InvestmentsMay 28 2013

Investors wary of tumultuous tech sector

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ByJenny Lowe

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.