Pros and cons of technology funds

Balance sheets are healthy and operating leverage and cash flows are strong, he adds.

Mr Gleeson says: “Valuations within the global technology sector are attractive, relative to historical levels, enhancing the potential growth.

“The true economic impact of innovation is hard to price accurately, so it may be worth considering a fund with detailed fundamental analysis and a bottom-up stock picking approach.”

Ben Seager-Scott, senior research analyst of BestInvest, says the manager of a fund may be able to bring extra insight for the area compared to a more generalist manager.

Another advantage, according to Mr Seager-Scott, is that funds give investors an option if they want to ‘top-up’ exposure in this area in complement, for example, to a generalist global equity fund that may constraints on sector exposure.

The main disadvantage of these funds is that these are higher risk investments for a number of reasons, Mr Seager-Scott says.

Firstly, he says by being restricted to a single sector, you lose some of the benefits of diversification and the manager will be limited in their ability to mitigate losses that affect the entire sector.

Mr Seager-Scott says this is in contrast to someone like a global equity manager who has the option to reduce the weighting to a troubled sector.

Another reason is that technology as a sector tends to be more risky and susceptible to disruptive technologies, says Mr Seager-Scott. He says this sector makes long-standing, established and successful businesses obsolete in very short order.

Mr Seager-Scott says: “A major example of this was Nokia which used to rule the roost for mobile telephones, but whose model was all but wiped out with the rise of smart phones.

“This makes the sector very volatile, and can lead to extreme valuations being placed on companies whose business model and technology might have a lot of promise but be relatively unproven in reality.”

In particular in recent years, the rise of social media companies such as Facebook and Twitter has seen them list with hugely inflated valuations based on audience penetration and reach, but which are not yet consistent with revenues.

Juliet Schooling Latter, research director of Chelsea Financial Services, agrees that Technology funds in particular can be very volatile as the nature of the sector is very entrepreneurial so companies come and go.

But she says most technology companies are global in nature although there may well be a high weighting to US equities as the technology sector there is far more varied, which means there is exposure to the US dollar and currency fluctuations.

She says: “Technology is also a sector that has to deal with almost continual deflation – the price of products is always falling as their lifespan can be so short (before upgrades are made, for example).

“A lot of money is reinvested in this type of business rather than going to shareholders in the form of dividends, so it is less attractive for income seekers.

“The right investment can do extremely well though and it’s an exciting and continually evolving and expanding area.”