23rd May 2013
Since the turn of the century and subsequent dot.com crash burnt investors have remained wary of dipping their toes back into technology funds cauldron. But a cursory glance at performance since the implosion may change some investors’ minds. But returns for the brave fund investor have been substantial writes Phil Scott.
In the run up to the year 2000, technology funds were all the rage as money piled into the so-called ‘new economy’ which was encapsulated in businesses held within technology funds. While early tech arrivals such as Google and Amazon navigated themselves through the downfall, thousands of internet and tech start-ups vanished after the technology, media and telecommunications (TMT) implosion. Since then the world has embraced internet giants such as Facebook and Twitter.
Ben Yearsley head of investment research at Charles Stanley Direct, says: “The technology sector is renowned for creating notable winners as well as spectacular losers. Witness the rise of Microsoft in the 1990s or Apple in the past decade versus the declines of Motorola and Nokia, large successful businesses that failed to adapt to change. It is therefore an area where thorough research and a vision of the future can really help when picking stocks.”
Since the technology sector bottomed-out in September 2002, the area has actually enjoyed some pretty steady growth, partly helped by the technology revolution largely instigated by Apple and the arrival of the iPod, iPhone and now just as ubiquitous iPad.
Over the past 10 years, the average investor return from the Technology & Telecoms fund sector has been a substantial 168%, in the past five years in has delivered a mean return to investors of 86%. To put those figures in some perspective, the FTSE 100 index, of the UK’s largest firms, has achieved growth of 146% and 34% over 10 and five years respectively.
Apple recently reported its first fall in profits for a decade, falling 18% compared to a year earlier, to $9.6bn, as market sentiment pointed towards it losing its dominance in the mobile phone market as rival such as rivals such as Samsung and Google have released innovative devices at lower prices and in turn pulled some market share away from Apple’s iPhone.
Phil Pearson co-manager of £163m GLG Technology Equity portfolio says: “The company has failed to maintain its premium status. Given the uncertainty, exposure to Apple has been significantly reduced within the fund.”
Pearson is now focusing on companies he believes can benefit from the shift towards mobile computing no matter which of the giants, be it Apple, Samsung, Microsoft and Google, win out. In particular, he is seeking out stocks that design or supply the components of smart phones and tablets. The fund’s top holding is ARM whose chip designs are used in many of these devices. Taiwan Semiconductor, ASML and Qualcomm are also part of this theme. They also favour certain social media firms such as Mail.ru and Facebook which they believe could benefit from increased advertising revenue from mobile computing, as well as some smaller businesses in the field of business intelligence and data analysis such as Splunk and Qliktech.
A further major theme running through the technology sector is the increased viewing of TV programmes, films and sporting events via the internet, via providers such as NetFlix and LoveFilm. On top of existing media such as television, Pearson believes companies owning important content rights are well placed. Pearson recently repurchased Walt Disney and invested in Manchester United, which has a huge following across the globe and could benefit from the use of its rights across mobile media. Pearson notably does not invest in IBM or Intel, firms whose fate the manager believes is too strongly linked to the desktop PC for instance, an area viewed to be in decline.
Pearson’s fund, which he has managed since 2009, has underperformed, albeit just, his sector over the past five years, achieving an 85% return, 1% less than the mean. But Yearsley tips the fund going forward, he says: “I believe the team are capable of generating attractive returns from the sector over the long term, so this fund could be considered by adventurous investors seeking exposure to this specialist area.”
Adrian Lowcock, senior investment manager at fund broker Hargreaves Lansdown say the only fund they recommend is also the GLG fund. He says: “Overall the portfolio is concentrated, containing around 40 stocks at present. This allows each to contribute to performance, but it is higher risk. Funds investing in a single sector should also be considered higher risk than funds diversified across a number of sectors.
“The managers focus on companies they believe can benefit from a global shift towards mobile computing, while avoiding those companies reliant on PC sales, or supplying components to PC manufacturers.”