It’s no surprise that investors have lost interest in the technology sector. Since the bubble burst nine years ago, the Nasdaq index has lost around 65%. There are now just three listed technology funds in the UK, compared to around 15 at the boom’s height.
Sad relics of a bygone era? Not at all – in fact, now could be a great time to buy them. The tech sector could be set to outperform the market, says a recent report from Oriel Securities.
Firms have strong balance sheets, low leverage and new revenue opportunities, such as cloud computing, to look forward to. On large discounts to net asset value (NAV), tech investment trusts could be “the long-term investment opportunity of the decade”.
The three listed UK tech funds are Polar Capital Technology Trust (LSE: PCT), RCM Technology Investment Trust (LSE: RTT) and Herald Investment Trust (LSE: HRI). They trade on discounts to NAV of 16%, 5% and 21% respectively.
The £203m small-cap focused Herald fund boasts a 56% exposure to UK tech firms. The first two, however, focus on the American market, and it is here where the most potential lies for investors, analysts reckon. “Technology is our favourite [US market] sector,” Brian Belski of Oppenheimer Asset Management Inc. tells Market Watch. Boasting the highest long-term earnings growth, “it is the most pristine sector in terms of fundamentals”.
Tech stocks have already risen 18.3% this year, making them the second-best performing S&P sector of 2009 so far. But there’s more to come. They now account for about 17% of the S&P 500 in terms of market capitalisation, but hold 35% of the cash, says Sacha Millstone of the Millstone Evans Group on Forbes. That makes them safer than many other stocks, as they can use that cash for acquisitions instead of turning to the volatile capital markets to raise money to do so. Being eyed up by larger rivals should help support the price of small-cap stocks.
Of course demand for everything is slowing. And, as in the original tech bubble, new wave firms such as Twitter still haven’t figured out how to make money. But as productivity growth slows, businesses have traditionally grown their investment in software, says broker Charles Schwab. That makes tech’s “growth potential and low volatility” very attractive, says Savita Subramanian of Merrill Lynch on Marketwatch. With its hefty NAV discount, Polar Capital in particular looks worth a punt.