Tech stocks: Is this latest trend for you?
Technology stocks are all the rage at the moment and investors are falling over themselves for a piece of the action. In the first of a multi-part series Philip Macalister looks at how technology fits into a diversified portfolio.
Tuesday, March 21st 2000, 12:00AM
You've got to ask yourself then how do you get a piece of this tech action and make some big money?
Well it's not as easy as it looks. First of all you have to decide what is technology and how much of it should be in your portfolio.
One of the surprises is that many stocks you don't think of as being technology stocks fall into that category. For instance, Telecom, Sky TV and even Baycorp are all now considered technology stocks, as are the pure tech plays such as Advantage Group, IT Capital and Strathmore.
Likewise, businesses such as semi-conductor manufacturers were once considered to be in the manufacturing sector, now they are called tech stocks.
The other element to consider is that technology is transforming the global economy and it's not just the so-called new "online" economy which is benefiting.
Traditional smokestack industries, such as car building and steel making are also reaping significant gains through adopting technology to save costs.
Fiduciary Trust International executive vice president William Yun says the impact of business to business technology applications are improving the position of some of these older businesses.
He says the Ford Motor Company in the United States currently spends US$122.9 billion on goods annually and it is estimated the company will have earnings per share (eps) of US$5.88 in 2000. If it can use technology to reduce its costs by just 5 per cent a year it will boost its eps a massive $3.30. If it managed to save 10 per cent then the eps boost would be $6.60.
Tech categories
Technology can be broken down into five broad categories. The first of these is mobile data, or as some call it the wireless world. Companies involved in this area are providing equipment or networks for transmitting data, such as email, share prices and information.
One of the big sectors, particularly in the United States, is the semi-conductor business. Semi-conductors are the chips and circuits that are the vital organs inside most digital electronic devices such as PCs, cell phones, DVDs, Playstations and MP3 players.
With all these devices and methods of transmitting data there is a third market comprised of storage systems.
The fourth market is the infrastructure that supplies all the bits that make the machines in the other areas work. Companies in this area range for the software provider Microsoft, to computer maker Dell and Cisco Systems.
The final market, and the one that gets the most attention, is the dot.com or Internet business market.
Dot.com stocks are a bit like Miss Universe contests. All the attention is focussed on the winner, yet there are a bevy of beauties on stage as well.
How much should you put into tech stocks?
One of the biggest risks at the moment is that investors have become so besotted with tech that their portfolios end up being heavily overweight in the sector.
Before making any decisions investors need to examine their portfolio and work out what composition is in tech. This can become difficult for two reasons. Firstly, the definition of tech is broad and vague. For instance is Telecom, a telecommunications play or tech exposure?
In many ways the question parallels the one which has been heavily debated in the property sector. That is: are listed property companies share or property exposure?
Secondly, many managed funds have already tilted their portfolios towards tech.
London-based fund manager Michael Watt of Henderson Investors gave a graphic example of this point last week when he was in New Zealand talking about the £263 million Henderson TR Pacific Fund UK listed investment trust that he manages.
Watt says the fund, which has done well recently, actually has a 55 per cent exposure to technology, against a benchmark of 29 per cent.
Like many things in this tech sector drawing the line between what is what is difficult, and that is true when it comes down to looking at what proportion of the world share market is technology.
In the United States tech makes up about 33 per cent of the S&P 500, while in Japan about 29 per cent of the market is tech.
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Tech stocks as a proportion of the MSCI |
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| * Excluding telcos and media |
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In New Zealand the proportion is much lower, even when Telecom is included.
Stobo's advice is that technology certainly has a place in an investor's portfolio, however one has to be careful that it isn't heavily overweighted.
He illustrates the point of inadequate diversification by what happened to BT's Pacific Basin Fund in the early 1990s.
Back then the emerging Asia tiger economies were in vogue and money poured into trusts like the Pacific Basin Fund. However, things turned terribly bad in the mid-1990s when the Asian crisis hit and investors who were well-overweight in the sector got badly burnt.
Stobo's advice on sector funds: "Don't go to the races on these things."
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