Chips with everything
Many investors are still afraid of new-tech stocks. They are missing out, writes Mark Dampier
Sunday 06 June 1999
The technology sector includes software companies, telecoms equipment, PC hardware and, of course, the internet. If one sector goes off the boil, as software services have done, another can take the lead as we have seen with net stocks.
The impact of technology on business has been consistently underestimated and in the main it is highly deflationary. Much newsprint has been expended on the Abbey National bank's intention to charge clients pounds 5 for paying bills at branches. But take figures from America: a single transaction through a branch costs $1.07 (about 66p), through PC banking 2 cents, and using the net cuts it to 1 cent. No wonder that banks wish to push their clients down this route.
Another deflationary area is document transfers. Take the example of a 42-page document going from New York to Tokyo: an overnight package would take 24 hours and cost $26.25 and a fax would take 31 minutes and cost $28.23. The net would cost 95 cents and take two minutes.
Even old industries such as energy can benefit from advances made in technology. Shell's operating costs of pounds 2.50 a barrel are three times lower than those projected 10 years ago. Given these advances and the cost savings, is it any wonder that developed economies are seeing so little in the way of inflation?
Much has been made of the latest investment fashion - the internet. The ability to buy services over the net will alter shopping for ever. The data being built up by net providers will allow them to target specific items of interest, be it hobbies, sports or books.
The huge valuations placed on internet companies have been a big talking point. Some of the scepticism is valid. Like any revolution, there will be failures along the way.
The fact that many appear not to make a profit has also been a concern. How can you value a company that is not making any profit?
But the truth is that many of these companies are beginning to make profits and every last penny is being reinvested. If it wasn't, the companies would die. These companies are nothing if they have not got the latest technology to keep tabs on every available piece of information. If you control the information flow, you have market power.
The companies are not handicapped by high starting costs, however. Most internet companies have a low cost capital base. The money is spent on sales and marketing, not on a giant steelworks or chemical refinery. It means, therefore, that only a tiny upswing in demand can create massive profits.
With so many winners and losers, how can investors sort the wheat from the chaff, or the Sinclair C5s from the Microsoft Windows of the world? From a practical point of view it must be through a pooled investment vehicle - either a unit or investment trust that will offer diversification and professional management.
Aberdeen Technology unit trust has been around since 1982 and to my knowledge was the first technology unit trust to be set up. It has developed a tremendous track record, turning pounds 1,000 at launch to pounds 28,561 today. A monthly savings plan could be an ideal method of building up funds in this sector and volatility can work for you, averaging the cost of purchase.
There are other choices. Most recently Framlington's NetNet fund, which is slightly more specialised, buying internet companies and companies that will benefit from it. With internet traffic doubling every 100 days and internet commerce expected to reach pounds 300bn by 2002, it is hard to ignore.
Technology funds can also be accessed through investment trusts. Probably the best is Henderson Technology, which, despite the enormous gains, still trades on an 8 per cent discount.
The sector often goes through a summer lull but comes back strongly in the autumn when the trade fairs start in the United States. This year we may see more volatility because of the uncertainty over the millennium bug, so this may be a buying opportunity.
Why has this area been neglected by most retail investors? After all, Aberdeen's fund after 17 years is still only pounds 175m in size. Probably because many of us do not understand technology and perhaps even feel frightened by it, coupled with the fact that we think it is high-risk. However, I believe we are confusing short-term volatility with losing money. There can indeed be some large swings in the short term in this sector, but over periods of five years or more excellent returns have been made.
This is no longer a fringe area but an extremely important mainstream sector. It is time to take our heads out of the sand and grasp the opportunities ahead of us.
n Mark Dampier is an investment manager of Bristol-based brokers and investment managers Hargreaves Lansdown (0117-988 9880).
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