Technology funds suffered in an uncertain August as investors sought safe havens

In August, investors dumped technology-focused funds amid a volatile month for global stock markets and sought solid ground among more defensive stocks.

Fidelity said that as highly valued AI stocks faced a tough time, investors sought safer investments, with money market funds and globally diversified funds seeing increased interest.

While markets eventually recovered much of their losses in time for the end of the month, August got off to a shaky start.

Ben Yearsley, director at Fairview Investing, said: ‘August really felt like a strange month, starting with the mother of all crises in Japan only to see most markets rallying at the end of the month.

‘There was panic in early August, and no doubt some investors probably sold their shares, but riding out periods of volatility is usually the best strategy.’

Stocks fell as investors expressed concern about a possible U.S. recession after disappointing July labor market data indicated a slowdown in job creation along with rising unemployment.

Investors, concerned that the Fed was not acting to cut rates quickly enough, also saw a major sell-off on the Tokyo stock exchange.

Taken together, this caused stocks to suffer: the S&P 500 fell 8 percent on August 5.

Over the first five days of August, the FTSE 100 fell 5.6 per cent, while the FTSE 250 slumped more than 8 per cent over the same period.

The turmoil in global markets was compounded by AI stocks, with the US “Magnificent Seven” suffering similar falls in August, at odds with the rest of their recent performance.

In an attempt to reduce their exposure to these major technology stocks, investors have turned their attention to other areas and invested in more diversified or defensive assets.

Fidelity said Legal & General’s Global Technology Index Trust has consistently been one of the top 10 best-selling funds among its ISA and Sipp investors. However, in August it failed to make the list.

Tom Stevenson, chief investment officer at Fidelity International, said: ‘The technology sector has been a stellar performer, but the past month has been a tough one.

‘Nvidia has emerged as the biggest influence on the stock market this year, with its share price movements highly correlated with the broader market and the company’s value at around $750 billion in July and August before regaining all of that lost market capitalization in a handful of trading days.’

Which funds performed well?

Money market funds have proven attractive to investors in recent weeks as they offer decent returns for the comparatively low level of risk and are generally popular as short-term investments, making them ideal during volatile periods.

Stevenson said: ‘We are seeing a classic shift to safety as stability-seeking investors look to preserve capital amid market volatility.

‘In this shift, money market funds have once again become very attractive: offering liquidity and security, funds such as the Royal London Short Term Money Market Fund and the Fidelity Cash Fund remain popular with Fidelity ISA and Sipp investors.’

According to Fidelity, the move away from technology funds was also positive for global funds and emerging market funds, which have given investors the opportunity to diversify their holdings and reduce their exposure to technology stocks.

‘A new entrant into the top ten of ISA investors is the HSBC FTSE All Share World Index Fund, indicating that investors are seeking broader exposure amid global economic uncertainties,’ said Stevenson.

‘In particular, emerging market funds such as Fidelity China Focus Fund and Jupiter India Fund also attracted significant interest, highlighting a strategic shift towards regions with growth potential.’

Now that U.S. inflation is under control, Yearsley said, the Federal Reserve is likely to cut rates in September.

However, despite a rebound seen as August progressed, global markets fell again on September 4 as weak manufacturing data raised renewed fears of an economic slowdown.

With uncertainty among investors growing, it looks like these safe-haven funds may have more than just a month’s head start.