Last week marked one year since the initial public offering of Facebook, but its high valuation stoked fears among investors of an almighty crash.
These fears are warranted. The technology story in the past two decades has been far from smooth. In little more than a decade, it has been through periods of both chronic overvaluation – tech boom – and undervaluation – post-credit crunch in 2008-09.
Juliet Schooling Latter, research director at Chelsea Financial Services, says: “The most highly anticipated technology IPO since Google went public in 2004 saw Facebook raise a huge $10.5bn on May 18 last year.
“But, like Renren, the Chinese equivalent of the social media site which was made public the preceding year, its share price fell quite rapidly in the following months.”
In weeks, Facebook had fallen from its flotation price of $38 to $22 on September 12 2012. On May 16 2013, the share price stood at $26.1.
Nick Evans, manager of the Polar Capital Global Technology fund, is optimistic for the stock, but claims there is clearly a lot of work still to do.
He says risks remain, such as whether growing mobile revenues can make up for decreasing desktop revenues.
“Competitors are nipping at [Facebook’s] heels, but it has a massive head start, with more than a billion users, and there is a lengthening list of examples of big-name brands, such as Bud Light, launching campaigns on the website which have had very good rates of return,” he says.
The GLG Technology team, led by Philip Pearson, agree that the prospects for Facebook are looking up.
“Facebook’s recent results demonstrate not only solid progress in usage and engagement, but they also marked a third consecutive quarter of year-on-year advertising growth rate acceleration.
“Moreover, mobile revenues have grown and, having represented 2 per cent in the second quarter of 2012, now account for 30 per cent of total revenues,” the team notes.
This may sound positive, but those who bought into Facebook last year are yet to recover.
Of the 13 constituents that make up the IMA Technology and Telecommunications sector, only two funds hold Facebook stock – GLG Technology Equity and Polar Capital Global Technology. The GLG fund has the larger weighting, at 4.6 per cent.
Based on one-year performance figures, both of these funds have underperformed the sector average. GLG Technology Equity returned 18.51 per cent, underperforming the average by nearly 2 percentage points. The Polar Capital fund fared less well, underperforming by 2.05 percentage points, with a return of 18.44 per cent.
This, of course, may not have anything to do with Facebook – during the period, only five funds in the sector outperformed the peer group average, the best of which was a tracker fund and another of which invests in telecommunications companies such as BT.
Investors, however, are right to be wary of the sector that has proved to be a rocky road in the past 10 years. Let’s not forget – once bitten, twice shy.
THE PICKS
Pictet Digital Communication
This fund is a Luxembourg-domiciled Sicav that invests at least two-thirds of its total assets in the shares of companies using digital technology. Stocks in the top 10 include the likes of eBay and Amazon, as well as Vodafone, Google and Yahoo. Over three years, the fund has returned 30.57 per cent, ranking it fifth in the 13-strong IMA Technology and Telecommunications sector.
GLG Technology Equity
Managed by Philip Pearson and deputy manager Anthony Burton, this £164.3m fund is yet to deliver top-quartile returns. Over three and five years it sits firmly in the second quartile, but its one-year numbers have seen it slip into the third quartile. With a concentrated portfolio of roughly 40 stocks, however, this fund is naturally higher risk than some of its peers, and the strong views taken by the managers on social networking and online consumers could come good in the near future.
EDITOR’S PICK
MFM Techinvest Technology
This £23.9m fund is managed by Conor Macarthy and provides investors with both capital growth and the accumulation of income. It has a global remit, but admits that up to 75 per cent of the total fund value is normally invested in London-listed technology firms, with the remainder primarily in North America. Over five years, this fund tops the sector with a return of 97.18 per cent, compared with a sector average return of 70.7 per cent.
