Will tech have the last laugh - or is it just another fad?
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Emma Thelwell Jan 25, 2006
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Is it time to get back into tech funds? Jeremy Gleeson certainly thinks so. Here he explains why. But is he right? Below we also look at the other side of the story...
It is now more than five years since the technology market hit its all-time high, but the disappointments that followed the boom in dotcom and telecom share prices are still fresh in investors’ memories.
This means that they have been quick to sell into rallies. However, there are several reasons why now might be a good time to stop thinking about selling and start thinking about buying.
Recent results from technology firms have been broadly better than expected, analysts are suggesting that future results will also surprise to the upside, and relatively little consideration has been given to tech firms’ operating leverage (this means operating profits tend to increase at a faster rate then revenues).
A further plus is the fact that many of the new innovations promised in the past are now becoming reality: technologies that were barely concepts in 1999/2000 are now ready to be deployed commercially, and this coincides with a time when enterprises and service providers have shaken off the effects of recession and are increasing capital expenditure budgets.
A particularly interesting subsector is communications. Broadband access for homes and businesses is now widely and cheaply available, something that enables numerous new applications. Network operators are also deploying new equipment so they can offer their customers new services, such as ‘voice-over internet protocol’ (Voip), ‘video on demand’ and third-generation wireless (3G).
There is also a trend for these service providers to buy, rather than build, the software they need to manage networks. One company that is a beneficiary of this is France’s Infovista (IFV, e5.81), which has great products, a good cash balance, partnerships with the likes of Accenture, EDS and Nortel, and a compelling valuation.
Another promising subsector is semiconductors. There is some debate about where we are in the semi-conductor cycle at the moment, but regardless of this, with many traditional manufacturing processes pushing against the boundaries of physics, new materials and the equipment required to process them become all the more important.
Soitec (SOI, e18.27) a pioneer of ‘silicon on insulator’ (SOI) technology, stands out as a potential winner here – the new games consoles from Sony and Nintendo due out in 2006 will use SOI technology. The shares have had a tremendous run, but if the company makes new deals with, say, Intel or Samsung, they could go further.
It’s no coincidence the two stocks I’ve mentioned are based in Europe. Many believe the US is the world’s technological centre, but Europe’s pedigree has been proven by firms such as Nokia, SAP, ASM Lithography, Ericsson, ARM Holdings and Dassault Systemes, each of which leads the world in its field.
Europe also arguably leads the way in communications technology; Nokia holds over 30% of the world’s market share for mobile phones, Ericsson supplies 40% of global mobile communications infrastructure, and ARM processors power 70% of the world’s mobile phones. There are plenty of opportunities for investors to make money in the tech sector over the next few years, especially in Europe.
Jeremy Gleeson is investment adviser to the Close Finsbury Technology fund
… or is it just another fad?
Having fallen an average of 71% since March 2000, there’s no doubt that tech funds are on the rise again. The question is why? And will it last?
The answer to the first question is that fund managers are touting 2006 as a big year for new products to hit the market, says Robert Cyran on Breakingviews.com, and investors now “seem willing to believe that an IT capital expenditure orgy is about to take place”. But even if it is, that doesn’t necessarily mean investing in the sector is a good idea.
Consider PCs. They are the backbone of much IT-related capital expenditure, yet average prices are falling at an annual rate of 10%. As for the consumer market, sales volumes may be increasing, but there’s more competition and prices are falling, so revenue growth in the tech sector will continue to be quite slow.
Richard Holway of technology consultancy Ovum isn’t bullish either. Over the next 20 years or so, he told Mark Atherton in The Times, there’s little chance of such double-digit growth as we saw in the 1990s. Technology will perform no better than other cyclical sectors such as steel and will expand at roughly 5% a year.
The truth is that however much technology has become a part of our lives, it’s still one of the higher-risk and faddish investment sectors and one to be approached with caution. Don’t go for too specialised a fund, says Heather Connon in The Observer, as the more specialised it is, the more volatile. And don’t just look at one year’s performance – look for consistency, says Cyran. Finally, only make a specialist fund a small part of your overall portfolio.
Citywire’s top-three performing funds (measuring discrete performance percentage over a three-year period) in the technology and telecoms sector are Close FTSE TechMark, Artemis New Enterprises and Legg Mason European TMT.
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