How to benefit from a bubble-free tech boom
The manager of the Unicorn Free Spirit fund says unfashionable internet infrastructure firms will still be making money when iPhones and Facebook have fallen out of fashion.
The big opportunities in technology lie not in giant consumer-facing stocks such as Apple and Facebook but in the infrastructure companies that support them, according to Fraser MacKersie
, co-manager of the Unicorn Free Spirit
Research published this week from the Boston Consulting Group showed that the UK is the country with the highest proportion of GDP dependent on the internet, and MacKersie says that locally based companies offer a number of ways to benefit from this.
He warns, however, that the traditional technology funds may be playing a risky game by investing in the world’s best-known brands.
"Rather than consumer-facing companies, we go for infrastructure companies and those that work in the background. As we see with Facebook and LinkedIn, those consumer-facing stocks can be more volatile and difficult to value," he said.
MacKersie believes bad memories of the dotcom crash still make people wary of investing in technology, but he claims many sceptics are unaware of how much the sector has developed and matured over the past 10 years.
"People have the conception that the sector is full of ‘blue sky’, volatile companies, but we have no trouble avoiding those," he said.
"We apply traditional analytical criteria to the stocks we select and only pick those with strong earnings and balance sheets."
Data from FE Analytics
shows that Unicorn Free Spirit is a top-quartile performer over three and 10 years in its IMA UK All Companies sector, although in the year-to-date it has only fractionally beaten the sector average.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
It lost more than its sector average in 2008, which pushes down its performance over five years, but was then a top-quartile performer in 2009, 2010 and 2011.
Unicorn Free Spirit has a number of characteristics that would suggest volatility to the average investor – it has only 31 holdings and has a strong bias to the smaller end of the market.
In fact, 45.1 per cent of the fund is currently in AIM-listed stocks, and a further 6.3 per cent on the FTSE Fledgling index.
However, data from FE Analytics
shows it is marginally less volatile than its sector average, scoring 14.68 per cent compared with 14.79 per cent from the sector over the past three years.
Since MacKersie joined FE Alpha Manager John McClure
as co-manager on the fund, he has overseen a shift to smaller cap technology stocks.
One of his highest-conviction positions in that time has been iomart, a provider of cloud computing and data storage systems, which is now the portfolio’s biggest holding at 6.6 per cent.
It is also the biggest contributor to performance, and MacKersie says that the company still has 55 per cent spare capacity, making it easy for it to increase its revenues in the future, at a low cost.
A more familiar company the fund has recently bought into is BT group.
A regulatory change earlier this year restricted how much it can charge other internet providers that use its copper cabling, but MacKersie explains that the restrictions do not apply to its fibre cables, which he expects to be in demand as the use of high-speed broadband picks up.
MacKersie says that the small size of the fund – it is currently worth £5.6m – makes it easier for him to move in and out of positions, although he would be comfortable for the fund to increase 10-fold in size.