Tech trusts outperform industry

The planned Facebook IPO has unsurprisingly inspired huge volumes of media coverage. For many commentators, the irony has not been lost that while many investors have tended to avoid technology funds at all costs following the boom and bust at the turn of the century, in recent years it has come to permeate our lives more than ever before.

Even so, looking at the performance figures, those investing at the height of the technology boom are likely to still be nursing losses. But it nevertheless seems incredible now that in the run-up to the technology bubble, the use of email had only just exploded onto the scene, with Microsoft releasing Internet Mail and News 1.0 as late as 1996 (later renamed Outlook), and the fledgling Hotmail beginning to offer free, use-anywhere, internet email in the same year.

So it is perhaps not surprising that some comment pieces have actually questioned whether the easy money has already been made in technology investment, and a few have even dared to question whether we may now be getting back into bubble territory.

It is probably fair to say that investment company discounts in the technology sectors do not currently seem wildly overvalued, certainly when compared with the height of the technology bubble, when many technology investment companies were standing on premiums. At the moment, they are all on discounts.

RCM Technology, in the Specialist: Tech, Media & Telecomms sector, is on a discount of 14.5 per cent at the time of writing, while in the same sector, Polar Capital Technology Trust is on a discount of 4.4 per cent. Meanwhile, Herald Investment Trust, which admittedly has a very different focus, and is in the Specialist: Small Media Comms & IT Cos sector, is on a discount of 17.3 per cent.

Far from believing that we are in a technology bubble, Ben Rogoff, manager of Polar Capital Technology Trust, points to attractive valuations in the sector in the context of the growth opportunities available.

"The Facebook IPO is a good opportunity for investors to reconsider the merits of the technology sector, which despite better growth prospects and a vastly superior aggregate balance sheet trades broadly in line with the market multiple," he said.

"It is also a timely reminder that a new technology cycle is continuing to unfold, driven by cloud computing, broadband applications and mobile data."

"Specifically we've been adding to our networking exposure, as we are hopeful that US service provider spending will improve through the year. We've also added to our semiconductor exposure as a cycle low is in this quarter, and semiconductor equipment companies due to rising capital intensity as manufacturing moves to smaller nodes."

It is not just technology managers who are waxing lyrical about the sector’s prospects. Scottish Mortgage Investment Trust alone counts both Amazon and Google among its top holdings.

Its manager James Anderson said: "Amidst the fashionable and exaggerated gloom, it is the accelerating pace of change in technology and dramatic innovation that should give the pessimists most cause for thought."

"Innovation is transforming our societies and generating fabulously strong companies with remarkable economics and superb growth prospects. The leaders are broadening out from being dominated by electronics into fields as diverse as social media and healthcare (from genomics to robot surgery) and with China joining the west coast of America as a driver of rapid and disruptive change."

Performance figures for technology investment companies have been strong over the last five years, despite volatile markets. They have by far outperformed the average investment company, although they have suffered along with most other funds over the last year. With technology finally becoming mainstream, it will be interesting to see whether there may be scope for further re-ratings in the technology space.

Annabel Brodie-Smith is communications director for the Association of Investment Companies (AIC). The views expressed here are her own.