Technology fund managers are in a unique position. They have to chase companies that are using new de...
The fashionable explanation for the tech sector's continued success is that it forms part of the 'new economy', the implication being that somehow these companies are not obliged to follow normal market rules and patterns.
Of course the fact is that every company is now in the new economy and what is driving the technology sector is the straightforward process of a high proportion of market liquidity being concentrated in a small sector. Performance engenders more attention and, in some cases, the lucky sector can lift the performance of the whole market.
In this environment, some managers live on the edge, seeking out new blood from the current brood of tech stocks. This strategy requires in-depth knowledge of the small cap market and can deliver fantastic gains - so long as the fund manager keeps ahead of the game.
Other funds, typically the more mainstream ones, take a step back and instead look for companies that will benefit in the longer term from these structural changes.
John Pullar Strecker, fund manager of the Aberdeen UK tech fund, says: "There are two approaches you can have to new technologies - you can dive in and wet your feet or you can sit back and watch. We fall into the latter category."
Investec Guinness Flight has a fund based on the US Wired Index, which seeks to list those companies that have positioned themselves to take full advantage of the new economy. The success of the index depends on a strong view of the markets involved.
Philip Saunders, a director of Investec Guinness Flight, says: "Our view is that you've got an overarching theme - the new economy. Underneath that, there are several segments; telecoms, software and hardware, and as a subset of that, internet plumbing.
"We look for companies where the management 'gets it', in other words understands the landscape is changing radically. Cisco is a classic example. Having made a series of acquisitions, it has positioned itself as a key supplier of internet plumbing. Also, it does some 85% of its business online.
"Orthodox opinion is shifting about the new economy. The numbers show strong productivity improvements. It's not going to abolish the old business cycles but we are just five years into a maybe 15-year change, after which the corporate landscape will have altered dramatically.
"Those leading the charge decided what was going to happen five years ago, so when a company announces its internet strategy now Š well, it shows that it has taken three to five years for them to work out what's going on."
David Magliocco, fund manager on the Henderson technology team says that technology has always provided investment opportunities.
"Technology has always played a key role in the growth of the capital markets. At Henderson, we have been dedicated to technology for 15 years, for an average growth of around 25%pa. Technology is the driver of productivity and productivity is the driver of economic growth."
Current developments should all be seen in the context of the internet. He says: "All your investments should be looking at who wins and who loses as a result of the internet."
Magliocco sees three areas of internet-related service provision, where the needs of modernising companies will ensure both a buoyant and a sustainable market: bandwidth, storage and infrastructure.
The demands on bandwidth worldwide are accelerating inexorably. The number of internet users is doubling every 100 days, e-mail has overtaken 'real' mail in many offices and as people become more comfortable with it, they are starting to send not just text, but word processor documents, spreadsheets and pictures. Meanwhile, web sites are including animations, sounds and even bandwidth-hungry video.
More and more software houses give support online and this tends to be more up to date than any other form of support. As users become more comfortable with updating their own software, large downloads could become the norm.
Microsoft and Apple both have automated internet systems that allow users to keep their operating systems up to date. There seems to be no end to the appetites of users for high-bandwidth services and there is no sign that demand is going to slow down.
Companies that provide internet 'plumbing' are therefore in a rapidly growing market and, not surprisingly, get a great deal of investor interest. Cisco Systems, mentioned above, is the classic example of this.
Magliocco labels companies that help make the internet useful and productive 'infrastructure' companies. This is essentially a play on the need for companies to have access to increasingly large amounts of information in increasingly accessible formats.
This information, typically market information, but also detailed knowledge of the company's own workings, can be the vital resource that could give it a competitive edge. Wal-Mart is an obvious example of this, with its automated stock and customer-monitoring systems.
Oracle is one of the small number of enterprise-level database providers. The level of technical expertise, the R&D costs and the need to have a track record of good customer support effectively prevents other players from entering the arena. The high barriers to entry and the increasing demand are reflected in Oracle's performance.
Storage space is another perpetual issue. The amount of space companies require for the day-to-day running of their computer systems is increasing all the time. One reason for this is the increasing size of applications as manufacturers find ways to exploit the more and more powerful processors appearing
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