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Fund Review: Technology

Introduction

n the three months to June 19, the IMA Technology & Telecommunications sector disappointed with an average loss of 2.13 per cent, but that has recovered in the past month to return a positive 5.17 per cent, data from FE Analytics shows.

For the five years to June 19, the average return in the sector has been a rather more impressive 115.35 per cent.

Net retail sales in the sector have also seen more steady inflows so far this year after outflows of £20m in November last year. The sector saw sales of £13m and £15m in February and March 2014 respectively.

Jeremy Gleeson, manager of the Axa Framlington Global Technology fund, admits that technology and volatility “go hand in hand” and puts this down to what he refers to as investors’ love/hate relationship with the sector.

“Broadly speaking, investors are attracted to the technology sector but at the same time it’s quite a complicated sector to understand,” says Mr Gleeson.

“Sometimes results don’t trend up in a smooth line and investors who don’t necessarily feel confident about what they’re investing in can head to the exit door very quickly because it looks like something’s gone wrong.”

He cites this type of behaviour as one of the reasons for volatility in the sector but he is hopeful for a less volatile period now.

Walter Price, manager of the RCM Technology Trust, told the Association of Investment Companies (AIC) he is seeing a number of companies whose present valuations “do not fully reflect positive company and/or industry-specific tailwinds”.

He continues: “We agree that the valuations on many cloud and internet companies had become too lofty. In this sense, we think the pull-back is a healthy way of purging some of the speculative excesses that built up recently.

“That said, we continue to see new markets for these dynamic areas of technology that are much larger than the combined market capitalisation of these groups.”

Mr Price notes that he is finding investment opportunities in more attractively valued areas of technology.

“Components makers in the hard disk drive and memory spaces, previously thought to be casualties of languishing PC sales, are finding good demand from the expansion in data centres needed to store data and deliver cloud services,” he explains. “We think these companies could see significant re-ratings on their price multiples.”

Mr Gleeson says the outlook for the sector is “quite encouraging”.

He points out: “We had a bit of a sell-off in the first half of this year but fundamentally there hasn’t been anything awry in the sector.

“Results have generally been very healthy, so as we continue to see improvements in the macroeconomic environment we’ll see better confidence come through and a better spending environment all round, and that should benefit the technology sector.”

Mr Gleeson cannot predict whether the improved confidence will come through in the second half of this year or in 2015, but his feeling about the industry is one of general optimism.

The picks

Allianz RCM Technology Trust

This £128.6m investment company invests in the equity securities of quoted technology companies and is run by Walter Price. Among its top 10 holdings are Microsoft, Palo Alto Networks and Salesforce. The trust has delivered a top-quartile performance in the AIC Tech, Media and Telecomm sector over 10 years to June 18, having delivered a 167.93 per cent return. Over one and three years the trust has ranked top quartile, according to FE Analytics. The fund’s outperformance and its place in the Investment Adviser 100 Club 2013 suggests this could be one for investors.

Polar Capital Technology Trust

The £634.4m trust is co-managed by Fatima Lu, Ben Rogoff, Nick Evans and Xuesong Zhao. Google, Apple and Facebook make up the portfolio’s top three holdings currently. According to FE Analytics, the fund is top quartile over five and 10 years, having delivered a return of 206.48 per cent in the 10 years to June 19, against a sector average of 149.54 per cent. While the performance of the trust has dipped over one and three years, placing it fourth quartile in the AIC Tech, Media and Telecomm sector, returns have recovered in recent months. Perhaps one for investors with a long-term view.

Editor’s pick

MFM Techinvest Technology

Conor McCarthy and Darren Fremantle co-manage the MFM Techinvest Technology fund which has clocked up several years of outperformance since its launch in May 2003. It is first quartile over one, three, five and 10 years in the IMA Technology & Telecommunications sector, having returned 196.33 per cent over five years to June 18, against the sector’s 113.68 per cent return. The aim is to provide capital growth and income through investing in equities and bonds, with an emphasis on technology businesses. It remains relatively small at £41.6m, suggesting this fund is something of a hidden gem.

In this special report