Diversity of companies, a lack of upcoming regulations and cheaper-than-expected valuations are all reasons Invesco Perpetual manager William Lam has built an overweight position to the technology sector.
Technology stocks have been on a phenomenal run over the past decade but particularly in the emerging markets, where the MSCI Emerging Markets Information Technology sector index has more than trebled the returns of the broader MSCI Emerging Markets benchmark.
Performance of indices over 10yrs
Source: FE Analytics
Lam (pictured), who takes a value-approach to investing in his five FE Crown-rated Invesco Perpetual Asian fund, has a 30.15 per cent weighting in the sector compared with a 28.65 per cent weighting for the MSCI Emerging Markets.
“If you invest in an index in Asia then you are automatically exposed to a lot of the technology stocks,” he explained.
“It is well known that this has been going on a long time that these companies have been increasing in size and in portfolio weightings.”
This has been a dramatic change for investors over the last 10 or 15 years, as previously they would have taken region-specific specialities such as Latin America or Eastern Europe, he added. 
“If you look at what countries most people were underweight in the emerging markets it would have been Korea and Taiwan and they are very technology focused markets but nowadays they can’t really do that – they have to be much more focused on technology.”
However, having had such strong performance, some are beginning to move their exposure elsewhere based on a number of concerns.
“People look at [technology stocks] with the same view that firstly that they seem to be expensive and secondly that they are potentially victims of regulatory clampdowns but I would take issue with both of those statements,” Lam said.
Firstly, while the sector has outperformed and investors have driven the price-to-earnings (P/E) multiples of stocks higher, the manager does not believe they are expensive.
“Don’t spend all of your time focusing on the P&L [profit & loss] and the P/E ratio. I would not see them as expensive, particularly when you look at the balance sheets and cashflows,” he said.
“If you look at the cashflow that they generate it tends to be much stronger than the net profit that they generate and then there’s obviously the growth.”
Indeed, these companies have grown exponentially, meaning that higher earnings are keeping the P/E ratios lower than investors might think, despite the outperformance.
One example of a stock that is cheap despite making superior gains is Korean tech company Samsung Electronics, which has gained 76 per cent over the past five years, as the below chart shows.
“When you look at the long-run returns on equity that Samsung makes through the cycle and also the growth it has achieved over many years it doesn’t seem that it trades on an appropriate multiple,” said Lam.
“Yes, the company is very cyclical, particularly in its semiconductor division, but even on a through-the-cycle basis we think it is too cheap.”
Performance of stock over 5yrs
Source: Google Finance
Additionally, within the technology sector as a whole there is a range of sectors on different valuations, meaning that while some of the Chinese internet stocks could be viewed as expensive, other sectors are not.
“Technology has got all sorts of things within it. Yes, we do have quite a lot of exposure to Chinese internet stocks but it is probably only around a half of our tech weighting. The other half is in more traditional technology such as hardware companies,” Lam said.
“It is a little bit like if you were to look at something like HP [Hewlett Packard] in the US – it wouldn’t be seen as wildly expensive. You have the HPs and Intels of this world on one side and on the other you have the Facebooks and the Amazons. The valuations are somewhat different.”
In emerging markets he said there are three main sectors: Chinese internet, traditional hardware and semiconductors and Indian IT services each with their own dynamics.
Turning to regulation, this has been a particular talking point in the US, where large social media companies such as Facebook and Twitter are coming under fire for owning too much of their clients’ personal data.
While they are being encouraged to figure out ways to reduce this or to make it more secure, potentially impacting earnings down the line, in Asia these stocks are not facing the same regulatory issues.
“In China specifically they have a similar if not greater level of data on their customers but the government is quite happy with that because it means that they can use that data to monitor its citizens,” Lam said.
“The Chinese government isn’t going to push back on it because it is working closely with these companies to make use of that data and the consumers aren’t about to push back because they are not used to having as much freedom as we do in the West.”
As such, it appears for the moment that there is not an obvious way in which these companies are going to become victims of regulatory action.
However, he noted that one thing investors may wish to keep an eye on is the level to which the government relies on these companies, as state intervention is not unheard of.
“If the government leans on them in one way or another then they are likely to bend to its will but so far at least the government doesn’t seem to leaning on them in such a way that will affect their earnings negatively,” the manager said.
Lam has managed the £2.4bn Invesco Perpetual Asian fund since April 2015, taking over from Stuart Parks having worked alongside him for two years.
During which time it has outperformed the IA Asia Pacific ex Japan sector peer by 22.17 percentage points.
Performance of fund vs sector over manager tenure
Source: FE Analytics
He is a value investor, believing that in the long term a share price will reflect the true value of the company but over the short term, the stock can trade meaningfully below its fair value for a variety of reasons, according to analysts at Square Mile Research.
Currently, the fund is most heavily weighted to technology, financials and consumer discretionary stocks with low positions in real estate and utilities.
Invesco Perpetual Asian has a yield of 1.24 per cent and a clean ongoing charges figure (OCF) of 0.95 per cent.