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Tech takes a turn

Technology funds have been something of a backwater for retail investors since the TMT crash that lost investors so much money.

But since 2003, returns have been strong although the sector took a 20 per cent hit over the course of the recent correction.

Churchill Investments adviser Warren Perry remains unconvinced that technology funds are worthwhile for most investors. He says: “When you have market corrections like the recent one it tends to be the high- beta areas like technology that suffer as investors take flight from risk. Many investors got their fingers burnt between 2000 and 2002 and are still sitting on those losses now.”

Perry believes there are a some high-tech companies producing useful new products but the potential slowdown of the US economy means companies that are looking to upgrade systems may could put off by the possibility of a downturn.

He also believes margins for technology companies may be narrowing.

Iimia chief investment officer Nick Greenwood is more positive on prospects and believes that negative sentiment could be encouraging for future performance.

He says: “Everyone hates the sector despite the fact that plenty of opportunities are there to be had. Iimia has reintroduced the Polar Capital technology investment trust into its portfolios. We realise we are taking an unfashionable stance but these are the very ones that add most value.”

SG technology fund co-manager Hugh Grieves says there are sub-sectors within technology that offer attractive growth prospects and after a lull, a stream of new products are expected to come online.

He acknowledges the recent volatility has led to some investors getting twitchy on tech stocks but believes that technology remains cheap.

Grieves also believes that companies have the money now to spend on upgrades.

He says: “After the boom years, companies were under a lot of pressure not to spend money because of the recession. After the 1990s product cycle, there was little coming out to get excited about but now we are seeing a cycle of new technology products coming to market.”

Grieves cites new products from major IT groups such as Oracle and Cisco Systems, the new Vista operating system from Microsoft and a range of launches from smaller tech companies as grounds for optimism for the sector.

He says: “Telecoms had a similar period of bust in 2002/03 but we are now seeing telecom companies like BT around the world upgrading their networks to offer high-speed data access, so we expect to see a strong pick-up in the sector as companies upgrade their products.

“In terms of a pick-up in corporate tech spending, we have seen companies like Oracle see big increases in profits. The Oracle chief financial officer said in June the group had doubled the amount of IT upgrade deals in the pipeline from companies worth over $500m.”

Grieves also believes the recent boom in technical products is leading to a big increase in demand from consumers, which was absent in the 1999 boom.

He says: “We did not have a big boom in spending on technology in 1999/2000. Sales of new products such as laptops, satellite navigation, DVDs and high-definition televisions have all hugely increased compared with five years ago. I expect this trend to increase for the next three years.”

Polar Cap technology fund manager Ben Rogoff believes that data compiled for the last two boom and bust tech cycles in the mid 1980s and the late 1990s suggests that we have reached the trough of the cycle as the sector starts to turn after six to seven years.

Rogoff says: “For a boom and bust sector like tech to come back, time must have passed and valuations should be more attractive. Tech stocks are trading at around a 25 per cent premium to the broader market and in 2000, they were trading at a 300 per cent premium. If a recession comes, there will only be a moderate amount of contraction in the sector.”

He says the cycle starts to turn when the market’s negative sentiment to tech stocks reaches a peak. “We are nearly at the point of maximum pain now and it is happening at a time when a ton of technology themes are coming through.”

Rogoff believes that while the launch of Microsoft’s Vista will make the company worth holding in the shorter term, broadband technology will be the next killer application and that the next wave of leading stocks in technology may not be the current household names but the companies that best harness the new mobile data.

He says: “The biggest caveat we have is to ignore the old tech names because we are in a transitional period which is hurting the incumbents and very few companies that have led in the last tech boom keep ahead next time round.”


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