Tech funds still have plenty to offer investors

As the dotcom bubble burst at the beginning of the 2000s, the boom in technology funds was met with a decreasing number of viable technology companies to invest in.

The shrinkage of the technology sector has been sharpest in the five years between 2003 and 2008, down from 29 funds to 12, but with the rise of cloud computing and key technology themes such as tablets and smartphones, is the tide about to turn?

Ben Willis, investment manager and head of research at Whitechurch Securities, notes: “Since the tech crash several funds have gone by the wayside – either closed due to decreasing fund size, or merged into other funds, such as global equity funds. However, there was not a plethora of tech funds even in the sector’s heyday. So there has been a dwindling of tech funds over the decade due to lack of interest or that investors, having been once bitten, twice shy, turned their backs on the sector.”

Jeremy Gleeson, manager of the £213.9m Axa Framlington Global Technology fund, admits technology has had an extended period of being out of favour, which has played into investment houses reviewing the future of pure tech funds.

“It is an easy decision if the fund is of a decent size, but if it is a small fund, and especially if the track record is questionable, then it is also an easy decision to wind it up or roll it into a global growth fund.”

But while the number of pure technology funds is falling, the number of technology and internet stocks available is on the rise, suggesting technology could be becoming more of a mainstream theme. Darius McDermott, managing director of Chelsea Financial Services, notes: “Themes like e-commerce, social media, mobile payments, factory automation and even smart agriculture are all examples of areas which traditional technology indices are materially under exposed to.

“For example, LinkedIn is recruitment/social, eBay and Amazon are e-commerce, Mastercard is electronic payments and the list goes on. None of these stocks are in the Dow Jones World technology index today.

“Some actively managed funds have started to shift away from the underlying benchmarks, as much of the secular growth of these trends and the exciting opportunities are occurring outside of traditional IT areas. This means index funds and ETFs are less able to capture these opportunities. It may be that the definition of a technology company and therefore the index needs to change at some point.”

Jake Robbins, manager of the Premier Global Alpha Growth fund, suggests that technology deserves a place in all equity funds.

He adds: “A pure technology fund is a bit archaic and a hangover from the tech boom 15 years ago. But technology dominates our lives and also the stockmarkets, with three of the top four largest companies in the world in the tech sector. A balanced diversified portfolio should use the sector to access some of the most exciting high-growth companies in the world that will shape the way we lead our lives in the future.

“What it shouldn’t be used for is exposure to those technology giants of yesteryear with obsolete products that have been superseded by the new generation.”

However, Mr Gleeson argues that while the success of Google and Apple has meant they have made an appearance in many mainstream equity funds, the tendency for these funds is to concentrate on the large-cap stocks.

He notes: “My point of view is that there are a lot of exciting things happening down the market cap scale in technology, and generalist portfolio managers typically don’t have the time or the resources to go and research those small and mid-cap tech companies they should be investing in.”

Mr McDermott favours a number of tech funds including the $433.1m (£283.8) Polar Capital Global Technology fund run by Nick Evans and Ben Rogoff, and the £164.6m GLG Technology Equity fund managed by Philip Pearson and Anthony Burton.

Another favourite of his, and also of Mr Willis’s, is Mr Gleeson’s Axa Framlington Global Technology fund (see page 31).

Mr Willis notes: “Mr Gleeson employs a stockpicking approach favouring mid and small-cap tech companies, and he will also meet and visit company management regularly to get first-hand information.

“He currently has a bias towards US technology companies favouring those with market-leading products and therefore a competitive edge. We believe that for investors seeking explicit exposure to this sector, then this fund is an excellent choice.”

An alternative for Andy Parsons, head of investment research at The Share Centre, is the £353.13m Henderson Global Technology fund run by Stuart O’Gorman and Gordon Happell (see page 32).

Mr Parson notes: “The fund benefits from a shift in demographics helping to drive technological adoption. In some developing countries, demand for mobile phones is far greater than that of land lines. It is also placed to benefit from changes in consumer behaviour as online shopping continues to grow and technology companies take advantage of this.”

With technology stocks becoming more mainstream, investors can achieve exposure to the sector through generalist funds. But for those looking for specialists and the chance to invest in lesser known companies with better returns, the pure tech funds remain the best option.