For investors who have avoided the technology-stock hype in recent times, the sell-off of such companies in early September must have felt like vindication. After an impressive run since the Covid-19 volatility of March and April, tech shares shuddered, led by Apple (NASDAQ:AAPL), which dropped 14% at its lowest point on 3 September. 

Its fellow FAANG stocks – Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL) – registered similar declines and the contagion spread around the world, with companies from Tencent in China to Germany’s SAP registering sharp falls.

However, anyone feeling smug about the plight of tech-stock investors may be in for a nasty surprise. While they may have been right to avoid technology funds, heeding more gloomy analysts’ warnings that the seemingly inexorable rise of the sector was anything but, many will not have dodged the bullet. 

The reality is that plenty of funds not categorised as tech specialists nonetheless have sizeable holdings in the sector – particularly the top performers of recent times, which have pulled in investors’ cash courtesy of the boost to returns generated by their tech exposures.

Take the much-lauded Scottish Mortgage investment trust (LSE:SMT), for example. Nine of its top 10 holdings are out-and-out tech stocks, accounting for 49% of the fund. These are the holdings that have propelled the fund to the top of the performance tables, but they are also the stocks that pushed its shares into a 12.4% nosedive during the first few days of September, exaggerated by the slippage from a 3% premium to the value underlying assets to a 9% discount at one point. This discount level did not last for long, as at 16 September the trust was trading on a 2.6% discount, according to data from Winterflood. 

Now, no one could accuse Scottish Mortgage’s managers of concealing their convictions that disruptive and transformative tech businesses will provide outstanding long-term returns. And there is unlikely to be much disquiet at Baillie Gifford about a bit of short-term volatility in their trust’s track record given its impressive pedigree.

However, there is a broader point here. Investors who are concerned about the sustainability of tech-stock outperformance – or those who just haven’t given the topic much thought – may unwittingly have large exposures to the sector because so many non-specialist funds are heavily invested.

The average global investment trust holds 18% of its portfolio in tech stocks, according to the Association of Investment Companies (AIC). That rises to as high as 25% at Mid Wynd International and to 23% at Alliance Trust.

In the open-ended industry, meanwhile, data from FE Analytics reveals that global equity funds’ top 10 most-bought stocks over the last six months include Amazon, Apple and Facebook. Open-ended fund managers have also looked beyond the best-known tech stocks, investing heavily in chip manufacturers such as Taiwan Semiconductor (NYSE:TSM) and ASML (NASDAQ:ASML).

Moreover, it is not only globally invested equity funds where exposure to tech stocks may be higher than investors realise. In markets where such stocks account for a large chunk of capitalisation, managers automatically gravitate towards them, even leaving aside their views on their long-term prospects. 

The US is one obvious example. Given that the FAANG stocks are capitalised at more than $4 trillion (£3.1 trillion) and account for around 15% of the S&P 500 index, it would take a very brave portfolio manager to decide to pare down exposure to these holdings. In fact, Morningstar data suggests the typical fund invested in US equities holds around 23% of its assets in the technology sector. In the investment trust industry, the average is also 23%, says the AIC.

Similarly, in China, the tech giants Alibaba (NYSE:BABA) and Tencent (SEHK:700) account for more than 30% of the MSCI China Index. Country specialists will have their own views about those stocks, but are likely to be big owners. Fidelity China Special (LSE:FCSS), for example, holds 10.6% in Tencent and 9.7% in Alibaba. At JPMorgan China Growth & Income (LSE:JCGI), the figures are 9.9% and 9.1%, respectively.

Investors in funds with an environmental, social and governance (ESG) tilt also need to be conscious of their tech-stock exposure. Research from Morningstar published last month found that eight of the 10 best performing large-cap US funds that apply ESG principles counted either Apple, Amazon or Microsoft as their biggest holding. On average, these funds held 17% of their portfolios in the five FAANG stocks.

Leaving aside the question of whether technology stocks really do carry the ESG attributes that investors are looking for – consider the debate over data privacy, for example, or the carbon footprint of massive server farms – many investors in these funds will be taken aback by the size of their tech-stock exposures.

None of which is to suggest the wool is being pulled over investors’ eyes or even that it is inappropriate for investors holding non-technology specialists to be so heavily invested in the sector via more generalist funds.

Indeed, Teodor Dilov, fund analyst at interactive investor, says it is important not to be too anxious about recent volatility, which may even have helped investors manage their exposures.

“To us, the recent tech sell-off looks like a healthy skimming off the top, rather than a response to bad news that could hinder the growth of tech stocks in the near future,” Dilov argues. “If your exposure to technology has knocked your portfolio out of kilter due to the recent outperformance of the sector, there is no harm in rebalancing your portfolio and banking the healthy profits of the tech bull run.”

In any case, Dilov adds, many of the leading tech companies are far from being pure-play investments. “The world has changed and many companies traditionally perceived as tech stocks are now so much more than that,” he says. “Investors might today see Amazon et al as far less exposed to economic malice than many others; likewise, Alibaba and Tencent, while beginning in the retail and entertainment businesses, are now driving financial inclusion and providing access to credit.”

Nevertheless, Darius McDermott, managing director of FundCalibre, urges investors to have a good look under the bonnets of their funds. “There is the danger that people investing in a US equity large-cap fund or a Chinese equity fund could have a large holding in tech stocks without realising it, especially if they are invested in a tracker,” he warns. 

McDermott points out that actively managed open-ended funds are limited to a maximum investment of 10% in any single stock, which provides at least some protection, although investment trusts do not face this restriction.

What to do if your tech exposure has gone beyond the level you feel comfortable with? McDermott believes it may now be time to consider taking some profits. 

“These stocks have been the right place to be for a few years now; they were enjoying structural growth as more people used the internet, streaming and online retailing, and these trends have been accelerated by Covid-19,” he says. “But they are also now quite expensive; I certainly wouldn’t be encouraging people to bet the house on them at this stage.”

Philippa Gee of Philippa Gee Wealth Management also suggests tempered caution. “I do believe that circumstances have changed significantly since the last tech bubble, when tech stocks were bought more for imagined hyped-up future profits, whereas we are currently in the middle of the biggest working example of how important and useful tech can be,” she says. “However, any fund that has taken too large an allocation to any at-risk sector, such as technology, should be managing that responsibly.”

The bottom line is that investors need to be sure they understand where their money is going. There are good reasons to consider investing in tech stocks and many will feel perfectly happy doing so. But it would be a mistake to assume that steering clear of tech funds is the same thing as avoiding exposure to tech stocks. And those who make this mistake may be in for rude awakening if and when tech stocks suffer a prolonged correction.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company’s or index name highlighted in the article.