The IMA Technology & Telecoms sector has made 94.56 per cent over the past five years, beaten only by the IMA North American Smaller Companies sector, according to data from FE Analytics.
Performance of sector vs index over 5yrs
Source: FE Analytics
Despite this strong performance, our data suggests there is little appetite among investors for the funds: over the past year, the sector has seen minimal inflows, and 64 per cent of respondents to a recent FE Trustnet poll said they do not hold a technology fund.
One of the reasons many investors are wary is the dotcom crash, which wiped out a lot of easy-won gains.
FE Analytics data shows that the sector index has still not recovered from this disaster, when unrealistic valuations of business ideas with little solid behind them saw a lot of investors lose everything.
Performance of sector over 15yrs
Source: FE Analytics
However, managers who invest in this area explain that the market is very different now.
Fraser MacKersie, manager of the Unicorn Free Spirit fund, which invests in niche UK technology companies, said: "This time around, companies are profitable and generating cash, well-financed, a lot pay dividends. A lot in the tech space are backed by sound financials."
"I think there’s quite a broad spread of attractive companies across the sector. We have infrastructure plays, a couple of direct to consumers, although we tend to have more of the infrastructure behind it rather than the internet businesses."
Funds in the IMA Technology & Telecoms sector tend to be dominated by large American companies such as Apple and Google, but MacKersie, whose fund sits in the IMA UK All Companies sector, invests in smaller UK businesses.
"I think that there are a few things that Britain is good at – the Boston Consulting Group reported last year that Britain has the largest proportion of GDP out of the G20 countries dependent on the internet," he said.
"We have good universities, so you will see spin-outs from them. We need an infrastructure to support the growing proportion of our economy online, so that throws up a lot of opportunities as well. We are able to create niche players globally."
The UK tech sector has done particularly well recently. According to data from FE Analytics, the FTSE All Share Technology index is up 221.6 per cent over the last five years.
Performance of sector and indices over 5yrs
Source: FE Analytics
Bestinvest’s Jason Hollands says that this is unsurprising.
"If you look at most recoveries in history, one of the earliest beneficiaries has been the technology sector, which starts to get going fast with new technology that drives efficiencies, so if you take the view that we are going to see a recovery of sorts, then it’s an interesting place to be."
AWD Chase de Vere’s Patrick Connolly is more sceptical, however, and warns investors that this outperformance may not continue.
"All specialist areas will have times when they perform well but others when they do badly. It’s very difficult to pick the winners and losers," he said.
"We understand that there are certain elements of technology that have the potential to perform very well, but there are others that will end up doing very badly."
"However you look at it, investing in tech is a risky proposition, so that is why we don’t have any specialist technology funds in any of our clients’ portfolios."
"Our investors get their exposure through broad-based funds, like some American funds, such as AXA Framlington American Growth, for example, which is heavily exposed to the sector."
Hollands says that investors need to be aware of how much exposure they may already have through growth funds, but adds that providing it is not simply duplicating exposure it already has, a focused technology fund could be an interesting addition.
He likes the Polar Capital Global Tech fund for exposure to the large cap companies such as Google and Apple – the former makes up 6.8 per cent of the fund while the latter makes up 3.3 per cent.
Data from FE Analytics shows that the fund has made 35.28 per cent over the past three years, performing roughly in line with the sector.
"For more interesting smaller cap tech, I’d look at Herald Investment Trust, a diversified trust of 200 small to mid cap stocks," Hollands added.
Herald has made 60.55 per cent over three years and 104.99 per cent over five.
MacKersie’s Unicorn Free Spirit has performed even better over the past three years, making 66.4 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
The manager says that he expects the tech sector’s good run to continue.
"We have seen a little bit of M&A and over the next five to 10 years, it will play an increasing role in the sector, benefiting investors," he said. "It’s quite a cash-rich sector globally."
"Looking on a five-to-10-year view, the growth in the proportion of GDP made over the internet, strong structural themes, and strong businesses backed by fundamentals and the M&A factor mean the sector should do very well."