By Ruth Alexander Having fallen by an average of 55.87% from the end of February 2000 to 1 March ...
By Ruth Alexander
Having fallen by an average of 55.87% from the end of February 2000 to 1 March 2001, UK technology unit trusts and Oeics are unlikely to recover in the short term, according to many in the industry.
The worst performing fund over that time period, Framlington NetNet, has seen its returns fall by 70.51% over the year to 1 March. To bring £100 invested in the fund at the end of February 2000 back to its original value, the fund now needs to return 239.1% over the next year, or realise compound returns of 50.24% over a three year period, or 27.66% over five years, according to calculations by Standard & Poor's.
The fund's one-year return of -70.51% compares unfavourably to that of some of the hardest hit global indices, such as the MSCI Japan index, which returned -21.46% to 1 March.
Even the Nasdaq composite index's returns of -48.01% beat that of the Framlington NetNet fund. Over the same period, the S&P 500 returned 3.87%, while the MSCI World index returned -4.66%.
Justin Modray, marketing manager at Fundsdirect, believes there is only a slim chance technology funds will be able to make back the money investors have lost over the past year.
An investment held in a technology fund over five years is much more likely to see returns that return the original capital, according to Modray, who views five years as a minimum time period and 10 years as ideal.
The Aegon Technology unit trust fell 51.65% over the year to 1 March, which compares to its three-year annualised growth rate of 25.85% and its five-year rate of 21.7%.
The M&G Global Technology fund, which has fallen by a modest -39.38% over the past year, still needs to achieve returns of 64.96% over the next year to bring capital invested a year ago back to its starting value. The fund would need an annualised growth rate of 18.16% over three years to do the same, and 10.53% over five years.
Greg Kerr, who runs the M&G Global Technology fund, said: "Clearly, returns over the next 12 months will be difficult to predict given the low level of earnings visibility most companies are currently experiencing.
"However, valuations now reflect a significant revenue correction and we believe a return of 10% to 15% from current levels is eminently achievable, particularly if we see signs of US economic recovery in the fourth quarter of 2001.
"In the longer term we believe superior returns in the 15% to 20% range are conservative and sustainable."
M&G Global Technology was launched on 18 October 1999 and in its first full year, Kerr said, achieved a return of 88% on an offer to offer basis.
He added that, to the end of February 2001 the fund has achieved an average annualised return of 30.3%. Over the same period, he said, the Micropal Specialist sector average annualised return was 1.6% and the Nasdaq index average annualised return was -6.5%.
Kerr said that at its highest point on 5 September 2000, the fund's unit price was 128p, representing a return of 156% since its inception on 18 October 1999.
Over the next 12 months, Kerr said he will reduce some of the more defensive positions in the fund's portfolio. He will reduce the fund's holdings of IT services companies and telecom shares and increase its holdings of software, semiconductors and telecom equipment.
John Pullar-Strecker, head of technology at Aberdeen Asset Management and the lead manager of the Aberdeen Technology fund, said it is impossible to predict what the actual returns for the fund will be for the next five years.
Aberdeen Technology, whose returns have fallen by 56.7% over the year, now needs to realise compound returns of 193.7%, 43.12% and 24% over one, three and five years respectively, to return the original capital of those who invested a year ago.
Similarly, the Aberdeen Euro Technology fund fell by 65.72% to March 1, which contrasts to its five-year compound return of 7.74%.
Pullar-Strecker said looking at past returns over the past 15 years, including both the highs and lows of economic cycles, the fund has produced an annual return of 23.1%, while the Nasdaq index produced an annual return of 15%.
According to Pullar-Strecker, between February 1999 and February 2000 the fund achieved its highest returns to date at around 190%, on a bid to bid basis. Its three-year compound returns amount to 23.43%, while over five years the fund realised returns of 17.61%.
Going forward, Pullar-Strecker believes that over the longer term the technology sector will continue to produce superior earnings in comparison with the rest of the economy.
He said: "However, there will inevitably be periods of volatility, something our long-term investors are used to and our recent investors are unfortunately finding out about.
"Technology is a long-term investment. Since launch the fund has turned 50p into more than £15. In other words, I guess the answer to the question of how long to invest in such a fund would be 'as long as possible'. Perhaps the best way of avoiding short-term volatility is to invest amounts at regular intervals, such as in a monthly savings plan."
In these volatile times, Pullar-Strecker said he is positioning the fund in more defensive parts of the market, such as companies that provide essential technology services and products and those whose cycles are out of sync with the rest of the technology sector.
Mark Dampier, investment manager at Hargreaves Lansdown, sees a buying opportunity within the technology sector over the coming months as, with the Nasdaq composite index expected by many to fall a further 1000 points, the market is at a very low point.
He said: "Many of these companies which have been hard hit over the past year are still showing high growth, it is just that they have been overvalued. Investors should go on the offensive and put more of their money into technology.
"I would say to investors, if you sell out of technology now, where are you going to go to achieve the returns you need to regain your capital? If you move out of technology now, you will just compound the losses it has made you."
Dampier believes that although technology funds will not produce 100% returns in a year, it is likely they will perform well over a longer period as investors get their nerve back.
Modray said only those investors who rushed into technology funds on the back of high performance rates last year, without considering that they really want a medium risk investment, should sell out and cut their losses
He said technology funds should be held as fringe investments and, as long as you have other mainstream investments in your portfolio, a technology fund held over 10 years should bring rewards.
"We have seen how quickly technology stocks can fall in value but it is true to say that their recovery can be even more speedy.
"In the current economic environment it is unlikely that these funds will see returns of 200% in a year but, then again, stranger things have happened. A sudden economic recovery could see a bounce-back for technology stocks," he said.
Modray believes the three year annual growth rates needed by technology funds to recover investors' lost capital are feasible, though unlikely.
He said: "The sector is still relatively in its infancy. Technology companies are still expanding with the demand for their products increasing as technology moves more and more into our daily lives.
"Funds such as Framlington NetNet, which invested more in dot.com companies rather than those involved in supplying IT infrastructure, fared the worst over the past year."
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