The FTSE All Share Technology has raced away of the broader market over the last couple of years, returning 75.04 per cent to the index’s 42.76 per cent, according to data from FE Analytics.
Performance of sector vs index over 2yrs
Source: FE Analytics
Many companies involved in various forms of technology, including the internet, have raced on to hefty valuations, leading some commentators to warn of a bubble.
However, Gleeson (pictured) says that while some stocks may be too expensive, the sector as a whole is not in bubble territory and as the economy gradually emerges from the recession it will likely be one of the biggest gainers. “It’s a classic cyclical shift: when you come out of a recession, technology is one of the areas that does best,” he said.
“You have seen through the recession companies not doing any investment spending – there’s been a lot of talk about companies sitting on their cash piles – and they are now more confident and spending on infrastructure, which includes IT systems.”
“At the same time you have investors now confident and lots of people looking for more risk, which is why you are seeing IPOs happening now – for the first time in a long while there’s money [to be invested].”
Gleeson points out that the last five years have seen huge technological advantages, but that companies have been slow to embrace them thanks to their cautious outlook.
“Think of all the technological change that has happened in five years – tablets, smartphones and so on – that hasn’t really permeated big business yet.”
Even the major banks still have old IT systems that are likely to be upgraded in the coming years, Gleeson suggests.
Some of the concerns around valuations centre on the appetite in the US for stocks such as Twitter and Facebook.
Gleeson says that it is not surprising that some internet companies attract such a premium and he notes that Facebook has already regained the ground it lost following its much-criticised IPO.
A growing number of managers are looking at innovative technology companies to boost their returns in a number of regions.
Yesterday, FE Trustnet carried comments from John Bennett, manager of the Henderson European Focus fund, on his shift into high-tech engineering for the car industry.
Bennett is buying companies that make automatic driving systems and advanced safety mechanisms, which he expects to be vital components of the next generation of automobiles.
Graham French announced his departure from management of the M&G Global Basics fund two weeks ago, saying that technology would bring the next leg of emerging markets growth.
His successor Randeep Somel cited Microsoft as a stock he was buying to generate growth from BRICs in particular.
Meanwhile lots of emerging markets and Asia-focused funds have been buying into stocks that play technological themes, in particular the internet: Chinese internet companies such as Alibaba and Tencent are major holdings of many of the funds that have done well in recent months.
Gleeson says that investors should not be concerned about a bubble in the sector, even if there are some toppy stocks to avoid.
“It’s a classic cyclical market rotation out of defensives and into early-stage recovery stocks,” he said.
For investors who want to take advantage of the theme, there are a number of open- and closed-ended options.
The best-performing open-ended fund over the past one, three and five years is MFM Techinvest Technology.
It has made 55.78 per cent in the last 12 months alone and 280.51 per cent over five years.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The £35m fund has five FE Crowns. It is heavily invested in smaller companies in the sector such as Blinkx, while it also holds Facebook in its top-10. It invests roughly 75 per cent in the UK and the remainder largely in the US.
A more mainstream choice is the $620m Polar Capital Global Tech fund, domiciled in Ireland.
The fund’s largest holdings are in Google, Facebook, Trip Advisor and Apple.
Best-performing tech funds
Source: FE Analytics
In the closed-ended space, the Polar Capital Technology Trust has lagged the Allianz RCM Technology Trust over one and three years, but leads over five.
Source: FE Analytics
The £600m Polar Capital Tech Trust has many of the same holdings in its top-10 as the fund, but one addition is Microsoft.
RCM Technology Trust holds electric car maker Tesla and Sandisk in its top-10.
Some commentators suggest that the large cap area of the market preferred by these funds is safer in valuation terms, with Henderson’s Stuart O’Gorman saying that many small cap tech stocks were launching on overly expensive valuations.
O’Gorman is moving his fund more into the larger end of the market as a result, into the type of stocks more likely to benefit from the dynamic Gleeson outlines.
