Technology stocks have not always been an industry favourite. We all distinctly remember the dot-com bubble bursting in March 2000, when the technology-heavy Nasdaq Composite index peaked at 5,048.86 points, more than double its March 1999 value, then subsequently fell 78 per cent to 1,114.11.
Technology stocks have not always been an industry favourite. We all distinctly remember the dotcom bubble bursting in March 2000, when the technology-heavy Nasdaq Composite index peaked at 5,048.86 points, more than double its March 1999 value, then subsequently fell 78 per cent to 1,114.11 over the next two years.
The technology sector has since recovered well, but rather than the software and internet companies that dominated at the turn of the century, in 2014 social media stocks are prompting talk of another bubble.
Facebook floated the New York Stock Exchange on 18 May 2012 as one of the biggest in technology and the biggest in internet history with an individual share price of $38 (£22) per share, with its peak market cap of more than $104bn (£62bn). Twitter followed in November last year, with shares opening at $26 (£15) per share. At time of press, Facebook currently stands around at $72 (£43) per share, while Twitter is $55 (£33).
With this in mind, technology funds are gaining in popularity. According to recent data from the Investment Management Association (IMA), the Technology and Telecommunications sector saw consistent net retail inflows from May to October last year, but saw £19m in outflows in November. It has since, however, seen positive flows of £4m and £13m in December and January respectively.
Table 1 shows the performance of unit trusts and investment trusts over five years based on an initial £1,000 investment. The Table shows the top 5 performing unit trusts from the IMA Technology and Telecommunications sector, and the only three available closed-ended funds in the UK market. The top performing fund according to the Morningstar data is the £47.3m MFM Techinvest Technology fund, which returned £4,064 over the time period, 32.4 per cent annualised. More than 40 per cent of the fund’s holdings are in technology hardware and equipment, one of the largest areas in the space.
But could there be a bubble in the technology space again? Jeremy Gleeson, manager of the AXA Framlington Global Technology fund, says it is important to keep in mind there are two types of bubble: one in a small sector where there is a lot of hype, and another driven by excitement over a product or space where valuations could become stretched. “During the 16 years I have been managing funds, I have seen there is always going to be an area in a bubble,” he says.
He says the difference between now and what happened in 2000 is the fact that the entire sector was in a bubble, rather than just a small area of it. He says that although he does not believe there is a bubble to worry about imminently, there are always going to be areas that are getting attention.
“There was green technology, which some got very excited about. Then more recently there were some expectations on Twitter. The IPO was successful and the stock had a strong run and gave a lot back. Yes, there was a bubble, it was hot social media,” he says.
Mr Gleeson is also a shareholder in Facebook, and has been for nine months, avoiding the initial stock turbulence. He says the Facebook acquisition of Instagram was, in hindsight, a steal at the time. “People did not know what Instagram was and they were confused as to why Facebook was buying another social network.”
He adds that the more recent $19bn (£11bn) purchase of WhatsApp, however was not a bargain as Facebook was in a bidding war with Google and had to settle. Only time will tell whether or not the purchase of WhatsApp will pay for itself, he says, but from the outset it has a great and highly engaged user interface with remarkably high user numbers. “If Facebook wants to reach emerging markets, it has to be very successful on smartphones. WhatsApp gives Facebook those demographics,” Mr Gleeson says.
For Anis Lahlou-Abid, fund manager of the £231m JP Morgan Europe Technology fund, there are other more overlooked IPOs that have been good buys in the technology space. He cites AO, the online white goods seller, which has 34 per cent of the UK online domestic market share. “It is a company that has the knowledge. It is a good website which gives a better experience to shop - it is easy to compete. It is not paying rent on the high street either,” he says. He says share of sales value grew from 4 to 11 per cent between 2010 and 2012, and the IPO saw the stock go up 40 per cent.
Mr Lahlou-Abid compares the start of AO.com to Amazon, which rolled its business model out over many years, but AO is just at the start.
He says electronic retails, or ‘e-tailers’, are where he really likes to find opportunities. Companies such as online supermarket Ocado and clothes retailer Asos both have no high street presence, but a large market share.
The technology sector is not just the internet though. And Mr Lahlou-Abid gives the example of companies such as Ericcson and Cisco, which are advancing their technologies. He says it will soon be possible for there to be medical connections, so you can be connected via Bluetooth to your doctor, who can take blood pressure and know by a sensor if you need to visit a surgery.
One area Mr Gleeson has seen an increase in is cloud computing. There have been big changes and there is no longer a big impact on capital expenditure. “Operational costs are more versatile and it is starting to really help some companies,” he adds.
In a similar space are mobile payments. JP Morgan’s Mr Lahlou-Abid says Europe is very good at mobile payment and security on the internet. “Technology is not as visible to the consumer now,” he says.
But it is not all just social media and hardware firms. Telecoms is also set for a big success story. Due to an improvement in 4G connectivity and an extension to wifi networks, there is now more offered. Stephen Baines, investment manager on the Kames fixed income team, says that telecoms companies are often seen more as a utility, rather than a technology buy.
He says telecoms companies are big purchasers of technology and buy a lot of network equipment as part of their expenditure. “But their business profile is much more defensive. They benefit from a huge consumer basis, so a large number of customers pay on monthly contracts. They usually see high and stable levels of cash generation which makes them attractive as a lending opportunity,” he adds.
One telecoms firm Mr Baines says has been a big success for the team has been Liberty Global, which has many subsidiary companies that borrow individually, including Virgin Media in the UK, Unity Media Kabel in Germany and UPC Broadband in the Netherlands. “It has been seeing customer growth by adding in customers through upgrading their packages,” he says. Companies such as Virgin Media make their extra money by attracting consumers to additional packages, for example if they have a basic package, they can add broadband or telephone for a set fee. Mr Baines says it captures revenue by selling the networks well.
With regards to telecoms, Mr Baines says he has noticed a major trend towards consolidation in the space. “What you have traditionally seen in Europe is a telecoms space that is segmented by country, and each country would be an individual market; what we are now seeing is more and more companies are consolidating across borders.”
