EquitiesMay 6 2016

Best in Class: Is your head in the clouds?

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Best in Class: Is your head in the clouds?

If a video of someone experiencing virtual reality for the first time hasn’t arrived in your Facebook feed, keep your eyes peeled.

Facebook-acquired Oculus VR is releasing a consumer headset this year and virtual reality has been described as tech’s next “mega theme”.

Notably, a report published in May last year by US investment bank and asset manager Piper Jaffray claimed: “The state of virtual and augmented reality [is] similar to the state of mobile phones 15 years ago.”

While most of us are familiar with virtual reality, augmented reality goes further by enhancing real life – from small-time stuff like 3D apps to life-sized holograms.

Although the report notes mainstream adoption may be a decade or so away, it predicts a far-reaching market. Imagine the potential impact on our industry. Could we see face-to-face advice delivered via a virtual headset? Possibly. However, I digress...

The point is, investors are naturally attracted to this kind of growth story but the question is how to get exposure without taking on too much risk. For all the winners everyone gets excited about, many more companies cost their investors a lot of money. The dot com bubble may be almost 20 years old but many still remember the pain.

Some of biggest names in tech are doing some of the work for us, acquiring these early-stage companies and padding out their own research and development efforts. Facebook’s 2014 purchase of Oculus VR was one. In that same year, Google (Alphabet) led an investment of more than half a billion dollars into augmented reality start-up Magic Leap. Apple has been more tight-lipped, but acquisitions including augmented reality start-up Metaio have sparked interest.

All of these companies are among the elite-rated Axa Framlington Global Technology’s top-10 holdings. The fund is an unconstrained multi-cap that seeks growth from “new tech” stocks, according to lead manager Jeremy Gleeson.

Importantly, this doesn’t mean piling into those aforementioned high-risk start-ups but, rather, keeping a finger on the pulse of future mega trends. One such trend into which Mr Gleeson has invested is cloud computing.

Salesforce.com is among his preferred stocks, and he’s named IBM and Hewlett-Packard as examples of the kind of legacy companies he won’t be buying.

This old-world technology is becoming expensive for firms to maintain, he suggests, and doesn’t provide the flexibility required. But an entirely cloud-based CRM system like Salesforce is at the forefront of the digital sales revolution.

He concedes macroeconomic events will dictate the pace of change (meaning that while corporate earnings are sluggish and global growth is low, businesses may be reluctant to upgrade their systems), but remains confident cloud computing is on track.

Virtual reality headsets may be less of a sure thing at this stage and I do always feel the need to sound a note of caution in this area of investing.

The extraordinarily high price-to-earnings ratios of industry leaders like Amazon can create a distorted sense of “normality” in terms of valuations, which could fall fast if investor expectations shift.

However, as a satellite investment, a solid growth technology fund gives you the chance to invest in today’s winners and tomorrow’s dreamers. That’s a reality I’d definitely like to experience.

Darius McDermott is managing director of FundCalibre