Technology funds are often assumed to be managed by computer geeks and populated by obscure companies that operate in arcane markets prone to intense cyclicality depending on what new development is the gadget du jour.
However, this impression is changing that to major cultural shifts that have placed technology at the core of almost every aspect of contemporary living. We are living in a communications age that is rapidly evolving.
An example of this came on 24 October, which played host to the single biggest change to broadcasting in the UK for a generation as analogue was replaced by digital television.
According to Digital UK chief executive David Scott, following the completion of the switchover, some airwaves previously used for television will be auctioned for 4G high-speed mobile broadband. 4G is the fourth generation of mobile phone technology, ideally suited for video streaming, email, messenger services and social networking.
Paul Lee, director of technology, media and telecommunications research at Deloitte, adds: “Digitisation of the broadcast signal has enabled a massive growth in the number of channels available, with UK households now enjoying between 50 to 400 broadcast channels, collectively broadcasting three million hours per year.
“Added to this, video-on-demand services, from broadcasters and providers such as Netflix, have expanded the choice available to UK consumers to near infinite levels. The underlying technology underpinning television has changed radically.”
The OECD Internet Economy Outlook report supports this assumption and the rapid rise in take-up of the internet, reporting that 70 per cent of OECD households have access to broadband internet at “increasingly higher speeds and lower costs”.
The report also suggests the shift to mobile internet connectivity is changing the consumption of content.
James Anderson, manager of Scottish Mortgage Investment Trust, agrees with the report’s findings.
“Amid the fashionable and exaggerated gloom it is the accelerating pace of change in technology and dramatic innovation that should give the pessimists most cause for thought,” he says.
“Innovation is transforming our societies and generating fabulously strong companies with remarkable economics and superb growth prospects. The leaders are broadening out from being dominated by electronics into fields as diverse as social media and healthcare... and with China joining the West coast of America as a driver of rapid and disruptive change.”
Cloud computing
Matthew Griffin, managing director and a member of the Boston Company Asset Management’s team managing the BNY Mellon American fund, suggests there is a comparison to be made with the current switch in the technology sector to that brought about by the invention of the personal computer.
He explains: “Microsoft and Intel displaced many mainframe computer companies. Now, such companies face being unseated from their positions of market dominance.
“Already a challenge to traditional client server technology, ‘cloud computing’ allows companies to present their products and services to a global audience at a fraction of the cost of current offerings.”
Cloud computing is facilitating an explosion of a new breed of companies such as data transfer firm Dropbox, which have significantly lower operating costs that those that aren’t yet ‘in the cloud’.
Mr Griffin adds: “Mobility and agility are key concepts in the next phase of computing innovation. More workers will report to virtual offices, with locally installed applications becoming obsolete, and will require sturdy mobile products that can connect to and use any available internet connectivity.
“Being able to extract data effortlessly from ‘cloud’-based applications will be an important component of agility. Even individual users are expected to come to favour online storage over, say, flash drives, to access their data.”
Social media
Tweeting, blogging and status updates are as much a part of our daily routine as brushing our teeth and it is this dramatic shift in how people consume technology that is exciting fund managers in the sector.
Walter Price, manager of the RCM Technology Trust goes so far as to claim: ‘’Facebook could be one of the most important companies to emerge from Silicon Valley in history.”
He adds: “Users are constantly updating the information on their pages and, by parsing this information, Facebook has a database of hundreds of millions of people that is fresh and unique. Using this data well should allow advertisers to target product introductions, build loyalty to their products, and establish a relationship with their best customers that they never had an opportunity to do in the past. “
Ben Rogoff, manager of the Polar Capital Technology trust has been adding to the portfolio’s exposure to ‘networking’ companies and is “hopeful that US service provider spending will improve”.
He adds: “The Facebook IPO is a timely reminder that a new technology cycle is continuing to unfold driven by cloud computing, broadband applications and mobile data.”
Behind the scenes
Bolko Hohaus, portfolio manager at Lombard Odier Investment Managers highlights other areas where investors could find opportunity.
“The industry supplying the hardware to the Internet can also be interesting to investors,” he adds.
“Data centres and their software, as supplied by F5 Networks, Citrix Systems, Rackspace or Equinix are in demand, and problems with latency (speed), cooling and design, mean they are not simple facilities to provide.”
He warns, however, that those companies that don’t keep up with social media trends are putting their businesses at risk.
“Investing in the internet still carries risks for investors -illegal downloading may become a threat to some of the new social companies, for instance - but it is clear that prizes are out there to be won by savvy investors who understand the rapidly changing demands of today’s tech consumers,” he explains.
He cites US computer services firm Netscape as a prime example of a company that has been left behind as the technology sector has evolved.
For a long time, Netscape dominated the web browser sector, claiming to have the highest ‘usage’ of its Netscape Navigator browser. This lions share, however, was lost to Internet Explorer as its 1990 figure of 90 per cent usage share plummeted to below one per cent by 2006.
He adds: “Companies who don’t keep up with social media trends will be left behind – and like Netscape, superseded by younger, fitter rivals.”
