In spite of the outperformance of the technology sector over the past five years, valuations have contracted on both an absolute and relative basis, according to Henderson Global Technology manager Stuart O’Gorman.
The manager, whose £343m fund provides investors with capital growth through investment in technology companies, says the contraction is because share prices, while strong, have not kept up with underlying earnings growth. “We now find the sector trading at more or less the lowest forward price-to-earning (PE) multiples and relative PEs in a generation,” says Mr O’Gorman.
Another key issue in recent years has been the lag in technology spending compared with historic trends. “Measured either as a percentage of GDP or a percentage of cap-ex, corporate IT spend remains behind trend. This is partly a consequence of the ‘do more with less’ mind-set that has persisted since the bursting of the tech bubble more than a decade ago, but is also an indication of economic concerns,” he says.
“A normalisation towards trend at some point in the economic cycle could represent a significant boost to technology demand.”
The manager follows what he describes as a “valuation-aware, bottom-up” process, focusing on underappreciated areas of secular growth that offer strong long-term returns.
Mr O’Gorman says the team has a bias towards companies with strong barriers to entry, which he claims should “cushion the portfolios from macroeconomic volatility”, and cites eBay, Amazon and Rightmove as examples.
“In recent years, technology has actually tended to lag in strongly rising markets – quite a contrast from the past,” he says. “We believe this is a function of a much more conservative sector with higher recurring revenue, lower cyclicality, higher free cash-flow generation and more balance-sheet strength than in the past.
“We don’t change our approach based on short-term performance considerations. We believe our process and our biases towards attractive valuation, secular growth and companies with strong barriers to entry will stand us in good stead for the long term. The fund remains biased to our preferred themes of e-commerce, online advertising, data growth, connectivity and paperless payment.”
While the fund’s five-year numbers show it slightly lagging the wider IMA Technology and Telecommunications sector, it has outperformed its MSCI ACWI Information Technology index benchmark by 8.99 percentage points with a return of 68.62 per cent.
Mr O’Gorman says: “We are sensitive to valuation. As such, when the market goes through periods of hype surrounding new technologies we would tend to lag. Similarly we tend to be underweight commodity and more cyclical elements of the technology market as we have a strong preference for secular growth.
“When commodity stocks rally (on positive economic news for instance) we will tend to lag. Additionally, we construct our fund with the index in mind (an index-aware approach). This gives us somewhat of a large-cap bias against some of our peers – so we may lag when mid and small cap tech is significantly outperforming.”
The portfolio currently has an underweight position in technology giant Apple, with the manager saying he is “mindful that Apple needs to remain innovative if it is to gain new followers. The iPhone is beginning to face stiff competition from rivals whose products are cheaper and with similar functionality”.
Google, however, has an overweight position in the fund as it continues to be the dominant internet search engine in many parts of the world.
This fund, although not a ‘shoot the lights out’ performer based on its five-year figures, is a good pick for anyone looking to capitalise on the growth in the technology sector.
EXPERT VIEW
Adrian Lowcock, senior investment manager, Hargreaves Lansdown:
This is perhaps a more conservative manager than others in the sector, and this has been illustrated by his scepticism of cloud computing. The technology fund is fairly benchmark-focused and will rarely stray from big, liquid, large-cap names. The constraint of the fund size also dictates such a philosophy.
