Investing in technology is a growth industry - but along with the rewards there are some big risks. By Rachel Fixsen
Saturday 01 May 1999
The world is in the throes of a technological revolution as important as the industrial revolution, says Matthew Orr of stockbrokers Killik & Co. Investing in the companies pioneering this technological change has brought some impressive returns. "It is going to be the largest growth industry over the next 20 years," says Gavin Haynes of independent financial advisers Whitechurch Securities.
The Internet, for example, has taken off in the last four years, with Internet access now doubling every 18 months. And many believe we have not even scratched the surface of the medium's future impact on daily life.
So if you invest in the technology sector you could see staggering returns. Internet search engine Yahoo, for example, has been one of the shooting stars of the sector, with its shares up around 700 per cent in the last year. But you could be in for a bumpy ride.
Technology is one of the highest risk equity sectors. Although share valuations are always based on future profit potential rather than current earnings, valuations for technology stocks are extremely high because of the rapid expansion forecast in their markets. This, coupled with the fact that many of these companies have not even made a profit yet, means that if business growth disappoints the markets, the shares could see sharp falls.
And as with any revolution, there will be casualties. The successful companies will go on to witness their innovations becoming the industry standard, while others will fall by the wayside - remember Betamax? Picking the winners of tomorrow is not always easy.
"The important thing is to do research into the company," says Matthew Orr. "Don't go in on the back of a share tip someone gives you in a pub. Go to a broker and get them to produce some research," he says.
Technology companies tend to be global operators. Many are US companies and quoted on US stock exchange Nasdaq. Investing directly in foreign companies can increase your risk, not least because of your investment is vulnerable to currency fluctuations.
A pooled investment such as a unit trust or investment trust saves you from the logistical complications of buying shares abroad. For the technology sector, pooled investments are a particularly good idea because of the high risk nature of the sector. Investments of just pounds 1,000 can be spread across a range of sometimes 700 technology companies.
Gavin Haynes recommends the SocGen Technology Unit Trust. It is run by Alan Torry and Chris Godding, and holds shares in most areas of technology including biotechnology, semi-conductors, networks and telecommunications.
The fund was only launched 11 months ago, but according to financial data provider Moneyfacts, it already ranks fourth out of 200 international growth unit trusts for performance over the last three months.
Marie Thorne, one of Whitechurch Securities' clients, invested pounds 2,000 of a total portfolio of pounds 60,000 in the Aberdeen Prolific Technology Fund at the end of November 1996. Her investment has now grown to pounds 4,077. Another top technology unit trust is the Henderson Global Technology Fund. Mr Orr recommends the Finsbury Technology Trust, which is an investment trust. "It has been a stunning performer, and you can still buy it at 10 per cent discount to assets," he says.
Anyone aiming to transfer existing PEP funds into a technology fund should consider the CF Technology Fund, says Mr Orr. This is the only fully qualifying unit trust investing in technology, as it is weighted towards European telecommunications stocks, he says.
Some technology funds have their own particular focus. The Finsbury Technology Trust, for example, invests principally in companies which are heavily driven by research and development rather than companies primarily driven by service, says Mark Mathias, the head of investment funds at Rea Brothers, which owns the Finsbury Technology Trust.
How much should you invest in technology shares? "The average portfolio should contain no more than 10 per cent... because it is going to be volatile," says Mr Haynes. Technology shares should be seen as a long-term investment - 10 years or more rather than five years which is generally seen as the minimum for any equities-based investment.
Shares in the sector have certainly soared. But is there a danger the gains might already have been overdone? "There are some signs of speculation, especially in the US," says Chris Godding, one of the fund managers of the SocGen Technology Trust. "The amount of retail buying we're seeing in Internet stocks is a bit worrying," he adds.
Market players often say that it is time to sell a stock when retail investors - as opposed to the large institutional investors such as pension funds - have started to buy. Sadly, private investors are seen as the least well-informed type of investor. "We think over the next couple of months there will be some concerns about year 2000 issues in technology... but those problems will be discounted by the middle of the year," says Mr Godding.
Which area of technology will see the fastest growth in the future? Communications, says Mark Mathias. One of Finsbury Technology Trust's most successful holdings has been Psion, which has now linked up with mobile phone companies to produce hand-held devices which can be used for communication by talking, but also for messaging. "This used to be pie in the sky a couple of years ago, but now it's definitely going to happen," says Mr Mathias.
Data storage is a growth market too. "To us, it is as exciting as the Internet," says Chris Godding. Companies need to manage their customer databases, he says, using the information as a marketing tool.
Whitechurch Securities: 0117 9442266
Killik & Co: 0171-761 4400
SocGen Technology Unit Trust: 0808 100 254368
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