Financial News

Technology funds, until recently a disaster zone for private investors, could be set for a comeback, with some analysts calling them the 'investment opportunity of the decade'.

As investor appetite for growth stocks returns, analysts say tech companies, many of which have strong balance sheets and low levels of debt, could out-perform the market.

Tech stocks suffered badly after the dotcom crash of 2000 and most funds specialising in the area were forced to close to investors.

The sector has not really picked up since. Marketing departments have refrained from promoting their funds and some analysts have even stopped following the sector altogether.

However, those that still do - such as Oriel Securities - claim this could be a good time to buy in as under-researched companies often provide the most attractive long-term investment opportunities. In a recent note, analysts at Oriel go as far as saying that tech funds could prove to be the "long-term investment opportunity of the decade".

"Put simply, the tech sector looks set to outperform the market as a result of being rich in companies with strong balance sheets, low leverage and the genuine prospect of rising recurring earnings," they said.

There are just three remaining investment trusts that specialise in technology: Polar Capital Technology Trust, RCM Technology Trust and Herald Investment Trust.

Oriel analysts have put all of these on their "buy" recommendations.

These three trusts are trading at attractive discounts, with scope for these to narrow as the sector improves.

There are a number of factors that look set to herald greater returns from the tech sector.

Tech companies could benefit in the downturn as businesses increasingly turn to new technology to help them cut running costs.

Also, a number of companies in this area have escaped the worst of the credit crunch.

"It is strange to think of technology as a defensive area but the reality is that many blue-chip tech companies have held up reasonably well over the last 12 months - particularly the highly cash-generative ones with strong balance sheets," says Simon Elliott, an analyst at Wins Investment Trusts.

Tech funds do not offer very high yields, which may deter income-seekers who are looking to beat cash rates of near to zero. However, as interest rates start to rise, the tech sector could do well again.

There is also an attraction in buying funds that have already shown they can weather a downturn - as the three technology investment trusts have.

"To have survived through the downturn shows a certain resilience," say Oriel analysts. "Our contention is that well-managed tech funds have a useful role to play and, that if any subsector requires fund managers to have specialist knowledge, it is tech."

The largest of the tech funds is Polar, which has holdings in mainstream US tech companies such as Apple (NASDAQ: AAPL - news) , Google (NASDAQ: GOOG - news) and Microsoft (NASDAQ: MSFT - news) . It has significantly outperformed its benchmark this year, with its share price rising 44 per cent in six months.

RCM Technology has all of its top 10 holdings in the US, which is still the most thriving market for tech stocks.

Herald differs from the other two funds. It is weighted towards smaller growth stocks and has more holdings, a number of which are in the UK. This makes the fund more risky than the other two, say analysts - although it could have the potential to outperform.

Mick Gilligan at Killik & Co, the adviser, says that while Herald is a small-cap play, Polar, with its mainstream holdings, is well positioned to benefit from the increasing amount of money being spent on technology in emerging markets.

But he warns that it is very difficult to pick the winning tech stocks from the losers.

Gilligan identifies one stock that has a finger in every pie - Imagination Technologies (LSE: IMG.L - news) . It supplies components for many of the products in the tech sector, deriving 57 per cent of its revenue from technology, and supplies embedded graphics to mobile phones and other gadgets.

Investors can also access technology funds through specialist venture capital trusts. These incluse Albion and Foresight, which is launching a fund specialising in environmental technology in the autumn.

Investing in start-up technology ventures is notoriously risky, with the vast majority of early ventures failing.

The UK government has set up a fund - the London Technology Fund - to provide venture capital at an early stage in the start-up process.

This fund is not aimed at private investors, although David McMeekin, its chairman, says that once a technology company is big and successful enough to be snapped up by a VCT for funding, it could grow very quickly indeed although investors should have a longer term view.

And as there is such a shortage of funding in the UK tech sector, managers of tech funds are able to cherrypick the best investments at the growth stage.