28th January 2016
It is out with the old and in with the new, says Chelsea Financial Services managing director Darius McDermott assessing the funds leading the new wave of tech investing.
Investing in technology no longer means finding the next Facebook while its founder is still working in a garage and wearing tracksuit bottoms. Industries including healthcare, energy and manufacturing are delivering the next wave of digital disruption.
As with the more ‘traditional’ tech investing (if such a term exists), innovation and invention remain key drivers. However, whereas unique software or hardware alone used to be enough to catapult a company’s stock price into the stratosphere, many of these capabilities have become basic expectations.
For example, the data-driven algorithms that have boosted advertising revenue and product sales at behemoths such as Google and Amazon are now par for the course. Website users express frustration when a program does not immediately recognise their preferences and serve up relevant material.
Likewise for ‘simple services’ such as maps and location tracking, which underpin the e-commerce and marketing strategies of retail companies around the world. Nowadays, if an app can’t tell you where you are, direct you to your nearest supermarket and tell you about its weekly specials it’s hardly worth the download.
Big winners, big losers
Over the past 10 years, residual fears from the dotcom bubble have faded (although perhaps not completely receded) and tech pioneers have delivered exceptional returns for investors.
Globally, the sector has posted total returns of around 80%* in US dollar terms since 2006, based on the MSCI World/Information Technology index. The S&P 500 has clocked total returns of 70%*, by way of comparison.
Unsurprisingly, much of the world’s tech action in that time has taken place in the US market, where the sector has returned 120%* according to the FTSE USE Technology index, nurtured by Silicon Valley and other start-up hot spots.
However, while these benchmark figures were significantly aided by super growth from companies such as Amazon, the share price of which rose more than 1,000%† over the period, the successes mask some significant underperformers.
For example, although it only listed late 2013, Twitter provides a famous recent example of a tech stock that has lost money for its investors, with its price currently down nearly 60%†† since it went public.
Where you put your money can make a big difference and knowing how to select the best investments is vital. We take a quick look at how a handful of fund managers are positioning their investments.
Stock selection is key
Jeremy Gleeson, lead fund manager of FundCalibre’s Elite Rated AXA Framlington Global Technology, believes one part of the answer is to avoid the slow growth ‘old guard’ tech companies altogether.
He says money spent by enterprises on maintaining legacy systems is declining, which is reflected in the revenue of companies such as IBM (down 15% in 2015), while ‘new technology’ spend is increasing rapidly.
In this sphere, Jeremy likes companies such as Salesforce.com, who develop cloud-based marketing and data solutions, and whose share price rose 32% in 2015 versus IBM’s 14% decline, he says.
On the other hand, the tech sector can throw up more than its fair share of ‘blue sky’ companies at the other end of the spectrum, with grand ideas but no income and growing development costs. Steering clear of these is also a core pillar of Jeremy’s strategy.
Not all about the tech sector, per se
Meanwhile, James Thomson, fund manager of Rathbone Global Opportunities fund, also Elite Rated by FundCalibre, says his top three contributors to returns in 2015 were Betfair, Amazon and Rightmove. Rightmove and Betfair are cases in point when it comes to identifying digital disruptors outside the specialist tech sector.
James describes the property listing website, Rightmove, as “the best investment of [his] career”, saying it now provides real estate agents with an average 70% of their leads and dominates the UK market.
When Betfair launched its online gambling operations in the UK, it quickly differentiated itself from competitors with innovations such as its ‘Cash Out’ and ‘Price Rush’ products, he says, both of which offer customers additional betting features.
Another fund actively looking for digitally disruptive companies outside the tech sector is Elite Rated Polar Capital Healthcare Opportunities. Its co-manager, Dr Dan Mahony, prefers to be underweight in the pharmaceuticals sector relative to the fund’s benchmark index but likes to invest in businesses he believes are using technology creatively to innovate in the healthcare space.
He mentions a product called ‘Invisalign’, which is being used in dentistry for braces, as an example. Basically, you go to the doctor or dentist, have your teeth scanned, the scan is emailed to California, and someone 3D prints your brace and sends it back to you! A couple of weeks later, as your teeth move, you do the same thing again. There are a few regulatory issues around 3D printing in other areas of healthcare, but it will surely be used more and more in the future, Dr Dan predicts.
New opportunities in Japan?
New kid on the block Neptune Global Technology fund, managed by Alistair Unwin, selects tech investments through a geographic lens and, in addition to the US, is interested in developments in Japan and Asia. A sentiment which is shared by Praveen Kumar, fund manager of Baillie Gifford’s Japan Smaller Companies fund, which looks for high growth start-ups run by young, ambitious entrepreneurs.
Attitudes to risk taking and entrepreneurship are changing in Japan, Praveen believes, with an increasing number of founder-managed companies now coming to market. He likes companies such as Broadleaf, which has developed a cloud-based car parts ordering system to increase productivity in the automotive industry.
As always, I’d remind readers the tech sector overall tends to be extremely volatile and it’s not an area where I’d personally park a significant portion of my savings. Given the diversity of developments in new and interesting areas, however, it’s always worth keeping an eye on the latest trends to find intriguing opportunities.
*Source: FE Analytics, 10 year figures, from 20 Jan 2006 – 20 Jan 2016
†Source: Google Finance, 10 year figures, from 20 Jan 2006 – 20 Jan 2016
††Source: Google Finance, figures since listing, from 7 Nov 2013 – 20 Jan 2016
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ view are his own and do not constitute financial advice.