Magnus Grimond:
The broadband effect
THEY say the time to invest in the stock market is when the last bull has become a bear. On that basis, now looks like an excellent time to get back into technology stocks.
According to the latest global survey of fund managers by Merrill Lynch, investment in the sector by the moneymen is at its lowest ebb since early 2003. And figures from the Investment Management Association, the unit trust and Oeic trade body, show that retail investors have been net sellers of technology and telecoms funds for each of the first six months of this year.
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Clearly, painful memories still linger with investors, six-and-a-half years on from the boom and bust in the market. But many professionals think that this creates an excellent buying opportunity.
Ben Rogoff, manager of the Polar Capital Technology investment trust, bases his optimism partly on researching previous tech booms in the late 1960s and early 1980s. “We looked at when the sector bottomed after those bubbles and it was between six and seven years. And that’s exactly where we are today,” he says.
Technology share-price ratings based on earnings — p/e ratios — are now in aggregate 1.2 to 1.3 times that of the market, says Mr Rogoff, against a long-term average of 1.4 to 1.5 times. He says: “You want to buy when valuations are attractive, when nobody else is buying and the industry’s ills have been repaired.”
And despite another tough year, rival manager Jeremy Gleeson, of the Finsbury Technology Trust, suggests that those ills are being cured. “Technology has gone through another sell-off, but the fundamentals have been improving over the past 18 months,” he says. “Earnings have been growing, as well as revenues, and tech companies are quite leveraged to revenue growth.”
What has been fuelling this is spending by big telephone networks on broadband, whether it is 3G technology on mobile phones or ADSL in the home. Mr Rogoff says that broadband is having a profound effect on a number of areas of technology, boosted by high penetration rates as companies such as AOL, Orange and Carphone Warehouse virtually give free access to customers.
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Tom Gidley-Kitchin, an analyst with Charles Stanley, the stockbroker, believes that this consumer demand will particularly benefit three UK-based global hardware suppliers: Cambridge Silicon Radio, ARM Holdings and Wolfson Microelectronics. “These companies are geared into consumer microelectronics,” he says. “And there you’re not talking about capital expenditure by companies but about the world’s appetite to replace their mobile phones or iPods.”
Trading on between 20 and 24 times historic earnings, the shares are “not a steal”, says Mr Gidley-Kitchin, “but if you believe they will be around in ten years’ time, which I do, they are good stocks.”
Another UK company that should do well from the mobile phone boom is Imagination Technologies, Mr Gleeson says. But investors need to be selective: “You can’t just throw money at the sector, but by understanding the themes playing out and the companies benefiting, there are opportunities to make money.”
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Mark Atherton:
High-tech burns cash and investors
BY THE law of averages technology shares should come good again at some point. But many experts doubt whether that will be any time soon.
The sector still has not fully recovered from the drubbing that it received when the tech bubble burst in 2000. Tim Cockerill, of Rowan & Co, the independent financial adviser (IFA), says: “A lot of stocks have gone bust or shrunk to a fraction of their previous values, leaving behind some shaken investors.
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“The companies burned cash but in many cases the hoped-for new technology never materialised. When they went to the wall there was nothing left in the kitty. Investors are now wary of getting their fingers burnt again.”
Even today, he says, there is a danger of brilliant ideas, such as 3G technology for mobile phones, running ahead of the ability of businesses to make solid profits from them.
He says that technology remains a specialist part of the stock market and carries a high level of risk. Since the start of the recent market shakeout, which began in late April, technology shares have fallen more heavily than most, with the FTSE techMARK 100 index down 6.8 per cent, compared with a fall of only 3.4 per cent for the FTSE all-share.
Paul Ilott, of Bates Investment Services, another IFA, says that the outlook for tech stocks continues to be gloomy. “Technology companies are a geared play on the global economy, and this is expected to grow more slowly next year,” he says. “If the outcome is a slower pace than expected, technology could be one of the sectors that is hit hardest.”
He adds that current rising interest rates are also bad news for technology companies because higher rates tend to limit consumer spending. If US shoppers stop making purchases in their local malls, the impact will be felt by technology companies round the world, with Asia especially hard hit.
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Mr Cockerill says: “For most investors, buying individual tech funds is not the way to go. They are better off buying an ordinary equity fund or a special situations fund and leaving the decisions to the fund manager.”
Mr Ilott says that even if investors do not hold any tech funds they should check what percentage of their portfolios already offer exposure to technology, paying particular attention to US, Japanese and global emerging-markets funds, which tend to have the highest levels of exposure. If investors find that they have an overall technology weighting of more than 11 per cent — the weighting of tech stocks in the MSCI world index — they probably have enough exposure.
If, despite these caveats, investors are still looking to select a fund in this sector, Mr Ilott picks Axa Framlington Global Technology, while Mr Cockerill goes for SocGen Global Technology.
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