'Be careful. Current ratings make even tulip bulbs look cheap'

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The year to date has been most curate's eggish - other than for technology investors that is.

The year to date has been most curate's eggish - other than for technology investors that is.

It seems the way to make your portfolio perform is to ensure you have a few tech stocks. Unfortunately, enough managers have been buying into this concept sufficiently late to have given added impetus to the sector, so if you haven't yet climbed aboard, you are being left further behind. It all looks a little unhealthy.

The technology sector has grown massively in the US, accounting for more than a quarter of the total value of the market by the end of last year. Here, many managers ignored the sector, not least because of the sky-high ratings. As the shares powered on, some investors had to rebalance their portfolios, pushing levels up still higher.

It may all sound like madness, but there is risk in being out of this sector. No one knows how much of a difference electronic commerce will make to basic industries.

The market is a distributor of investment and more money becomes available to the new technologies at the expense of last year's industries. Some of these now offer incredible value.

Scottish & Newcastle has a barely double-digit price-earnings multiple and yields nearly 7 per cent. But the shares are not performing, which is why active managers piled into CMG, which has risen by 100 per cent. They are involved in the provision of wireless application protocol software to Vodafone, a concept almost impossible to evaluate.

There is the rub. If you cannot value it, perhaps it will be just as dangerous not to be investing as backing the new technologies. And if you are a private investor, be cautious. The latest rally is driven by fund managers trying to redress what were seen to be underweight positions.

The strong public appetite for technology funds has led to several launches, while money has been flowing into the established funds. This need not continue indefinitely.

Many money managers bought bank shares before demutualisation, knowing investors would need to get up to weight once the new banks - in which institutions were unable to take pre-flotation positions - came into the index.

This drove up the value of banks as a whole, so we had a long run of underperformance and disenchantment. It could happen in technology, if there is a major glitch.

Already, the Henderson Technology Report is gloomy reading. Their funds have done extremely well but the fund managers point to almost every indicator as showing this sector of the market to be over-valued.

Technology investing seems a bandwagon at present, although it would be wrong to stand on the sidelines. But be careful. The sort of ratings we are seeing are making even tulip bulbs look cheap.


Brian Tora is the chairman of the Greig Middleton investment strategy committee

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