Blurred lines of Technology and Telecommunication

The official Investment Management Association definition of Technology and Telecommunication funds are those that invest at least 80 per cent of their assets in technology and telecommunications sectors as defined by major index providers.

In reality though, Juliet Schooling Latter, research director of Chelsea Financial Services, says the sector is dominated by funds that invest all or the vast majority of their portfolio in technology-related companies, rather than those in the telecommunications (or media) sectors.

Ms Schooling Latter says just a handful invest in both areas and out of 38 onshore funds, offshore funds and investment trusts, only three actively specialise in telecommunications.

Ben Seager-Scott, senior research analyst of BestInvest, says investors should not think about these funds as simply investing in PC companies, rather as funds that invest in a rich and fairly diverse array of companies ranging from microchip manufacturers and PC builders to software creators and providers of cloud computing services.

Mr Seager-Scott says one major theme that a number of technology funds are exploiting is a shift from ‘old world’ computing dominated by significant capital expenditure used to buy and replace bulky servers and PCs for employees, to ‘new world’ computing focused on cloud computing where services and even hardware are effectively rented on an ongoing basis.

He says: “Technology funds are a way for investors to potentially exploit some of the innovations that are revolutionising the modern era and seeing things like the internet not just as something passive that you read on your PC at home, but rather something that is becoming increasingly interactive and ubiquitous through mobile internet and cloud computing.

“However, it is important that investors don’t get too carried away – technology companies are risky, and even if you can identify a ‘winning’ technology, it can be much harder to pick a winning company in a highly competitive arena, which can be a bit of a ‘winner-takes-all’ industry.”

Technology funds work in a similar style to other actively managed funds, according to Mr Seager-Scott, albeit they specialise in a particular sector.

Often he says these will be run on a number of themes, such as ‘content digitalisation’, efficiency saving, or ‘the internet everywhere’, with the manager identifying long-term trends and then looking for high-quality companies that could benefit as a result.

The manager will then look in detail at the company, how it works, how it makes money and factors such as the strength of the balance sheet and other financial statements to form a view of the company – often this will involve very detailed financial models.

Mr Seager-Scott says: “The advantage of this process is that it can often (but not always) ‘ground’ a manager against the headline-grabbing hype around a given technology and push investment to companies that are also well-run in their own right.

“Technology companies also have a number of sub-sectors (such as IT services, office electronics, software, etc) and most managers will look to have a portfolio diversified across these different sub-sectors.”