Technology returning to the fore
At the height of the dotcom boom the forward price/earnings ratio on the Dow Jones Global Technology index (DJGTI) was three times what it was on the US S&P 500 index.
Few companies could fulfill such high expectations, so the bubble burst and the sector has struggled for 10 years to regain investor confidence.
A bounce in 2003 was followed by five years of sideways or downward drift in the DJGTI. Muted progress this year, following a 44% gain in 2009, casts doubt on whether technology can progress now global economic recovery is less assured.
With the DJGTI no longer trading on a premium rating, investors are taking little for granted.
Grounds for optimism
Ben Rogoff, who manages Polar Capital Technology Trust, is optimistic. He says technology products and services are absorbing a growing proportion of corporate and consumer spending for the first time since the 1990s, and this should continue if global growth is maintained.
Polar Capital has the best five-year record of the three technology trusts and the highest market capitalisation. Two-thirds of its portfolio is in US companies, a fifth is in Asia, and the rest is in Europe.
It focuses mainly on larger companies, but Rogoff expects to increase exposure to medium and smaller companies to 50%, citing strengths in new areas such as "virtualisation" and "mobile computing".
"With a new [technology] cycle beginning to gather pace, made pertinent by substantially obsolescent capital stock and companies once again focused on delivering productivity, we are confident that this is the beginning rather than the end of a sector renaissance following years of purgatory," he says.
RCM Technology Trust has picked up since Walter Price took charge in April 2007. Three quarters of its portfolio is in US companies, and Price says it differs from the index, with an emphasis on cloud computing, for example.
He is optimistic about technology's role as a cost-cutter. "The world faces a difficult transition from easy access to credit, but we are hopeful that technology will help to smooth the transition by allowing more efficient use of resources."
Some non-specialist investment trust managers see above-average upside in technology. Mark Urquhart, manager of Baillie Gifford's Edinburgh Worldwide Investment Trust, attempts to identify the best 45 long-term holdings on world stockmarkets.
Half his top 10 holdings are technology stocks namely Amazon.com, Apple, Baidu, Google and Tencent.
However, Jeroen Huysinga, who transformed the fortunes of JPMorgan Overseas Investment Trust, has only 6% in technology. If managers like him can be converted, the sector could really fly.
Spotlight on Herald investment trust
Herald has the best one and 10-year net asset value total returns in the sector, and more assets under management than Polar Capital. Yet its shares sell on a disparagingly wide discount of 22%.
Manager Katie Potts believes its low rating reflects fears that its bias to smaller companies makes it riskier, and its focus on the UK, which makes up more than half of its portfolio, makes it less exciting than trusts more exposed to the US. She considers both views ill-founded.
Potts points out that the indices for large and small US technology companies have moved closely in line since the end of 2000, and that Herald has outperformed both.
She admits its three-year returns have been the worst in the sector, but says this is largely because dollar strength has enhanced the sterling-converted returns of the RCM and Polar trusts, which are US-biased.
"Leaving aside currency considerations, the UK has been an easier place to make money," she declares.
Potts says valuations of smaller technology companies are compelling despite last year's strong recovery, and she expects a wave of takeovers by large, cash-rich US companies.
More than half of Herald's portfolio is invested in defensively positioned companies with recurring revenues, and many trade on single-digit p/e ratios. The balance is in higher-risk companies focused on emerging markets.
Potts stopped investing Herald's gearing in March as she expected worries about the economy to unsettle the market over the summer.
But she says many technology companies are comparatively immune to problems in the wider economy, and products such as the iPad are providing opportunities for a lengthy supply chain.
This article was originally published in Money Observer - Moneywise's sister publication - in August 2010
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.