application, we think that technology will continue to remain a key pillar in the global equity market.

Who should invest in Technology?

The long-lived mantra in investing, along the lines of “high risk, high returns,” is never wrong and is even more appropriate when considering technology. While the sector offers highly attractive benefits as outlined above, tech investing has demonstrated a high level of risk through cycles, and one should consider his  or her risk appetite carefully before deciding to allocate specifically to technology. More importantly, it is also important to assess what is the appropriate amount of allocation in the overall investment portfolio so that you have a holistic picture of your exposure and level of risk.

A quick and simple assessment would be for an investor to ask himself, “if there was another Dot-com bubble, Global Financial Crisis (“GFC”), or the outbreak of COVID-19 again tomorrow, will I be able to stay invested despite the short-term volatility?” In the three market crises in 2000 (Dot-com), 2007 (GFC), and 2020 (COVID-19), the MSCI ACWI IT Index suffered massive drawdowns. Additionally, apart from such major market crashes, the technology sector has been a historically volatile sector with an annualised volatility of 22.9% from January 2000 to October 2021.

Another relevant question would be “how long can I stay invested with the losses, even if there was a crash in the tech market tomorrow?” Although the tech sector has become more resilient against market crises, one might still argue that the recent rebound from the COVID-19 drawdown was an outlier, as the pandemic effectively accelerated digital adoption to the sector’s favour. Ultimately, the longer one’s investment horizon, the greater the chance of their investment riding out the market volatility to achieve a higher return.

All in all, investors who are prepared to withstand the potentially steep losses arising from market volatility and have a mid to long-term investment horizon would be best suited to allocate to the tech sector.

Why should you invest in the Endowus Technology Satellite Portfolio?

Invest in a diversified technology portfolio

The Portfolio is globally diversified, with a high allocation to US companies, reflecting the large opportunity set in the US market for technology companies. It also has a notable allocation to Asian markets such as China, Korea, Japan, and Taiwan, as well as to European nations, such as Netherlands, Germany, and France.  Although it may appear at first glance that the Portfolio is fairly overweight to the US, we remain confident in the overall diversification of the Portfolio as it is designed to efficiently capture the best opportunities in technology investing, whether it is assessed from a sectoral or a market capitalisation point of view. One of the key reasons for the large US overweight is the heavy dominance of US technology companies in the global technology index.

While many of these companies are founded or headquartered or domiciled in the US, often the US companies) have a global footprint which means their exposure is truly global and well diversified across the world. Think about even our own daily lives here in Singapore and we know that we use many of the household names like Apple phones and Netflix for entertainment and Amazon and Facebook and Google is of common usage here. So the revenues and profits generated by these US firms are truly globally diversified and are not geographically contained to the US.  The portfolio also complements the new Endowus Megatrends portfolio as it has more exposure to less discovered and emerging themes and therefore less overlap with the Technology portfolio, which has exposure to more dominant themes and large addressable market opportunities.

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Also, the large overweight position in the US is spread out across different market capitalisations of underlying equities. Additionally, although not included in the breakdown above, the Portfolio also contains Funds that allow placements into private companies of up to 3.5% on a portfolio level, which provides another chance to further diversify the Portfolio.

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In terms of sector exposure, the Portfolio naturally allocates a majority of its investments in the technology sector, however it contains healthy diversified exposure to the various sub-sectors within technology. Also, the portfolio is diversified by investing in other non-tech sectors such as Communications, Consumers, and Financials. These non-technology industries capture the broad opportunities that exist in the widespread application of technology in today’s world in sometimes traditional industries.

Ongoing assessment of underlying funds by Endowus Investment Office

The underlying funds in the Portfolio have been selected based on the rigorous assessment by the Endowus Investment Office for their superior quantitative and qualitative characteristics, and are believed to be the best-in-class among their peers that are available to retail investors in Singapore today. However, we recognise that the technology sector is constantly evolving, giving rise to new ideas and funds that effectively capture them. To make sure that the Portfolio reflects the best opportunities in technology investing,  we conduct ongoing re-assessments of the underlying funds to ensure that their superior characteristics are maintained into the future, and where needed, to introduce new funds to supplement or replace the existing portfolio design.

Learn more about how you should approach a Core-Satellite Portfolio investment strategy here.

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Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

Investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors, The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations.

For Cash Smart Secure, Cash Smart Enhanced, Cash Smart Ultra: It is not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested. Investment products are not insured products under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act 2011 of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Interest rates are indicative and subject to change at any time.

‍Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

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