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Investing in Technology Funds - May 2013



    The original bubble burst at the end of the 1990s, after internet stock prices had soared in spite of unsustainably high price-to-earning ratios. The subsequent crash saw many online start-ups either shed huge amounts of their market capitalisation or fold completely.

    Last year, social networking website Facebook saw its initial public offering price more than halve within three months, from $38 (£24.9) to $18.75, while Apple faced a 14-month low in its share price last month after struggling to keep pace with its previous rate of innovation.

    The share price of search engine Google plummeted by $24bn in October after a ‘fat finger’ mistake (human error) revealed the company had suffered a 20 per cent profit loss in the third quarter, partly brought about by a slump in online advertising.

    “Ever since the burst of the tech bubble in 1999 when the height of fashion was to develop anything with the prefix dotcom, investment within the technology sector has tailed off significantly as investors have been reluctant to expose themselves to technology fearing another potential bubble,” says Andy Parsons, head of investment research at The Share Centre.

    But he adds that “times are changing and appetite is returning”, as the sector evolves and adapts to modern lifestyles. He is now tipping technology as a key sector for growth.

    “An example of the opportunities the sector has to offer is the growth of data and mobile phone usage. They are now embedded in our everyday lives with people preferring to reduce budgets elsewhere than surrender their personal phone or tablet,” he says.

    “As companies in this increasingly connected global world seek to compete, private companies investment in technology is expected to increase.”

    Paul O’Connor, multi-asset director at Henderson Global Investors, says there are reassuring signs that the technology sector has vastly matured since the original bubble.

    “We see it as an interesting space that has been transformed through the decade,” says Mr O’Connor. “It was a very volatile, fast-growing sector and it has changed really dramatically, particularly in the past five years.”

    The manager believes the technology sector has become less expensive, offering similar multiples to the overall stockmarket on a price-to-earnings basis. It also offers a wealth of megacaps with defensive characteristics, including a growing dividend trend.

    Responding to claims that tech stocks have been overvalued, Mr O’Connor says these shares are “actually pretty cheap”, offering a 14 per cent growth rate, 3 per cent faster than the market average.

    But he adds that the sector is split between the high-quality megacaps such as Apple and smaller, newer companies that are growing quickly.

    While normally the Henderson multi-asset team is happy to invest in some passively managed funds, technology is the one sector the team feels it can only play through actively managed products, because the indices are skewed towards the big names. It isn’t always beneficial to be exposed to companies that have already rallied, warns Mr O’Connor.

    “It’s not a homogenous sector and analysts can really add value. There are a lot of sector-specific dynamics,” the manager explains.

    Frances Hudson, global thematic strategist at Standard Life Investments, agrees with Mr O’Connor, saying that technology is a much more diverse sector than investors sometimes acknowledge.

    “It’s a sector that exhibits bubble-like tendencies quite often, but it’s not like it was in 2002 when it didn’t matter what you were doing because it was the golden sector. Now there’s much more discrimination.”

    She believes the writedowns suffered by the likes of Google, Apple, LinkedIn and Facebook are for stock-specific reasons, rather than a reflection that the whole sector has been overvalued.

    “Apple’s valuation was getting out of hand given its product development levels. The stock became so dominant in the indices that everybody owned it, and so the next move is everyone started to sell it – that’s the definition of a bubble, when you run out of buyers,” she argues.

    “Facebook was priced to perfection at launch, and if the founders thought it was rapidly growing they would not have done that.”

    Eleanor Lawrie is news reporter at Investment Adviser


    Juliet Schooling Latter, research director, Chelsea Financial Services:

    “I prefer actively managed funds in this sector as the best opportunities are being found more and more in non-traditional areas or even in different sectors, as technology has such a broad reach these days.

    “While more traditional IT companies, which make up a larger part of the index, have suffered in recent years, stockpickers who are not tied to the benchmark have been able to find companies with good growth prospects elsewhere.”

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. Which ‘super tech’ stock is the one that appears most frequently in the top 10 holdings of UK retail technology funds?

    2. How many UK domiciled technology funds in the IMA Technology and Telecommunications sector have disappeared from the sector between May 2001 and May 2013?

    3. How much did Google’s share price plummet by in October after a ‘fat finger’ mistake?

    4. Which of these online businesses may seem attractive at first glance but don’t offer real value, according to Bolko Hohaus and Julien Leegenhoek?

    5. Global mobile transaction growth is estimated by Gartner to average how much per year between 2011 and 2016?

    6. Facebook tops the list of 10 largest US internet IPOs of all time, but what was it deal size?

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