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Your Money > Investing Ideas Articles > Technology - A sector update
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By Rob Morgan
A recent survey by Ofcom has revealed that spending on technology such as the internet and digital TV is, for many people, a higher priority than eating out, holidays or DIY. However, the technology sector has largely been overlooked by investors who remember the boom and bust of technology shares a decade ago. Nevertheless the sector has put in some good performances recently with the IMA Technology & Telecoms sector up 24.5% over one year compared to 7.8% for the IMA UK All Companies sector (source: Lipper Hindsight 1.10.08 to 1.10.09). Where are we now? There is a general perception that technology shares are risky. This is a diverse sector and whilst there are more speculative smaller companies whose technologies are yet to be proven, other firms have matured and are now stable businesses with a truly global presence. For instance Hewlett Packard, Microsoft and Sony are household names and amongst the largest companies in the world. What's more, many firms have a combination of strong earnings and excellent growth prospects. A prime example is Nokia, the world's leading provider of mobile phone handsets, which is a resilient business that currently pays a 3.4% dividend (variable and not guaranteed). Nokia has a dominant position and the potential for growth in emerging markets where mobile phones are becoming more widely used. Technology firms typically operate in expanding markets where barriers to entry are high, and they have bolstered their presence by building recognisable brands. For instance, Microsoft and Samsung are familiar to people the world over and Apple has shaped the portable music market with the iPod range, combining leading technology with strong marketing. There is also a diverse range of smaller, lesser known tech firms that dominate their own areas. For instance Sage is established as a key provider in accountancy and business software and Pace Micro Technology has carved a niche as a developer of set top boxes for cable and satellite television. Deal in shares from £9.95 per trade. What are the prospects? Today's technology firms have already experienced tough times and have had to prove their business models are valid and profitable. Furthermore many have also used the current recession as an opportunity to improve their balance sheets by cutting costs, reducing debt and building large cash reserves - so these are now well positioned for recovery. As the economic outlook becomes clearer companies will spend more money on new technology, systems or software. Likewise, when consumer spending improves it is likely that the latest 'must have' gadget will be at the top of shopping lists. As such the technology sector is linked to the health of the economy as a whole and is likely to be an immediate beneficiary of any economic growth. If the economic backdrop turns out to be more difficult, I think many technology stocks could still offer some opportunities for growth. Investing in new technology can improve efficiency, saving companies time and money so the sector might benefit from companies looking to cut costs during a downturn. Furthermore, government spending on certain areas of technology is increasingly being seen as essential. For instance, the commitment to tackling climate change is creating demand for new technologies that aim to produce energy in an environmentally friendly way. Energy efficiency is also seen as vital and the US and Chinese governments are spending heavily in this area including the creation of 'smart grids', modernised networks that deliver electricity using digital technology to save energy and reduce cost. A further fillip to the sector could come from merger and acquisition activity as firms look to deploy their cash reserves. The recently announced merger of mobile phone operators T-Mobile and Orange indicates that confidence may have returned and that firms are looking to forge deals. This can result in the creation of larger, more competitive firms with increased market share. How could I invest in technology? Given the lack of interest at the moment, contrarian investors (who like to invest in areas that are unpopular or out of fashion) might view the technology sector as an opportunity. Technology is a challenging, fast-changing environment so it is worth investing with a specialist who can sort the wheat from the chaff. For investors new to the sector, or those wishing to increase their exposure, I would suggest the GLG Technology Equity Fund, which looks to take advantage of opportunities across the whole breadth of the technology sector, including media and telecoms. Save up to 5.5% on fund initial charges Although not a household name, GLG is a large US company who took over the UK arm of Societe Generale Asset Management in April 2009. Managers Philip Pearson and Anthony Burton have 28 years of combined experience and have a highly commendable track record through good times and bad in this volatile sector. Previously they ran a technology hedge fund for GLG, which has performed well since its launch in 2002. What makes these fund managers unusual is their aim to deliver positive returns and shelter investors from the worst of any market falls. As such the fund has the facility of moving into cash and employing certain derivative techniques such as 'shorting' which allows them to try and take advantage of shares that fall in value, see below for an explanation. However, please note that this is not an absolute return fund, positive returns are not guaranteed and the fund will fall as well as rise in value given its higher risk nature. Since taking over the fund, Philip Pearson and Anthony Burton have moved the fund towards larger global companies with market leading products and services. The number of holdings in the fund has also been lowered from 60 to 40 as they believe having a more concentrated portfolio is the best way to generate higher long term returns than their peers, though this also increases risk. Rob Morgan - Analyst Shorting - an explanation Traditionally investors buy assets they believe will rise in value. Shorting is different. The principle is that the fund manager actually sells shares they don't own. This in effect means he owes the buyer the shares. The buyer agrees they will not take delivery of the shares for, say, six months and the fund manager hopes that by then the share price will have fallen. After six months the fund manager purchases the shares in the market and passes them on to his buyer. The difference between the two prices is the profit or loss. For example: 1. Fund manager sells short 10,000 shares at £2 each = £20,000 2. Purchase these shares six months later at 80p each = £8,000 3. Profit = £12,000 In this example had the share price risen by the same amount, it would have cost the manager more to purchase the shares than they made from selling them and they would have made a £12,000 loss. There are many ways of effecting this investment strategy and managers may short by entering into contracts with a broker and not actually take delivery of the shares. Therefore this is not an exact description of how it happens, and ignores transaction and other costs, but it hopefully explains the principle. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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