Mark Dampier: Sky's the limit with cloud computing

The Analyst

If I asked you to name an industry whose companies are generally increasing their profits, have little pension liability and net cash on their balance sheets, what would spring to mind? Tobacco? Utilities? Actually, the answer is the technology sector.

I think the first thing we need to do is divorce today's tech sector with that of late 1999 and early 2000. It has been well-documented how over-hyped this sector became. Fast-forward nine years and the sector is far more mature and contains some truly world-class companies.

For example, last week Google announced record quarterly profits and Apple also announced quarterly profits of $1.6bn. We mustn't forget Microsoft, who, despite losing a degree of their dominance, still deliver huge profits and have vast reserves of cash on their balance sheet.

This brings me to this week's fund: Polar Global Technology, managed by Nick Evans. It can invest in the aforementioned household names, but also looks for comparatively small firms where innovation is rife.

One of the fund's key themes at present is "cloud computing". This might be a phrase that's new to you, but essentially it enables companies to outsource their computing needs.

It may help to think of computing power like a supply of electricity. You wouldn't expect every company to have its own generator; they simply plug into the grid and get electricity from the power station.

Cloud computing works on the same principle, where data storage and processing power is provided by a central supplier, so companies can make use of it when necessary without building the entire infrastructure themselves.

This is especially valuable for small and medium-sized companies as it simplifies the process of getting an IT system up and running, saving costs on staff and equipment. Big firms can benefit, too, and Hewlett-Packard demonstrated its potential by cutting their operating budget for hardware by $2bn by using it.

Moving on to more familiar ground, I think it is fair to say that the internet has taken hold of shopping and many traditional high-street stores are losing out.

The market leaders, including Amazon, have branched out from niche players to selling almost anything and everything. Internet retailers have been among the biggest winners over the last decade, but it is still a relatively young industry and there is still room for innovation and new success stories to emerge.

The final main area of the portfolio is mobile broadband. I don't think this theme needs much introduction; all you need do is look at how many adverts there are on television for 3G mobile phones, low-cost laptops and particularly the popularity of Apple's iconic iPhone with all its associated applications.

I think one of the interesting things about technology is that this is one of the only true growth areas available to investors in developed markets. Most of the world's other top investment themes rely on emerging markets.

It is also an area where stock-picking is crucial. As an example, RIM (makers of the ubiquitous BlackBerry) and Apple only have 5 per cent of the global mobile-phone market, however they make 47 per cent of the profits.

This fund will be a broad spread of mainly small and mid-sized firms but there will be larger companies in the portfolio as well. It will be truly global and the manager won't pay much regard, if any, to the make-up of his benchmark index.

Many investors still have the scars from the turn of the century and will be wary of going back into the technology sector. However, I think in the long run this would prove a mistake.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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