Ben Yearsley’s Fund Focus
If I asked you to name an industry whose companies are generally increasing their profits, have little pension liability and net cash on their balance sheets, what would spring to mind? Tobacco? Utilities? The answer is the technology sector.
I think the first thing we need to do is to divorce today’s tech sector with that of late 1999 and early 2000. It has been well documented how overhyped this sector became. Fast-forward nine years and the sector is far more mature and contains some truly world-class companies.
For example, last week, Google announced record quarterly profits and Apple revealed quarterly profits of $1.6bn. We must not forget Microsoft which, despite losing a degree of its dominance, still delivers huge profits and has vast reserves of cash on its balance sheet.
This brings me to this week’s fund – Polar Capital global technology managed by Nick Evans. It can invest in the afore-mentioned household names but also looks for comparatively smaller firms,where innovation is rife.
One of the fund’s key themes at present is cloud computing. This enables companies to outsource their computing needs. It may help to think of computing power like a supply of electricity.
You would not expect every company to have its own generator, they simply plug into the grid and get electricity from the power station. Cloud computing works on the same principle, where data storage and processing power is provided by a central supplier so companies can make use of it when necessary without building the entire infrastructure themselves.
This is especially valuable for small and medium-sized companies as it dramatically simplifies the process of getting an IT system up and running, saving costs on staff and equipment. Big firms can benefit too and Hewlett Packard demonstrated its potential by cutting its operating budget for hardware by $2bn by using it.
Moving on to more familiar ground, I think it is fair to say that the internet has taken hold of shopping and many traditional high-street stores are losing out. The market leaders, such as Amazon, have branched out from niche players to selling virtually anything and everything. Internet retailers have been among the biggest winners over the last decade but it is still a relatively young industry and there is still room for innovation and new success stories to emerge.
“Many investors still have the scars from the turn of the century and will be wary of going back into the technology sector again. However, in the long run, this would prove a mistake.”
The final main area of the portfolio is mobile broadband. I do not think this theme needs much introduction as all you need do is look at how many ads there are on TV for 3G mobile phones, low-cost laptops and especially the popularity of Apple’s iconic iPhone with all its associated applications.
I think one of the interesting things about technology is that this is one of the only true growth areas available to investors in developed markets. Most of the world’s other top investment themes rely on emerging markets. It is also an area where stockpicking is crucial.
As an example, RIM (maker of the ubiquitous BlackBerry) and Apple, only have 5 per cent of the global mobile phone market but they make 47 per cent of the profits.
This fund will be a broad spread of mainly small and mid-sized companies but there will be bigger companies in the portfolio as well. It will be truly global and the manager will not pay much regard, if any, to the make-up of his benchmark index. Importantly, the manager will look for profitable companies and avoid blue-sky/start-up-type firms.
When investing in any specialist sector, it is important to invest with a manager/management team who are experts. Technology is a fast-changing environment rife with new developments and there- fore appropriate expertise is even more important. Polar is an expert in this field.
Many investors still have the scars from the turn of the century and will be wary of going back into the technology sector again. However, in the long run, this would prove a mistake.
Ben Yearsley is investment manager at Hargreaves Lansdown