Technology stocks: Time to party like it's 1999?

It all went terribly wrong last time, but technology stocks are soaring again. Emma Dunkley has some words of caution

Technology investment is back with a bang. Facebook's float is just the latest in what is a lengthening line of exciting companies coming to market at what seem huge valuations. Investors, it seems, are being asked to party like it's 1999 all over again, back when everything technology glittered.

But could this just be another bubble, a case of history repeating itself? "If anyone tells you it is different this time, run a mile," says Gavin Haynes at the investment specialists Whitechurch Securities. "There will be winners and losers in the new technological revolution, which is being driven by social media and cloud computing."

But funds in the sector have in the main a terrible record over the long term. "The problems for tech specific funds are identifying the businesses and the technology that will succeed and then ensuring that they don't over-pay," says Peter Fitzgerald at Aviva Investors.

Tech funds have never really recovered from the disaster at the start of the millennium, says Mr Fitzgerald. "The capital loss was simply too great following the tech bust. Investors who put their money in at the end of December 1999 will still be showing large losses, in some cases up to 70 per cent."

There are still major issues dogging the tech sector that should make you wary. "Technology is such a fast-changing environment there is scope for business models to become obsolete," says Rob Morgan at Hargreaves Lansdown. "Apple's tablets and other mobile devices cannibalising the sales of desktop PCs and laptops is one example. Nokia's rise and fall is also a good example of a global leader losing its way."

And warning signs that there may be danger ahead include hype and over-priced stocks. "Certainly we have seen recent floats suffer," says Adrian Lowcock at Bestinvest. "Groupon is an example. Although Facebook will likely break many records at float, for most retail investors I would stick to a more diversified approach."

If you don't want to go down the tech-focused fund route, there are other ways you can access this theme, depending on how much risk you want to take with your money. "You could go to one extreme and decide to hold a handful of tech companies like Apple, Microsoft and Google," says Darius McDermott at Chelsea Financial Services.

Although this means you have spread your money less and so are taking more risk, you could potentially see higher returns. "You could also go for an exchange-trade fund (ETF), which tracks a particular index, for example the Nasdaq," says Mr McDermott.

If you want to play it safer and spread your money, then you could consider a US equity fund. "The US is still the home for many tech companies, particularly their intellectual capital, so the choice is good," says Mr McDermott. "The AXA Framlington American fund, for example, has a third of its investments in the technology sector at the moment."

But there is another good reason to look at US funds and the tech sector, in terms of dividend pay-outs, especially at a time when the UK is disappointing on this front. "Historically, dividends have been seen as a bad thing for US tech, as it was believed a company paying them was admitting it could no longer grow," says Mr McDermott. "But that attitude is changing, particularly with Apple announcing recently it would pay a dividend."

But dividends are still at low levels. Of the 71 large US tech companies, 37 pay a dividend of, on average, 1.07 per cent, says Mr McDermott. Apple, for example, offers around 1.8 per cent and Microsoft is nearer 2.4 per cent.

But technology stocks could very well be the new income sector of choice, says Brian Dennehy at Dennehy Weller. More tech firms are paying out dividends than at any time since January 2000, with six companies initiating pay-outs this year. He says technology stocks' dividends are also expected to increase by as much as 48 per cent this year, and tech funds could be paying out more dividends than any other type of fund by 2013.

"This has not passed income fund managers by," says Mr Dennehy. For example, the JPM Global Equity Income fund now holds approximately 9 per cent of assets in technology, because of the potential for strong future dividend growth. "So the message is that the technology sector is certainly one to watch," he adds.

So even if the crashed funds of the tech crisis have left scars, the new revolution is providing some opportunities as well as the chance to build your income. But don't necessarily rush to the latest fad, because tomorrow's iPad could soon be yesterday's PC.

Emma Dunkley is a reporter at citywire.co.uk

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