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Technology funds shine again By Fiona Hamilton
Technology has been hugely unfashionable among investors in recent years, and it is easy to see why. Expectations soared far too high in 2000, and many lost their shirts in the subsequent collapse. A lot of technology funds have This is nothing new however. Technology has a history of being exceptionally cyclical, with big runs every decade or so, following by precipitous downturns. Those who jump on the bandwagon as it is gathering speed can do very well, but they must have the nerve to sit out a lot of lurches along the way, and then to jump off again before the eventual crash. In the sixties, the mainframe computer was the catalyst for the upturn, and in the eighties it was the personal computer. Not that these were the only exciting technology stories in town at the time, but they acted as the 'killer application' which fired the expectations of the wider investment community. In the early nineties, the word processor was important and in the late nineties the Internet, especially as applied to business. Enthusiasts hope the ever more pervasive use of broad band, in the emerging markets as well as the developed world, will help galvanise the next upturn. The relative resilience of the technology sector in the August downturn has bolstered their optimism. Investors beware However, investors should note that technology can be particularly treacherous. For every company that succeeds there are a lot that do not, so skilled share selection is vital and very few fund managers have good long term records. An even bigger caveat is that technology would be very vulnerable to a major downturn in the US economy, especially if it was steep enough to seriously unsettle growth in the Far East. So long as that is avoided, however, the sector looks promising, with most technology companies having been left behind in the bull market of the last four years This means some of the better ones now sell on valuations which look very modest compared to their above average growth prospects. The three largest specialists - after a good bounce in 2003 - have all have lagged well behind the wider UK stockmarket, as represented by the All Share index. However they all have a global remit, so the Dow Jones World Technology index is a fairer benchmark. On that basis, the Henderson Global Technology fund has been performing well since Geoff Paton took charge in 2004, while the M&G Global Technology fund was fairly creditable until the last year or so, when Cyrille Fillott began to take over from the redoubtable Aled Smith. However, the New Star Technology has fallen on poor times. Hitesh Thakrar only became manager in September 2006, so it may be too early to judge, but his initial returns are not encouraging and the fund's performance is a reminder that no management house should be trusted to do well in all sectors. A dollar downfall The global technology funds all have a lot of US holdings, so at least part of their slowdown can be attributed to dollar weakness. Henderson has the heaviest US weighting, at around 66%, with Finland, Taiwan and the Netherlands being its next largest areas, whereas the UK and Japan both account for less than 3%. As it happens, the UK has been a relatively benign place for technology investment over the last five years, as can be seen from the performance of the Close FTSE Techmark tracker fund. Analysis of its portfolio demonstrates what diverse interests UK Technology includes, with 25% in software and computer services, 21% in aerospace and defence, 17% in pharmaceuticals and biotechnology, and 9% each in media, healthcare equipment & services, and technology hardware & equipment. The fund's top 10 holdings are headed by Bae Systems, Reuters, Shire Pharmaceutical and Smith & Nephew. Relatively strong UK returns have been good news for Artemis New Enterprises, which is very different from most of its peers in that the UK accounts for three quarters of its portfolio. It also differs in concentrating mainly on small to medium sized companies, as manager Lindsay Whitelaw believes that "the emerging technologies and the commercialisation of new technologies typically happen in the small cap arena." Whitelaw divides the fund into three sectors - emerging technologies, proven technologies and companies which "can be materially altered by the adoption of a technology". The resultant portfolio is overweight in services, especially business services, and its top three holdings are Aveva, Sage, and Dettica. Aveva specialises in engineering software for the plant and marine industries, Sage is the Newcastle based specialist in business management software and services for companies of all sizes, and Dettica is a consultant specialising in fraud prevention, security and risk management.
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