FTSE 100 investors: I believe these tech shares can help you retire wealthy
The bull run of the past decade seems to be taking a big pause in 2020. Youmay remember that in the last decade tech shares in particular helped fuelthat rally. Many investors may not necessarily associate FTSE 100 shares withtechnology. Yet I believe the UK’s main index provides ample opportunity forgrowth, especially if you’re looking to retire wealthy. Let’s take a closerlook.
The tech sector
Broadly speaking, tech companies develop, manufacture or offer technology-based services or products. The sector encompasses a wide range of businesses,from telecommunications, to personal computers, semiconductors, e-commerce,software as a service (SaaS), cloud computing, fintech, online socialnetworks, artificial intelligence (AI), and internet of things (IoT).We first tend to think of companies headquartered in Silicon Valley or Seattlein the US, such as Amazon, Apple, Google, or Microsoft when we mention techshares. Nonetheless, the UK also has promising technology businesses withplenty of scope for future growth.The London Stock Exchange’s techMARK market “was launched in November 1999 bythe Exchange to create new opportunities for companies whose business isdependent on technological innovation, and for investors in those companies”.And the FTSE techMARK All-Share Index comprises all companies included withinthe techMARK market. There are currently 26 UK-listed companies in the index.The list includes large-cap as well as medium and smaller companies, which aregrowing fast and offer potential for impressive stock price gains. Investorsmay use the index as a starting point to research tech shares further.Our blue-chip FTSE 100 index also offers several possibilities for investorsto consider. I believe many of them may provide long-term returns to helpinvestors retire wealthy.
FTSE 100 tech shares
One of the most successful stocks of the past decade has been Aveva. Itprovides engineering and industrial software. Then there’s global defencecontractor and cyber security firm BAE Systems. Year-to-date (YTD) both sharesare down by 13% and 15% respectively.Telecoms giants BT and Vodafone are two tech-based names that may increasinglybenefit from the current stay-at-home and work-from-home economy.Multinational consumer credit reporting company Experian may become anotherbusiness to ride the Covid-19 wave. Many consumers and business are likely torely on credit data as uncertainty begins to take its toll on many economies.Bookmaker holding company Flutter Entertainment is another stock to watch.Since March, due to the lockdown, sports fixtures have been cancelledworldwide. Yet as economies begin to open up, the company is likely to seerevenue growth in the coming months.Stock exchange and financial information company London Stock Exchange Groupmay also come out of the current volatility in acceptable financial shape. Thelockdown shouldn’t affect its business model much.Engineering group Halma specialises in products for hazard detection and lifeprotection. Although not a household name, its stock has been a robust long-term investment.Online retailer Ocado is regularly in the news. The group is currently workingaround the clock to answer the increase in demand for online grocery shopping.From warehouse to delivery routes, the business is highly automated. In late2019, it successfully sold its automated technology to Japan, a leader inrobot technology.Finally, cloud-based accounting and payroll services provider Sage Group maydeserve further due diligence as a tech share to consider to retire wealthy.YTD, the shares are down by 12%.5 Stocks For Trying To Build Wealth After 50Markets around the world are reeling from the coronavirus pandemic…And with so many great companies trading at what look to be ‘discount-bin’prices, now could be the time for savvy investors to snap up some potentialbargains.But whether you’re a newbie investor or a seasoned pro, deciding which stocksto add to your shopping list can be daunting prospect during suchunprecedented times.Fortunately, The Motley Fool is here to help: our UK Chief Investment Officerand his analyst team have short-listed five companies that they believe STILLboast significant long-term growth prospects despite the global lock-down…You see, here at The Motley Fool we don’t believe “over-trading” is the rightpath to financial freedom in retirement; instead, we advocate buying andholding (for AT LEAST three to five years) 15 or more quality companies, withshareholder-focused management teams at the helm.That’s why we’re sharing the names of all five of these companies in a specialinvesting report that you can download today for FREE. If you’re 50 or over,we believe these stocks could be a great fit for any well-diversifiedportfolio, and that you can consider building a position in all five rightaway.Click here to claim your free copy of this special investing report now!John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member ofThe Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet,is a member of The Motley Fool’s board of directors. Teresa Kersten, anemployee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’sboard of directors. tezcang has no position in any of the shares mentioned.The Motley Fool UK owns shares of and has recommended Alphabet (A shares),Alphabet (C shares), Amazon, Apple, and Microsoft. The Motley Fool UK ownsshares of Flutter Entertainment. The Motley Fool UK has recommended Halma andSage Group and recommends the following options: long January 2021 $85 callson Microsoft, short January 2021 $115 calls on Microsoft, short January 2022$1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. Viewsexpressed on the companies mentioned in this article are those of the writerand therefore may differ from the official recommendations we make in oursubscription services such as Share Advisor, Hidden Winners and Pro. Here atThe Motley Fool we believe that considering a diverse range of insights makesus better investors.The British software sector stars investors should buy nowYou might not think of the UK as a market full of promising tech stocks. Butour small and medium-sized companies are punching above their weight, says DrMike Tubbs.When it comes to technology, Britain’s stockmarket doesn’t spring to mindimmediately. There is no British Google or Apple, while our blue-chip index,the FTSE 100, is resolutely old-economy, dominated by miners, oil giants andbanks. But it’s time investors took a closer look. While we may not have anynational giants, we have plenty of excellent smaller companies with leadingpositions in global market niches. Many are profitable, expanding rapidly, andoffer ample scope for impressive share price gains.Indeed, there is a palpable sense of excitement surrounding the UK techsector. The digital technology sector is expanding at an annual pace of 4.5%,around two-and-a-half times faster than the overall economy, and is now worth£184bn. We rank third in the world for total capital invested in digital techcompanies, behind America and China, according to research published by TechNation, a network of tech entrepreneurs. London is widely deemed the third-most important centre for tech startups after Silicon Valley and New York.Rapid growers such as Deliveroo and TransferWise tend to hog the headlines,but a more obscure and fruitful area for investors is software. This sub-sector has expanded at an annual rate of 10.1% over the past five years andboasts sales of roughly £29bn.
UK software’s strength in depth
A good example of how Britain has established a strong foothold in this sectoris Craneware. A healthcare software firm, it has become the leading supplierof financial and performance-management software to US hospitals. Almost athird of registered US hospitals are now Craneware customers. Its shareholdershave been rewarded by a 23-fold rise in the stock between January 2008 andOctober 2018.Craneware offers US hospitals 16 different software packages including revenuerecovery and retention, claims analysis, patient engagement (whereby patientscan access their records and make appointments, for instance) and costanalytics. Craneware is growing both by introducing new software applicationsto existing customers and by recruiting new hospitals. Its revenue for 2017-18grew by 16% to £67.1m.Research and development (R&D) has been key to achieving leading marketpositions such as Craneware’s, underpinning growth that has often beensupplemented by bolt-on acquisitions. The EU industrial R&D InvestmentScoreboard 2017 highlights the strength in depth of UK software. It lists allthe EU software and computer services companies investing at least €7mannually in R&D. The UK boasts almost half the EU total, with 56 firms out of114, followed by Germany with just 19, France with 16, Sweden seven andFinland five. There are also many smaller software companies investing lessthan €7m a year in R&D. We will concentrate on those focused mainly onsoftware rather than IT services, and with market caps of at least £50m.
Overseas buyers snap up our winners
Given our wealth of software companies it may seem puzzling that there areonly two UK software companies in the FTSE 100, Sage Group and Micro Focus. Amajor reason is that overseas companies regularly snap up quality UK softwarefirms before they get very big. Recent examples include Arm Holdings, a FTSE100 chip-design software group acquired by Softbank of Japan. Fidessa was amedium-sized, FTSE 250 member and software firm acquired by private equitygroup ION Capital. A majority stake in Aveva was acquired by SchneiderElectric of France. In 2014, Alphabet, Google’s parent company, pounced onDeepMind, an artificial intelligence (AI) company established in 2010.Nevertheless, there are still plenty of small and medium-sized softwarecompanies with strong positions in niche growth markets.
Wide range of sub-sectors and companies
UK software companies operate in six main sub-sectors: cybersecurity,engineering design, finance and trading, gaming and entertainment, mobileapplications and process automation (administrative, production and testingprocesses). Given the wide range of business processes (BP), this categorycontains the largest number of companies. When it comes to software processes,many companies are taking advantage of a structural shift whereby clientsessentially rent their services on the internet rather than buy them on a discand install them as they used to. The SaaS (software as a service) model meansclients can have their software automatically updated, while it is also easierto sell them related services; recurring revenues tend to be higher under theSaaS system.Large UK software companies — Company| Sector| Revenue(last full year)| Revenue change(2015-17)| Operatingmargin Sage Group| Business processes| £1,715m| 20%| 21.5% Micro Focus| Business processes| £3,209m| 158% (due to merger)| 7.6% Aveva| Engineering design| £499m| 15% (1 year)| 10.1% Keywords Studios| Gaming| £151m| 161%| 8.3% First Derivatives| Finance| £186m| 59%| 7.1% Craneware| Business processes / Finance| £58m| 29%| 28.5% Emis Health| Business processes| £160m| 2.9%| 12.8% SafeCharge International| Mobiles| $112m| 12%| 23.8% Avast| Cyber security| £653m| 160%| 9.2% Sophos| Cyber security| £641m| 34%| loss Blue Prism| Business processes| £24.5m| 304%| loss Accesso Technology| Gaming| $133m| 43%| 6.8% Examples of large cybersecurity companies are Avast, a producer of antivirussoftware that also designs systems to keep mobiles, PCs and office networkssafe. It has 400 million users and is a member of the FTSE 250. Sophos, also amid-cap, specialises in network security. GB Group focuses on identity andlocation verification. The largest operator in engineering design is Aveva. Abig name in the finance segment, with an emphasis on trading systems, is FirstDerivatives, while Craneware is active in this sub-sector, too. In gaming andentertainment key names are Playtech, Keywords Studios and Accesso Technology.Mobile applications are represented by SafeCharge International. For processautomation we cite five companies in different areas FTSE 100 members Sage andMicro Focus, along with Blue Prism, SDL and EMIS Health. Sage specialises inaccountancy and business management software for SMEs, Micro Focus in updatingmature software infrastructure, Blue Prism in software robots for automatingback-office processes, SDL in automated translation and global multi-languagepublishing, and EMIS in healthcare.Further details for 12 of these software companies are given in the tableabove. Note that software is among the economy’s more profitable industries,as the double-digit operating margins attest. The more mature companies offerconsistent dividends SafeCharge, Sage and Micro Focus yield 3% to 5%, forinstance. The faster-growing or unprofitable firms don’t pay dividends.
Potential in software small caps
There are also many smaller firms operating in a wide range of niches andgeographical regions. Eight of the most intriguing are introduced below andlisted below with their key financial data. The largest three have market capsof £250m to £300m and the smallest five £60m to £110m. They are fast-growingand pay little or no income. Most are listed on Aim. Quixant provides gamingplatforms for pay-gaming and slot-machines and makes nearly three-quarters ofits sales outside Europe. In 2017, earnings jumped by 29% and the group hasnet cash on its balance-sheet. Microgen offers business-process systems andanalysis suitable for chief financial officers (CFOs), and software for theglobal wealth-management sector. It is a profitable company, with the UKaccounting for just over half of its revenue. WANdisco is dual-headquarteredin Silicon Valley and Sheffield, with 82% of revenue from North America. Itprovides software to help ensure crucial parts of a business keep working ifthere is a cyber attack or some other catastrophe, and also helps firms movetheir businesses onto the cloud. Orders continue to rise quickly.Smaller UK software companies — Company| Market niche| Sales 2017| Revenue change(2015-17)| Operating margin Quixant| Gaming| $109m| 175%| 15% Microgen| Business processes / Finance| £63m| 100%| 15% WANdisco| Business processes| $20m| 73% (2016-17)| Loss Gresham| Finance| £22m| 50%| 15% Sopheon| Business processes| $29m| 40%| 20% Tax Systems| Finance| £15m| 200% (2016-17)| Loss Blancco| Mobiles| £28m| 80%| Loss Elecosoft| Engineering design| £20m| 33%| 10% Gresham Technologies specialises in software to manage financial transactionsand keep data consistent and accurate across databases (data integrity).Sopheon provides software to help companies improve their R&D to achieveshorter time to market. It gains 60% of its revenue from North America andpaid its first ever dividend this year. Tax Systems provides corporation taxand associated software to large corporations and the accountancy professionin the UK and Ireland. It narrowed its annual loss from £3.7m in 2016 to £0.5min 2017. Elecosoft offers software to the architectural, engineering andconstruction industries the UK accounts for 55% of revenue with the rest fromScandinavia and Germany.
Which ones should you pick?
We would advise against opting for the blue-chip software groups in the FTSE100, both of which are struggling. Micro Focus saw its shares drop 20% inJanuary when it revealed sales would fall this year following problems withits acquisition of HP Enterprise, while its CEO left in March. Sage has been asound investment for many years. It produced an organic growth rate for 2018of around 7% and yields 2.9%. But its market-leading position in small-business software is under threat from cloud-based competitors such as Intuit.Instead, consider engineering design specialist Aveva (LSE: AVV), which boastsa fine record and a strong market position. In the past few years it hasincorporated the industrial software division of its majority owner, SchneiderElectric. It is now involved in activities ranging from optimising miningsupply chains and utility management to designing smart cities. Aveva yields1.5% and says it intends to continue a progressive dividend policy.First Derivatives (Aim: FDP) has notched up 21 years of double-digit revenuegrowth and recently announced sales growth of 23% for the financial year2017-18. The dividend was raised 20% but this still only gave a yield of 0.7%since the share price has increased by four times over the past five years.Then there is Craneware (Aim: CRW), which again has a fine record, a strongmarket position and high profitability. Among the larger companies growingfast but still making losses is Blue Prism (Aim: PRSM).Nevertheless, the long-term outlook is compelling given that robots doing back-office admin is astrong growth area. So despite an impressive share-price performance in recentyears, there is plenty of scope for more. Cybersecurity expert Avast (LSE:AVST) floated in London last May. It is known for its emphasis on security forsmall and medium-sized businesses, but it is also the world’s largestantivirus supplier for consumers.In the gaming segment, Keywords Studios (Aim: KWS) looks a better bet than themany video-game developers. Keywords provides developers with a full range ofsoftware support and services, and has also bulked up with acquisitions. Itsclients include most of the top-25 developers, including Microsoft and Sony.It helped produce the famous game Rise of the Tomb Raider.In entertainment, Accesso Technology (Aim: ACSO) is clearly risky but alsooffers potentially high rewards. It controls 40% of the North American onlineticketing market for theme parks but 5% in Europe and nothing in Asia, so thelatter two regions offer clear potential for expansion. Among the smallercompanies, we like Elecosoft (Aim: Elco), Sopheon (Aim: SPE) and Tax Systems(Aim: TAX). Quixant (Aim: QXT) is another possibility provided its second halfshows improvement as it predicts.
Diversify your software portfolio
In building a portfolio of software companies it makes sense to combine somelarger, well-established and dividend-paying stocks with growth-orientatedones of medium size. Those with a wide global spread of sales reducegeographic risk. The 11 companies named above include ten with substantialnon-European sales the only exception is Tax Systems, given its focus ondomestic tax rules. A software portfolio should also contain some of the largeUS companies with strong global positions in their sub-sectors. Salesforce.com(NYSE: CRM), the world leader in customer relationship management, is just oneof many examples.
Keep an eye on minnows coming to market
There are also many unlisted UK software and AI companies that may list in thefuture and provide big gains, just as Sophos and Blue Prism have done. BluePrism’s IPO on Aim in March 2016 was at 78p but the shares are now in theregion of 2,025p. Fast-growing private software companies include Neuven(human resources software) and Thoughtonomy (automation software).When it comes to AI, examples to look out for include Darktrace(cybersecurity) now valued at $1.65bn, BenevolentAI (drug discovery), FiveAI(autonomous vehicles), Babylon Health and Improbable (complex virtual worldsfor game development). Although one or two of these could see a directacquisition as DeepMind was for Google, others could easily decide to float inthe next few years and could then be the next Blue Prism or be acquired at abig premium as Arm and Fidessa were.Dr Mike Tubbs owns shares in Aveva, Craneware, Fidessa, Sage, andSalesforce.comInvesting in world best tech companies through ETFs
Exchange Traded Funds are an efficient, lower-cost way to invest in tech
sector. As market analysts watching soaring tech share prices warn of an impendingtech bubble, is technology still worth investing in? And why should investorsconsider Exchange Traded Funds (ETFs) for their tech exposure?In basic terms, technology is scientific application for practical purposes orthe development of equipment and machines from scientific knowledge.We deal with technology so often that we barely notice how vast and all-encompassing it is. Every company in every sector uses or benefits from someform of technology.Investors in technology usually focus on single companies or, if looking atfunds, sector, or thematic exposure.The sector classification is often considered a “pure” exposure in thatcompanies deemed to be in the “information technology” sector generate thebulk of their revenue from hardware, software, and IT services.Microsoft would be classified within this sector due to generating most of itsrevenue through software and computer sales, whereas Facebook would notbecause it generates the bulk of its revenue through advertising.For example, an investment like ETFS Morningstar Global Technology ETF (ASX:TECH), which invests in global information technology companies, would beconsidered a sector exposure.Tech diversification vitalThematic exposure is more about investing in themes or trends. Many of thecompanies investors deem as “tech” might not fit the sector classification butmatch the theme instead.In this instance, Facebook is viewed as a thematic tech exposure because itgenerates its revenue from the trend towards online connectivity, whichextends to digital advertising.For example, investments like ETFS FANG+ ETF (ASX: FANG), which followsvirtual connectivity and consumer trends, or ETFS ROBO Global Robotics andAutomation ETF (ASX: ROBO), which follows the robotics and ArtificialIntelligence (AI) trend, would be considered thematic exposures.Where analysts talk about tech bubbles, they are often not talking about allforms of technology, but rather a specific industry or niche – think thedot.com bubble of the past – and the bubble is created from the companyfundamentals being below company pricing.Tech bubbles also occur at times of maximum innovation and change so therewill still be winners from these situations. Amazon survived the dot.com crashwhile others did not.From an investor perspective, this does not mean avoiding all tech investment,but rather being selective about how and where to invest. This is where ETFscan be valuable in allowing investors to spread the risk across a range ofcompanies where it may be harder to predict the winners or losers.Australian investors can be underexposed generally to technology companies –they only represent 4% of the ASX (i) compared to 21.27% of the MSCI WorldIndex (ii), with Australians typically heavily exposed to financials instead.That said, while small, the Australian technology industry is no slouch in theinnovation stakes, with companies like Afterpay (ASX: APT) and Atlassianinnovating and disrupting the market.Strong growth aheadTechnological advancement is the key driver behind some of the biggestmegatrends of our time, such as virtual connectivity and digitisation,automation, robotics, and biotechnology. We increasingly rely on technologyand with nearly 60 per cent of the world’s population estimated to be internetusers (iii), this is unlikely to change.In fact, the COVID-19 pandemic may have accelerated our dependence, with manyin lockdown depending on cloud storage and video conferencing for employmentand others heavily accessing online shopping and entertainment.In coming years, the roll-out of the 5G network is expected to furthertransform the world, for example, supporting the automation of global supplychains or home activities. It is predicted that around 500 billion deviceswill be connected to the internet by 2030 (iv).Technology is also the key to our ongoing battle to cure and prevent diseases.Biotechnology has come to the fore in the COVID-19 pandemic – it refers totechnologies that use biological processes, capturing companies that focus onresearch, development, manufacturing and/or marketing of products based onbiological and genetic information.Biotech is a growth industry predicted to be valued at more than US$729billion by 2025, compared to US$295 billion today (v). Biotech growth will bedriven by an increasing global population and the need for affordable,effective treatments and vaccines.Even our focus on moving to sustainable and renewable forms of energy, be itto power our homes, offices, or our transport, is supported by technology,from the creation of solar cells to power storage in the form of batteries.In the next five years, the market for battery technology is anticipated toreach $90 billion (vi) and the Tesla-built Hornsdale Power Reserve hassupported South Australia in achieving 50.5% of its energy needs via solar andwind generation (vii).Features of tech ETFs(Editor’s note: Do not read the following ideas as ETF recommendations. Dofurther research of your own or talk to a financial adviser before acting onthemes in this article).While investors can access exposure to technology in a range of ways, ETFs canbe an efficient means, via a single trade.Direct share investing in tech can be difficult in a few ways – for Australianinvestors, the technology sector is relatively concentrated, making itdifficult to manage risk through diversification.Buying international tech shares directly may be hard and costly for someinvestors. From this perspective, managed options can appeal, in particulartech ETFs.ETFs can offer cost-effective exposure to a large number of companies,including the “big tech names” that may otherwise be outside financial reach.Diversification across a large number of companies can be particularlyimportant as a risk-management strategy in more niche technology industriessuch as robotics and automation, or more high-risk industries likebiotechnology.This can be achieved through investments such as ETFS ROBO Global Robotics andAutomation ETF or the ETFS S&P Biotech ETF (ASX: CURE). ETFs usually havelower fees than actively managed funds.ETFs are typically transparent, easy to use and liquid, allowing investors tosee what they hold and trade as they need. For investors keen to incorporatespecific companies, such as Apple, being able to see the exact holdings of anETF can be helpful.