Tech sector in a ‘divergence’ phase

Technology stocks have performed strongly so far in 2015, with the Nasdaq index last week hitting an all-time high, but earnings from the sector have begun to disappoint the market.

Mr Rogoff said, however, that much of this weakness in earnings was related to foreign exchange headwinds and slower growth in emerging markets. He said the weakness was obscuring the arrival of a new wave of tech products that would shake up the sector.

Mr Rogoff, who runs the £800m Polar Capital Technology investment trust, said: “What these factors may be clouding is that the new technology cycle has likely entered a second, more pernicious phase where new technologies are rapidly becoming substitutes for – rather than complementing – legacy ones.”

A significant theme for the manager at the moment is cloud computing, whereby companies use servers hosted on the internet to store and manage data, as opposed to local servers or computer hard drives.

Mr Rogoff highlighted online retailer Amazon, one of the trust’s top 10 holdings, whose web services division already provides cloud services to companies such as Netflix, the video-streaming service, and even the US Central Intelligence Agency.

But as the cloud revolution accelerates, Mr Rogoff said it could spell “bad news for those that sell traditional information technology services”.

Mr Rogoff predicted that the fortunes of technology companies may diverge as some succeed while others fail to keep up and adjust to the market’s rapid evolution.

Another big play for Mr Rogoff is tech behemoth Apple, which also represents his top holding.

Notably, even with some 11 per cent of his portfolio invested in the maker of the ubiquitous iPhone, he is underweight the company, which makes up nearer 15 per cent of his Dow Jones World Technology index benchmark.

Mr Rogoff asserted that ultimately Apple could be viewed not so much a tech stock but “as a luxury goods business, with a mass affluent market share”.

Pointing to the company’s robust pricing power, he said: “An iPhone has roughly the same parts as a Samsung smartphone but Apple can charge a premium. The upside to Apple is pretty reasonable – it could become the first trillion-dollar company.”

Last week, Apple overtook Google to top the annual Brandz Top 100 Most Valuable Global Brands list, in a reflection of the growing pricing power of the iPhone maker.

Within Apple’s armoury, Mr Rogoff is most optimistic about the arrival of Apple Pay, which lets users of iPhone 6 and 6 Plus, some iPad models and Apple Watch pay for goods via contactless readers. The service, which has been rolled out in the US, has yet to hit Europe.

In terms of Polar Capital Technology’s performance, Mr Rogoff admitted that 2014 was a tricky year as large caps, which he is typically underweight, outperformed.

But in the past five years, the trust has achieved a 93 per cent return, while its benchmark had delivered 76 per cent to end of April.

Market goes from boom to bust and back

Following the infamous boom and bust of the technology, media and telecommunications (TMT) sector at the turn of the century, TMT-focused funds have made a spectacular comeback.

Between their September 2000 peak and the bottom of the subsequent bear market in March 2003, the IA’s Technology & Telecoms sector endured a spectacular 82 per cent collapse.

Since then, however, the typical tech fund has enjoyed a massive rebound on the back of a new wave of products, such as smartphones. While the ride has been for from smooth, given the financial crisis, the average Technology & Telecoms fund is up more than 300 per cent since March 2003.