Sentiment on the software industry remains bearish among fund managers in the short term. Despit...
Sentiment on the software industry remains bearish among fund managers in the short term.
Despite this, managers such as Jackie Bowie, investment manager at Aegon, are still looking to locate growth or defensive areas in the software industry.
Two software areas are of particular interest, she says, namely gaming and security. Gaming is on a different cycle to the rest of the industry as games are reliant on the release and upgrade of the consoles on which they are played. This, in addition to the fact games software is still selling, means the sector is performing well, she argues, despite the weak world economy. Security software is also performing well because companies are becoming more focused on the threat posed to their business from gaps in their security. The past 18 months has seen security ranked the biggest priority by companies in industry surveys, says Bowie.
Spending on IT by companies will increase by around 3% next year, according to Bowie. Of this, she predicts software security companies will take a large share. Stocks of particular interest include Mercury Interactive, a US company that helps businesses integrate and implement their software.
Despite her bearish investment posture, Bowie is optimistic for the sector in the long term. 'Software is still a growth sector,' she says. 'It is just that growth has stalled.'
Ian Warmerdam of Henderson Global Investors is another manager with a short-term bearish outlook.
Warmerdam is nervous about enterprise spending on IT, which has lead him to lean away from companies such as Siebel and Oracle, both of which are large enterprise application providers.
Companies are simply not buying high ticket items such as complete software systems for a company, Warmerdam says, and this will be the case for some time.
An exception to this is Microsoft, he notes, which has a dominant market position and shows promise with the new subscription model for its software.
Warmerdam likes security software for the same reasons as Bowie and singles out Symantec as a good buy.
'The main reason we like Symantec is because it is fairly dominant in its market,' he explains. 'It is also a well managed company and has strong franchises in the corporate and consumer markets.'
European software spending is weak while US spending is stabilising, he adds. However, analysing the sector on a geographic basis does not achieve anything, he argues, as the US is the dominant market and most software companies sell into it wherever they are based.
Overall, Warmerdam is fairly optimistic on the software sector, in line with his views on the technology sector as a whole. This comes from a belief that after suffering recently, values are low and a economic recovery will see prices rise.
'The main problem with the software sector,' he says, 'is that during the bubble years, lots of money was pumped into it. We are still coping with the hangover from that now.'
Sentiment still cautious.
Corporate software spending low.
European spending weak.
US economy stabilising.
Good valuations in gaming and security.
Long-term outlook positive.
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