The recent high-profile listings of social networking websites such as RenRen and business networking site LinkedIn have been grabbing the headlines. Some eye-popping valuations have prompted talk of another tech bubble. So should investors steer clear of tech stocks altogether?
“There’s a very big divide in tech at the moment,” Nick Evans, manager of Polar Capital’s Global Technology fund, tells the Financial Times. “On one side, you have social media stocks that look stretched in terms of valuation, while at the other extreme, you have cheap, larger stocks that are suffering share loss to other new business models.” A good tech fund manager needs to be looking for the stocks in the middle, “those that are benefiting from the new wave of technology being ushered in by smartphones and tablet devices”, says Alice Ross, also in the FT.
But the key question is whether the boom in technological innovations will translate into good returns for investors, says Heather Connon in Money Observer. The Bank of America/Merrill Lynch survey of investor attitudes shows technology has been the biggest overweight sector among institutional investors for a while now.
So the ‘smart money’ is already investing in the sector, and “the average tech fund is now well ahead of funds in the UK All Companies sector and global sectors over both one and three years”.
That’s not to say that all the gains have been made: the sector was starting from a low base, having been hammered for years following the tech bust. Tom Tuite-Dalton at Oriel Securities tells the FT he likes the Herald Investment Trust (LSE: HRI) . The share price has more than doubled in the past two years. Yet it’s still trading at a 16% discount to net asset value (so you can buy £1-worth of assets for 84p).
The trust was set up 17 years ago by Katie Potts, a former tech analyst who still runs the fund today. Since launch, the trust has returned 434%, while over the past three years it has returned 78%. The fund differs from many rivals in that it doesn’t invest in companies with market valuations above £1bn. “Potts prefers instead to fish for undiscovered technology companies that could become giants,” says Jeff Prestridge on Thisismoney.co.uk. But to minimise the volatility associated with tiny tech stocks, Potts has only around 18% of the fund invested in firms that have yet to break even. It’s at the risky end of the spectrum, but looks a better tech bet than a punt on a hot initial public offering.