The potential of so-called ‘disruptive technology’ stocks has attracted the interest of some investors, but big-ticket valuations and the high-risk nature of the sector means many remain sceptical.
Given the meteoric rise of firms such as Uber and Airbnb, many would assume disruptive technology offers exciting opportunities due to the impact on old-fashioned business models.
Since the end of 2002, around when the technology sector bottomed out, the Nasdaq 100 index has rocketed by 473 per cent, while the Investment Association’s (IA) Technology and Telecoms sector has delivered a total average return of 272 per cent.
In contrast, the FTSE 100 index has gained 147 per cent in the same period.
Notably, IA statistics show that in April 2003, technology funds represented 0.46 per cent of industry assets, but while the sector has since grown in monetary terms, it currently represents just 0.13 per cent.
Given the present backdrop, Neptune Global Technology fund manager Alastair Unwin believes people are underestimating the opportunities surrounding technology disruption.
He says: “It is not the case that everything is going to be disrupted immediately, but we feel that the speed of disruption is starting to inflect upwards.”
Simon Clements, investment manager on the Alliance Trust Investments Sustainable Future fund range, broadly agrees but suggests true disruption “is very difficult to predict”.
Mr Clements says the adoption of new, winning technologies is almost always underestimated, as is the impact on the challenged, incumbent technologies.
He points to the case, back in the mid-1980s, when telecoms giant AT&T hired McKinsey to forecast mobile phone adoption over the coming 15 years. The consultancy predicted an eventual 900,000 subscribers, but by 2000 there were approximately 109m.
Both Mr Clements and Mr Unwin highlight US electric car and battery product firm Tesla Motors as a company that has become something of a poster child for disruptive technology.
But while the pair admire the firm, they also believe it is too expensive. Valuations among those backed for success remains a huge concern. Merger and acquisition activity, common in the technology sector, has also made many people uncomfortable, as underlined by Tesla’s controversial bid for solar energy firm SolarCity last week. Tesla chief Elon Musk has significant stakes in both companies.
Mr Unwin says: “I think the valuation ultimately looks a bit rich for our blood, given it is still a company making cars.”
Valuations, alongside the lack of long-term growth trajectory for some disruptive firms are cited as two reasons why fund selectors struggle to fully engage with the sector. Of the past 12 months, 10 have seen net outflows from the Technology and Telecoms sector, data from the IA shows. The sector boasts 15 funds, of which Mr Unwin’s is the latest.
Axa Wealth head of investing Adrian Lowcock says valuations remain the biggest single issue for investors when it comes to technology stocks.
He says: “On a simple price-to-earnings basis, technology companies such as Facebook and Google look expensive. Valuations in disruption technologies or transformative companies don’t look attractive.”