Hi-tech clicks with investors

With good firms at bargain prices, it's time to get back into the sector

Just months after investors lost thousands of pounds when the dot-com and technology bubble burst in April, the once tech-weary are piling back into the sector.

Just months after investors lost thousands of pounds when the dot-com and technology bubble burst in April, the once tech-weary are piling back into the sector.

Before we get too excited, this needs to be put into context. According to the Association of Unit Trusts and Investment Funds (Autif), £112m was invested in technology funds in June, compared with £246.6m at the height of individual savings account (ISA) fever in April.

Although investors may be returning slowly, the good news is that this time they are being more selective about where they put their money. Rather than piling into any old dot com, they are being more fussy second time around.

"We are starting to see discrimination between good companies and more flaky models," says Tim Dainton, fund manager of the Gartmore UK Techtornado fund.

Not only are good stocks in demand, they are cheaper than they were at the height of the technology boom as the whole sector was affected by the downturn in prices - not just dubious dot coms. This means there are plenty of quality, undervalued stocks out there.

"We are seeing a healthy dose of realism," says Mike Webb, chief executive of fund manager Invesco. "The market needed that shock, although many threw the baby out with the bath water."

The UK technology sector is proving particularly attractive to investors. Unlike their North American counterparts, such as Cisco, Microsoft or IBM, which have high valuations and therefore further to fall, there are some good UK tech companies at rock-bottom prices. This is why, according to research company Lipper, UK technology funds are bouncing back faster than global tech funds and proving popular with investors.

The performance of Artemis New Enterprises, Solus Technology Plus, Close FT-SE techMARK and Gartmore UK Techtornado all overshadowed globally focused funds during July. The FT-SE techMARK, the UK technology index, bounced back 7.22 per cent on the previous month. Meanwhile the Nasdaq, the US technology index, fell during July, ending 3.07 per cent lower on the previous month.

Even so, Steve Lipper, glo-bal marketing director at market analysis company Lipper, warns investors against picking a UK-specific technology fund. "You would expect a UK tech fund to be more volatile than a global one.

"If you are going to narrow yourself to one sector, you would do well to go for a fund that gives the manager latitude to buy the best funds in the world. If you go only go for UK technology, you are doubling your bet. After all, when you narrow your manager's mandate to an industry, you want to give them the breadth of geography," says Mr Lipper.

Yet there are good reasons for investing in UK funds. "I'm not saying the UK has better companies than the US," says Gartmore's Mr Dainton. "But if you invest in a global fund, its biggest investment is going to be Cisco or Microsoft.

"These are great companies, but not where the real returns are to be made. Superior returns are going to be seen further down the size band, where there is plenty of opportunity for growth and where a UK tech fund would typically invest ... There are a whole load of new issues and good companies coming on to the market at the smaller end."

The companies he favours include ARM Holdings, Psion and Logica. "Three years ago we barely had a tech sector in the UK," he adds. "Then all of a sudden there was demand for communications data and software. All these events represent opportunities for com- panies, and all are at a nascent stage of development.

"They won't be the size of Microsoft but will grow to a substantial size - bigger than they are now. The FT-SE 100 in five years will be full of these technology companies."

Depending on your individual risk profile, you should have some exposure in your portfolio to the tech market in the long term, say five to 10 years. If you don't want to take on the risk of a pure technology fund, more general funds offer tech exposure, such as Invesco's Global Dynamic Theme Fund or Mercury Global Titans. As these funds have more than one theme and invest in several sectors, it dilutes the risk.

"Investors are coming back into our global theme fund after a bit of selling off," says Invesco's Mr Webb. "There is nothing like the frenzied levels of investment seen earlier this year. Technology stocks do get over-valued, but there is explosive growth potential."

Bear in mind that most fund managers recommend you avoid speculative dot coms. As most of these have weak or non-existent business models, they aren't worth the risk.

"We are more interested in companies that provide the picks and shovels - the enablers of web technology that enable dot coms to exist rather than the dot coms themselves," says Mr Webb.