With the giant US players looking fully valued and start-ups always fraught with risk, Darius McDermott suggests advisers point their clients eastwards for a better risk/reward balance within the technology sector
I am sure we all have a few clients who are unfailingly attracted to tech stocks, regardless of valuations, talk of bubbles and any number of cautionary tales of fortunes made then lost. The excitement of finding the next potential Amazon - whose shares have seen no less than 45,000% price growth since first listing in 1997 - sometimes seems to outweigh rational analysis.
It is true the famed ‘FANGs' of Facebook, Amazon, Netflix and Google have made investors a lot of money over the past few years, but these days they are looking pretty expensive, along with much of the US stockmarket. These companies may well have much further to grow but, with the election today and a Fed rate rise on the horizon, there is also, in my view, quite a bit of risk in buying at current valuations.
At the other end of the spectrum, you have the start-ups. This is where the inexperienced - or even the experienced - investor can really get into trouble, particularly if they do not actually know that much about technology.
Since higher-than-average P/E ratios are the norm and a lack of profits for early-stage businesses is not necessarily viewed negatively, there are many ‘blue-sky' companies that sell a suave story but never manage to come up with the goods. The conventional wisdom goes that nine out of ten start-ups fail, so the chances of finding yourself invested in the one that succeeds can be a bit hit and miss.
So where are some of the more intriguing options to gain exposure to the sector? One area that looks interesting, which many clients may not have considered, is Asia. The region even has its own tech acronym these days - the STATs. The cluster refers to four leading Asian technology giants: Samsung Electronics, Tencent, Alibaba and Taiwan Semiconductor.
Samsung is something of a global powerhouse in the mobile phone space - although of course it has faced some well-publicised challenges of late. Alibaba is held out as China's answer to Amazon, Tencent is most frequently compared to Facebook and Taiwan Semiconductor manufactures the semiconductors that are found in several of the world's biggest brands of devices and hardware. Much like the FANGs, however, it is not just the STATs themselves that have captured many Asia fund managers' attention, but the underlying universe of tech stocks they represent.
Don't be fooled by the throwaway comparisons to familiar names - many Asian tech companies offer quite a distinct proposition to their western counterparts. They can be highly innovative, integrated businesses with smart growth strategies and excellent target demographics to boot.
Tencent, a Chinese company listed on the Hong Kong stock exchange, is a good example. Yes it is a social media platform, deriving revenue from advertising. But it also offers users mobile pay, music streaming, other content, the ability to order taxis, e-commerce apps, games and much more.
And while one of the distinguishing features of technology businesses is their ability to reach a global audience - did you know, for example, if the population of Facebook were a country, it would be the biggest one on earth? - a large home market definitely helps too.
Here, China has an obvious advantage. It has the biggest e-commerce market in the world by far. Tencent operates almost solely in China at this stage and it is already the fourth biggest internet company in the world by revenue in US dollars. Alibaba and Baidu (a Chinese search engine) are also in the top ten. Yet they look cheap, on a valuation basis, compared with many of their US peers in the same list.
Finding the opportunities in Asian regions - or even knowing where to look and how to gain access - can be easier said than done for retail investors. Funds could be a good way to play the theme and Schroder Asian Alpha Plus, in particular, has a strong tech focus.
Its manager, Matthew Dobbs, is hugely experienced in Asia investing and, as of the end of September, the fund held all four STAT stocks. Likewise, Stewart Investors Asia Pacific Leaders is overweight technology and First State Greater China Growth has several technology stocks among its 10 largest holdings.
Of course, clients do need to understand there are other differences to investing in these companies versus the US stalwarts - not least the fact they are moving into emerging market economies with all the currency and other risks that those can entail. But in a sector that increasingly feels dominated by the big players, it's nice to know investors have options.
Darius McDermott is managing director of Chelsea Financial Services
Retired in 2014
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