The bursting of the technology bubble in 2000 is still quite fresh in investors' minds and they have given the sector a wide berth ever since, but it could be time to take another look at. Cherry Reynard takes a look at areas that could provide interesting opportunities for the more daring investor
Since the bursting of the technology bubble in 2000, there has been little to get excited about in investment. It's all been about safe, responsible investing - setting clear goals and risk parameters. Speculative investment seems consigned to the past (until everyone has forgotten about the technology bubble, of course). But what about the part of a client's portfolio that isn't for school fees or retirement planning? What should advisers be doing with the 5% to 10% that a client can afford to lose?
An investor could always take the kamikaze option of going with Joe Bloggs Micro Cap Ltd, which his mate told him was a dead cert - the investment equivalent of betting on the horses. Advisers clearly don't have much to add to that decision-making process. But there are a number of higher risk areas that could make clients a lot of money if they have the tolerance. So which areas should advisers be looking at in the current market?
Bambos Hambi, head of multi-manager at Gartmore, believes that the market has come full cycle and technology is now one of the most interesting areas for investment. He says: "We have had five dreadful years. Corporates weren't spending because they were busy rebuilding their balance sheets. But that has changed recently. The consumer has been the driver of world growth but this is likely to move to corporates and this would benefit technology companies."
Hambi also points out that many companies have not updated their IT systems since 2000. The traditional PC renewal cycle is likely to be a catalyst. Also there are a number of new technologies in place that could drive growth in the industry - for example, nanotechnology, flat screen TVs and MP3 players. However, he does caution that valuations are now back at their long-term average having been quite cheap, so technology funds are no longer the 'fantastic' value that they were.
Hambi prefers a team approach for technology funds and is looking for plenty of experience. He likes maximum flexibility, so is looking for a global fund. The Artemis New Enterprises fund, run by Lindsey Whitelaw, is well ahead of the technology and telecoms sector, having returned 122.2% over three years. Other top performers include the Close FTSE TechMARK and M&G Global Technology funds.
For Gary Potter, biotechnology and Russia offer the biggest opportunities. He says: "We've had some speculation in the market already. Eastern Europe is up 60% this year, metals and mining have risen significantly and Latin America has done phenomenally well. It is by no means clear that these more speculative areas will keep giving good returns."
The biotechnology sector, by contrast, has yet to see an upturn. Potter compares the performance of the Jupiter Emerging European Opportunities fund, which has returned 220% over the past three years to the Framlington Biotech fund, which has returned 66% over the same period.
Potter says that one of the main drivers for growth is increased M&A activity. The big drug companies need to progress and develop more products. The main areas of innovation are within the biotech sector. Potter adds: "Five years ago it would have been considered a frothy sector. But biotechnology has underperformed consistently since then. The fundamentals for the sector have now materially improved."
Potter also believes Russia is an area worth investigating. He says: "The way the oil market is developing, I wouldn't rule out specific Russian funds. The region is on a discount to the rest of Eastern Europe because of its politics, but I think Yukos is a one-off. It looks particularly interesting if the oil price stays high."
The trouble with investing in Russia is that most single country funds are offshore. Neptune's Robin Geffen runs an onshore one, but investors may have to look beyond the standard investment groups to gain exposure. Potter believes that this looks more promising than Asia, which is still buoyed by Chinese demand, but may see margins squeezed.
Craig Heron, fund of funds manager at New Star, believes Korea still has plenty of room for growth. Korea has struggled with consumer credit problems and Samsung, which is a high proportion of the benchmark, has suffered with the technology crisis. The economic and earnings forecasts for Korea are very low.
Heron believes there could be a surprise on the upside. He adds: "One of the good things about Korea is that domestic equity participation was practically nothing. Now there is cash coming into the equity market. This isn't 'hot' money and we think it will gather momentum. This story has further to run." Baring Korea is the best known fund in this market - it has returned 103% over three years.
Heron also likes Japan. The team currently has 30% of the New Star Tactical fund invested in the region. He prefers domestically-orientated funds. The funds have done well from smaller cap stocks, but may look further up the capitalisation scale. It has held Legg Mason Japan Equity and BDT Japan Smaller Companies. Heron adds: "I'm by nature a conservative investor, but if I could buy something and forget about it for five years, I'd put my money on a domestic Japanese recovery."
Potter adds that some of the best growth may actually be in the more conservative areas over the next few years. He says: "Many of the raciest areas have already done very well. Investors may see the best returns from mature companies and larger cap stocks."
Persuading clients to look at technology and biotechnology again isn't going to be easy. But five years have passed, markets have recovered and clients may be willing to add some spice to their portfolios again.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected