Equity managers have gone on a buying spree of software stocks this year, helping the likes of Microsoft, Salesforce and Intuit to displace banks as the largest industry allocation in global portfolios.
Eager to take advantage of the demand for software companies triggered by large-scale remote working, stock pickers increased their exposure to the sector from 5.1 per cent at the start of 2020 to 6.43 per cent, according to Copley Fund Research.
The consultancy, which examined data from 405 global equity funds with combined assets of $800bn, said that software now represented global equity funds’ largest industry allocation, ahead of pharmaceutical companies and banks, whose respective weightings fell to 6 per cent and 4.1 per cent.
Software makes up about a third of the broader tech sector, which includes semiconductors and hardware. Technology overall ranks as the biggest allocation in global equity portfolios at a sector level. Tech stocks have surged in recent years, thanks to the huge growth of Facebook, Amazon and Alphabet. But the coronavirus crisis and the resulting surge in demand for technologies that can support homeworking have helped software to come into its own.
“This pandemic has accelerated the digital transformation of most enterprises and forced most knowledge-based jobs to work from home,” said Sumant Wahi, portfolio manager of the Fidelity Global Communications fund. “Software is a key enabler for both accelerated digitisation of store fronts and for workforce productivity.”
Schroders and Invesco were among the asset managers to top up their positions in market leader Microsoft, which has benefited from a surge in demand for its Teams video conferencing software, over the past six months.
But second-tier software groups are on global investors’ radars too, with cloud software provider Salesforce attracting investment from Loomis Sayles and PineBridge funds, and accounting software specialist Intuit winning the backing of GAM and Brown Advisory strategies.
Growth funds, which like software stocks for the predictability offered by their subscription model and low capital requirements, are particularly bullish on software stocks. Aggressive growth funds’ allocations are at record levels, standing at 4.6 per cent above benchmark weights, according to Copley.
Value managers, who are sceptical about the sustainability of tech stock valuations, have increased their underweight positions in software companies.
Despite the disparity between growth and value managers’ allocations, Steven Holden, Copley chief executive, said that Covid-19 had made it more likely that tech stocks would continue to feature heavily in investor portfolios.
“The question is whether the effects of the Covid-19 pandemic have changed the game so much that these levels of exposure are sustainable, and whether the companies underlying these trends can continue to thrive,” he said.
Mr Wahi said that software stocks had further scope to grow, as companies and individuals changed the way they worked and lived post-pandemic. Companies, he said, were shifting from “initially ‘duct-taping’ their business to working online to really changing the guts of the infrastructure for a dynamic workforce supporting a digital enterprise”.
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