Edelweiss Asset Management has launched a thematic mutual fund - Edelweiss Technology Fund, which will focus on investing in technology and technology-related stocks in India and abroad. The NFO, which opened for subscription last week, closes on February 28.

Basic contours

The basic premise driving the fund is that the latest advancements in technology are poised to generate some of the most substantial impacts in history. Tech is permeating every industry more and more with each passing year. Consequently, tech and related stocks dominate equity markets globally. For example, eight of the 10 largest companies in MSCI World Index are from tech sector. Last week in our bl.portfolio edition dated February 11, in our Big Story section we had also highlighted how the Magnificent Seven stocks (Microsoft, Apple, Alphabet, Amazon, Meta Platform, Nvidia and Tesla) with their prowess in technology have been the main drivers accounting for bulk of the value addition in the US markets over the last one year. With AI and related developments, the clout of technology companies is only likely to increase.  

The fund will invest 70-80 per cent in stocks in India, while 20-30 per cent will be invested in global tech companies.

However, it needs to be noted that this is not a pure technology fund. For example, the sectors in India that it will invest in are renewables (electric vehicles and renewable tech), IT (services, BPO, products), digital (Internet platforms and telecom) and EMS (IT hardware, smart devices and IOT). Some of these such as electric vehicles, renewables, and EMS typically may not be technology companies. In fact, even in the case of Tesla, the world’s best EV company as of now, there is an ongoing debate whether it is an automobile or technology company. Its core automobile business does not qualify it to be a tech company. What results in it getting bracketed as technology company is its extensive investment in developing software for full self-driving cars and its Dojo super computer.

For its international investments, it will focus on investing in sectors such as AI, Internet, semiconductors, robotics, etc.

Our take

Thematically, there is a case for such a fund that invests in tech and allied sectors. However, we believe now is not the best time for investors to make their move into this space.

In India and globally, the sectors that the company is planning to invest in have already had a stellar run in the last one year and are trading at what may be unsustainable valuations in many cases, even though the long-term growth prospects appear interesting.

Consider IT services, for example, which will have a sizable share in the fund’s allocation — Nifty IT is already hovering close to its all-time highs last seen in January 2022, at a time when business trends remain sluggish and the management commentary remains cautious. While valuation is lower at trailing PE of 30.4 times today than the 38-39 times in January 2022, it is still 50 per cent higher than pre-Covid (January-February 2020) levels of 19-20 times when growth was actually better than now.

Similarly EMS companies that have been the rage in the last few years as Make in India and China+1 themes gain traction, are trading at PEs in the range of 50-150 times.

Same is the case when it comes to international opportunities as well. The Nasdaq 100, which is bellwether for global technology companies (although it includes non-tech companies as well), trades at trailing PE of 35 times, a 30 per cent premium to its 10-year average. It was trading at a similar valuation at the start of 2022, a year in which the index crashed 35 per cent. While this is not to say there will be deep correction this year, it is more to indicate that the margins of safety are low at current levels in global technology stocks.

Bottomline

Many of these sub-themes of the fund already appear well discovered and have priced in rosy growth prospects.   

While the fund will have its own internal investing philosophies to identify good companies at an acceptable price, given the elevated valuation levels combined with macro risks at a global level as well as sluggish growth in sectors like IT services, we recommend that investors wait and watch for now.

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