The high profile IPOs of Facebook and Twitter have put tech stocks in the spotlight once again. Is the sector about to stage a comeback with investors? Paul Burgin takes look.
The pure tech play space is tiny. The Association of Investment Companies’ (AIC) two specialist tech sectors have a combined capitalisation of just over £1.3bn, spread between just three investment trusts. The IMA Technology and Telecommunications sector is even smaller at just £900m at the end of September.
Investors may have missed a trick. Much of their continued avoidance of tech funds is due to bad experiences during the dotcom bust of 2000/2001, but the tech sector and fund managers have moved on since then. Tech investing today is about delivering results, not about believing the hype.
The 14-strong IMA Technology sector produced average returns of 18.5%, 38.5% and 107.6% over one, three and five years respectively to the end of August, according to Morningstar.
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MFM Techinvest Technology, the sector’s current star performer, delivered more than double the average return over one and three years.
Yet a number of funds have underperformed the broader market in the past 12 months. Jeremy Gleeson, manager of AXA Framlington Global Technology, for example, believes that investor preference for value and yield has worked against his investment style.
While a handful of big, mainly US, names such as Microsoft and, more recently, Apple, pay dividends, other index and non-index tech stocks are investing in their future rather than paying money back to shareholders.
“The philosophy is very much focused on growth companies, but growth companies that have delivered some level of proof they can commercialise their technology and that there is a large addressable market for them to go after,” says Gleeson.
Back in fashion
With value stocks now looking expensive, tech’s growth focus could be coming back into fashion.
“Growth stocks are currently trading at a significant discount to their 20-year average on a P/E basis. With signs of an improving economy in the US, UK, Europe and even tentative signs of a pickup in China, it is the growth area of the technology market that will be best placed to provide greater capital returns to investors,” he says.
Gleeson believes it will be small- and mid-cap stocks that will likely benefit. The larger, more stable stocks are no longer showing the growth they used to. Companies unhampered by size should perform better and the best-of-class small- and mid-caps will make the most attractive M&A targets, he says.
Large companies may also try to buy growth using their large cash piles. The big firms may be flush with cash but that does not mean they always spend their money wisely.
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