IMA Technology & Telecoms has been the best-performing sector over the last three years, but cynics say the rocketing share prices of social networking site LinkedIn and internet coupon site Groupon following their initial public offering (IPO) are unsustainable
Graham Toone, head of research at AFH Wealth Management, cannot see what all the fuss is about.
"I don’t understand why people are saying it," he said. "We quite like the technology sector. As for a bubble, the tracker we’ve been using has actually gone down over recent months."
Earlier this year Goldman Sachs bought a stake in social networking giant Facebook for $500m and valued the company at an incredible £31bn, despite advertising revenues standing at just £2bn.
Some analysts are likening the current situation to the crash at the end of the 20th century, which saw some investors lose 90 per cent. Toone believes the comparisons are unfair.
"The high valuation of Facebook and some of the recent IPOs are a little reminiscent of the dotcom bubble of 2000 but they are not representative of the sector as a whole. If you look at some of the companies in the sector like Apple and Oracle then we don’t think that valuations are stretched at all."
While the example of Facebook is worrying some investors, fund managers have almost unanimously ignored investment in social networking sites. Most prefer to hold industry stalwarts such as Apple, Hewlett-Packard and Google.
The performance of smaller technology companies has also been an important factor in driving growth in the sector. The best-performing technology fund over one- and three-year periods is MFM Techinvest Technology.
A Trustnet study earlier this year revealed that manager Darren Freemantle finds the best value in mid and small caps, investing with a bottom-up approach.
According to Financial Express data, Freemantle’s fund has returned 64 per cent over the last three years. compared with 40 per cent from the average fund in the sector.
Performance of fund vs sector over 3-yrs
Source: Financial Express Analytics
Technology bulls point out that regular innovations and technological breakthroughs are often so compelling that they are immediately snapped up by companies hoping to save money. Cloud computing is the next big idea being tipped for universal uptake.
Chris Spear, managing director at Spear Financial, says these stories are a sign that the technology sector encompasses a much wider range than many other sectors.
"I don’t really buy the bubble story," he said. "There are some pie-in-the-sky valuations out there but there are plenty of companies making money from manufacture. You have to separate out these companies from the others. I think people have had their fingers burned in the past and are getting anxious."
Both Toone and Spear agree that if investors are worried about a bubble then the best way to allocate to technology is through a wider fund.
"I’ve been in this industry since 1989 and I’ve lived through numerous bubbles and market crashes," said Spear. "The important thing is to learn your lessons. I don’t like to make too specific plays and I’m not a great fan of focused funds."
Comprising just 11 funds, Spear believes that a direct play in the Technology & Telecoms sector is too specialised for the majority of investors.
"To me it makes more sense to go for an Alpha fund such as Standard Life UK Equity Unconstrained where the manager can make specific sector calls on behalf of the investor."
Performance of fund vs sector over 5-yrs
Source: Financial Express Analytics
Data from Financial Express shows the Standard Life fund, managed by Ed Legget, currently has nearly 7 per cent of its £428m assets under management exposed to the IMA Technology & Telecoms sector.
Over the last five years it has returned 107 per cent compared with 20 per cent from the average UK All Companies fund.