Time to spread the risk

Microsoft's court defeat may boost technology sector, by Paul Slade

Small savers with money in Britain's handful of specialist technology funds will have been eying their screens nervously in the past few days. The US courts' anti-trust ruling against Microsoft on 5 November was bound to make technology investors wary. Judge Thomas Penfield Jackson did not mince his words, saying Microsoft had used its immense muscle to "harm any firm that ... could intensify competition against one of Microsoft's core products".

Small savers with money in Britain's handful of specialist technology funds will have been eying their screens nervously in the past few days. The US courts' anti-trust ruling against Microsoft on 5 November was bound to make technology investors wary. Judge Thomas Penfield Jackson did not mince his words, saying Microsoft had used its immense muscle to "harm any firm that ... could intensify competition against one of Microsoft's core products".

Alan Torry, manager of the SocGen Technology trust, says: "The Microsoft ruling is a wake-up call to investors that they can't always look for safety in the largest of the tech companies. They really have to spread their risk."

Given that Microsoft is such a big player in the technology sector, you might expect it to dominate the stock selection in specialist technology funds too. In fact, most technology funds hold only a small proportion of their assets in Microsoft shares, preferring to seek value among the company's smaller rivals instead. Scottish Equitable Technology devotes just 2.25 per cent of its £63m funds under management to Microsoft shares. Henderson's £289m Global Technology fund has only 0.75 per cent of assets in Microsoft shares.

Paul Kleiser, manager of the Scottish Equitable fund, says: "It would be a strange technology fund that didn't have any Microsoft in it. But it's not up to weight. That's mainly because Microsoft has been pretty highly-valued for quite a while, and there are plenty of opportunities elsewhere."

Tim Woolley, manager of Henderson Global Technology, adds: "We've had new money into the fund which we've not been putting into Microsoft, so its weighting has been going down. We're looking to give you exposure to some of the leaders, but also try and position you in the mid-cap growth companies."

Microsoft may suffer from being forced to loosen its monopolistic grip on the market, and its rivals could only benefit. Mark Johnson, head of research at stockbrokers Killik & Co says: "I think the ruling is good for the technology sector as a whole. If Microsoft get away with not being broken up, and is just told to play more fairly with its suppliers and its customers, it may not want to push itself into another market where it's trying to take over and control everyone else."

Kleiser believes that technology funds will ultimately be affected far more by the interest rate climate set by the US Federal Reserve than by any decline in Microsoft's fortunes. "The biggest factor that will influence technology stocks is Alan Greenspan," he says. "Technology tends to be a high-value, high-growth area, and that flourishes best in an environment of low interest rates."

Those looking after national funds will want to ensure their holdings broadly match the make up of the host country's stockmarket. Microsoft accounts for about 4 per cent of the S&P index's capitalisation, which means US funds are likely to have a far higher proportion of their portfolio in the company than any specialist technology fund would.

This principle applies just as much to actively-managed funds as it does to US index trackers. Scottish Equitable's actively-managed American trust, for example, has about 5 per cent of funds under management in Microsoft shares.

Paradoxically enough, it may not be tech fund investors who should be worried at any threat to Microsoft, but those in much more broadly-based US funds.