Robert Morgan: Tech stocks expert is adept at spotting winners - and losers

The Analyst

As you might have seen in the business pages, Google briefly became a more valuable company than Microsoft for the first time. It is a tale of contrasting fortunes. Microsoft enjoyed huge success in the Nineties as households adopted desktop PCs using its software and operating system, Windows. Yet these once ubiquitous programs now seem more expensive in the face of lower-cost and convenient "mobile computing". Compared to rivals such as Apple and Google, Microsoft has failed to harness this new wave of technology.

The growth of mobile connectivity has been much faster than desktop internet. Google has been able to exploit this through its Android operating system, which is used in a wide variety of mobile phones and tablet computers. It has now established itself as Apple's main rival. Microsoft, however, has struggled to build a significant user-base for its mobile products – despite continued success in its traditional (though far more mature) business of desktop PCs and servers for businesses.

These contrasting fortunes illustrate how the evolution of technology constantly produces winners and losers. Google was only founded in 1998, and Apple's share price is around 80 times that of 10 years ago, such has been its growth. Clearly, the winners can be spectacular, so when investing in this sector, it is worth putting the effort into keeping on top of developments.

Jeremy Gleeson, manager of the AXA Framlington Global Technology Fund, is constantly assessing where the next opportunities lie and, just as importantly, identifying the casualties of dying sectors.

As he puts it, it sometimes takes a "near death" experience for companies to make the tough choices to genuinely reinvent themselves. In the meantime there can be several "false dawns" as a company chases after new opportunities but fails to radically change its business.

Interestingly, Apple went through such a period in the 1990s, and eventually hit upon a winning formula with its portable MP3 player, the iPod, in 2001. At the same time the iTunes internet store was launched and quickly became the market leader in online music services. It was an innovation that spawned the widespread success of the more complex mobile devices that dominate the market today, such as the iPhone and iPad.

Such is Apple's size today that it represents nearly 20 per cent of the technology index. So although it is the fund's top holding at around 8 per cent, Jeremy Gleeson is still "underweight" the stock. His rivals are in a similar position, however, as individual stock weightings for all funds cannot exceed 10 per cent. In any case, he prefers to invest in companies such as Dialog Semiconductor and ARM holdings, which supply essential components to Apple. This diversifies risk to a degree and could be a more profitable way to capitalise on its domination. Being smaller, they may have the opportunity to expand their earnings more quickly.

Around half the fund is invested in smaller and medium-sized companies, and following a series of takeovers of portfolio holdings in the area last year, Jeremy Gleeson has invested in a new wave of fast-growing software firms such as Eloqua and ExactTarget. However, he avoids firms that aren't profitable or have unproven management teams. Interestingly, he puts Facebook in this category, as he doesn't have enough conviction that it can deliver on its plans. He also avoids business models that appear to be disrupted or in decline. As such he doesn't hold Microsoft, Intel or IBM, which are reliant on desktop PC sales, as well as Nokia, whose prospects outside its more traditional mobile phone handsets are looking increasingly limited.

Nowhere is corporate Darwinism more obvious than in the technology sector. Yet the long-term rewards are huge for the right companies. Valuation is also important, and this is where an adept fund manager comes in. There is no point in identifying exciting opportunities but paying the wrong price. I believe Jeremy Gleeson has the necessary experience and discipline to capitalise. The fund has a good record since he took over in July 2007, up 71 per cent versus 50 per cent for the sector, though holdings in more volatile smaller companies means it should be considered higher risk.

Robert Morgan is an investment analyst at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent