By Mohamed Ali Bernat Global technology fund managers are having to use a medley of hybrid benchmark...
By Mohamed Ali Bernat
Global technology fund managers are having to use a medley of hybrid benchmarks as there is no universally recognised benchmark to measure fund performance against.
This is making it difficult for fund managers and IFAs alike to compare the various tech fund performances.
A selection of benchmarks exist for individual markets, such as the UK, Europe, Japan and US, but fund managers are forced to put together a network of coverage from information providers to give them worldwide coverage of stock performance.
This lack of a recognised global technology index saw the Henderson Technology trust benchmarked against the FTSE World Index. The trust outperformed the index on the back of a tech market that outstripped other equities for returns in 1999 and resulted in the tech team, then headed by Brian Ashford-Russell and Tim Woolley, making several million pounds from a performance fee on the investment trust.
Hendersons has since changed the benchmark against which it is measured but there is still no universally recognised global index for technology stocks to measure performance against.
Kevin Doran, who manages the Solus Technology Plus, said the fund's UK bias made selecting a benchmark quite easy. The TechMark serving as the quoted benchmark while the FTSE Information Technology index is also used internally as an added performance guide. He said: "Everyone is looking at taking a sector approach as regional boundaries begin to have less importance but, with 55% of all tech companies based in the US, the Nasdaq leads the way for any technology index."
Five Arrows Private Portfolio co-manager, Robert Burdett, agrees the Nasdaq remains the focus of assessing the day-to-day movements of the technology market. The Five Arrows Independent Technology Plus fund of funds currently has seven global funds in its portfolio, including Close Finsbury Technology Growth, Goldman Sachs Technology and offshore funds from Hendersons and Framlington.
Burdett added: "When we were doing research into launching a technology fund of funds we quickly realised there was no global index. The exception is the FTSE TechMark for the UK and the new ETX covering Europe but FTSE has yet to produce a world tech index.
"It is a perennial problem to judge performance against peers. Imagine, with the current volatility, what the difference could be between a fund that prices at midday, before the Nasdaq gets into full swing, and a fund priced at midnight because it is following another index."
The Wired Index used by Guinness Flight is too broad because it encompasses companies that have benefited from adapting technology into their core business platform such as hotels or distribution companies, he said.
Burdett said other indices include Hambrecht and Quist, now part of the Chase group, which is followed by some US fund managers and the Pacific Stock Exchange. However, both are somewhat arbitrary in their approach to weighting companies.
Burdett said: "These sectors only rose to prominence in the last few years and the lack of a standardised benchmark leaves fund managers free to pursue what they think are the best companies. However, it does not help in giving outsiders an idea of performance levels."
Robert Sanders, investment director in charge of the Smith Williamson Global Technology Trust, said the fund currently uses a 65% TechMark, 35% Nasdaq benchmark for its 80% weighting in the UK and US markets.
He added he is trying to devise a more specialist benchmark to take into account Chinese companies like China Mobile, Legend Computers and Japan's NTT DoCoMo, which are among his largest holdings. He said: "China Mobile has the biggest and best exposure to China, which has fantastic potential to develop as a huge market."
Nick Evans, fund manager on Framlington's NetNet team, said the group gets around the lack of a global index by focusing on different regions to track equity performance then pooling the information to take investment decisions.
He said: "We look at a variety of indices on a regional basis. For example, I will monitor the technology stocks in the Bloomberg European 500 Plus and FTSE Eurotop 100 while a colleague keeps track of developments in Asian markets."
Gregg Kerr, fund manager of M&G Global Technology, said the problem has reached such proportions that M&G is constructing its own technology index, which will be a sub-sector of the FT World index.
"The FT World has more sensible sectors and will be based on public information with a third party operator feeding through the data," he said.
Kerr added there are a number of options available to global tech managers but all are cumbersome at present.
He said: "Everyone talks about the Nasdaq being the proxy for technology stocks and they certainly take their lead from its movements but it would be a hard index to run a unit trust from. Number one problem is it is a US index and although tech-heavy is not solely a technology index."
Kerr said a bigger problem was the index did not include a number of important stocks.
IBM, which is the fifth largest technology company in the US, with a market cap of $155bn, is not listed on the Nasdaq. Neither are EMC, worth $146bn, Nortel at $117bn or AOL, valued at $109bn but set to nearly double when it merges with the $93bn Time Warner.
Hewlett Packard, Lucent Technologies and Motorola are other stocks which are listed on New York Stock Exchange, not on the Nasdaq.
Kerr added: "The biggest technology stock on the Nasdaq by some way is Cisco Systems at $343bn, followed by Microsoft and then Intel but this gives the index a top heavy feel that would make it very difficult to run a unit trust against." The top five stocks on the Nasdaq make up more than 31% of the index.
Kerr said: "Top-heavy indices are problematic beca
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