Distinguish between market hype and the real world
Craig & Co research manager Cameron Watson says tech makes up an important component of a balanced portfolio, but investors need to be careful about how they do it.
Tuesday, May 23rd 2000, 12:00AM
The fledgling NZ tech sector continues to be rocked by aftershocks following the 20 per cent decline in the Nasdaq over late March and April. Worst hit were the highly speculative dotcom companies, many of which are new listings. More established technology companies with an earnings track record, growth strategy and market position have fared best for investors. This is hardly surprising when one reflects on the well-proven investment maxim that where there are high (potential) returns there also lurks high (real) risk.
EstarOnline was the first new listing casualty, its IPO (initial public offering) was canned due to adverse market conditions. Shortly after, the proposed Ihug merger with Force Corporation was vetoed by Force shareholders. Other dotcoms on the New Zealand market had their share prices slashed, as shown in table 1.
Table 1. NZ Dotcoms since Nasdaq decline
The lesson for investors from the "tech wreck" over April is the importance of sticking to quality. Companies that provide the infrastructure behind the Internet are the real benefactors from the Internet and because they have more defensive earnings provide a lower risk technology investment than dotcoms. These infrastructure providers are known as "info-utilities" and include companies like Cisco Systems, IBM, Oracle, Sun Microsystems and locally Telecom NZ, Telstra and Cable & Wireless Optus. Investors should prefer companies such as these, or even better invest in an investment trust or index fund that holds a portfolio of these sort of companies.
There is a wide range of investments providing access to the technology sector these days. The first option many investors consider is to put together their own portfolio of technology companies. It is indeed possible to construct a portfolio of local and international technology shares. However, stock picking at the best of times is tough work - ask any experienced stockbroker or fund manager. Selecting which technology companies will outperform is more difficult than usual. It is a complicated and fast changing sector. How many of us truly understand what Cisco Systems does exactly?
The best way to invest in technology is through a tax-efficient and cost-effective fund with a diversified portfolio. We recommend our clients use the likes of the US listed S&P 500 Technology Index Fund which has a portfolio of the 98 largest technology companies in America and includes names like Cisco Systems, Microsoft as well as up and comers like BMC Software and Altera.
A more global approach can be achieved with UK listed Investment Trusts like Finsbury Technology Trust and Henderson Technology Trust while a more aggressive position can be obtained with the newly listed Amerindo Internet Fund.
It should not be forgotten that balanced equity funds like Anglo & Overseas, Foreign & Colonial and Fleming Overseas all have a healthy proportion of their portfolio in technology shares. Investing in a more generalised fund like this entrusts the decision for how much to allocate to technology with those who should know best – the fund managers.
With the rapid development of new technologies investors should keep one eye on their technology portfolio. Last century the Telegraph was the new technology, but along came the telephone and telegraph companies disappeared. Nobody knows what the new technology will be or whether it will enhance the Net or replace it. Investors need to be prepared to adjust their portfolios if the ‘big picture’ changes.
Despite the strong growth underlying the technology sector it is prudent to remain diversified and not over-commit to this sector. Technology companies account for roughly 20% of total world stockmarket value so investors could have anywhere from 5% to 20% of their portfolio in this sector.
Investors should continue to invest in technology but at the same time distinguish between market hype and the real world. Take a measured and balanced approach and invest for the long term.
Cameron Watson is the research manager at Craig and Co
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