Despite recent setbacks, growth areas are expected to continue to perform well and we continue to fa...
Despite recent setbacks, growth areas are expected to continue to perform well and we continue to favour the technology, media, and telecoms (TMT) sectors. To date the significant flows of money into this area of the market have tended to favour almost all technology companies fairly indiscriminately.
Now maybe the time has come to be more discerning. The US tends to be a couple of years ahead of Europe in tech matters, and over the last year greater divergence has been seen in the performance of US TMT stocks. Those companies that have failed to meet business plans have been punished severely and, as valuations trend higher, risks increase.
Our approach is to focus on companies with a sustainable competitive advantage and with proven strong management teams. For example, Baltimore and Autonomy have excellent proprietary technology; Sage has established a service model it can leverage into e-commerce and other internet services; and Vodafone controls scarce resource in the form of radio spectrum as well as having huge scale. Contrast this with some of the dot.com stocks where, despite some great business ideas, barriers to entry are low and the management teams have little track record. It is frightening how quickly new business propositions are replicated across the internet. Back in the old economy, consumer areas continue to look exposed. While the internet still only accounts for a small proportion of retail sales, its deflationary effects are pervasive. This pressure will increase with the aggressive rollout of interactive TV and mobile internet.
Even those ahead of the game with their e-commerce propositions are all still chasing the same pot of consumer cash, but at lower margins. It doesn't pay to be deceived by apparently attractive valuations.
Initiatives such as the GM-Ford-Chrysler e-procurement internet site are indicative of the way those at the top of the food chain will use the internet to squeeze their suppliers further and are creating a grim outlook for companies that lack pricing power. Overseas companies will also be looking at the internet as an opportunity to get into the UK, likely to intensify competition. Growth areas are still the most attractive place to be. But valuations are demanding and it is necessary to be discerning. Sustainable competitive advantage will be as important in the new economy as it is in the old and sound investment principles such as backing quality management teams will be even more important given the accelerating pace of change. Caution is required.
At the other end of the market, do not be deceived by cheap short term valuation measures such as P/E ratios and dividend yields, they are low because there is serious concern about medium term earnings and cash flow sustainability.
Ralph Brook Fox is investment manager at Britannic Asset Management
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m