Rules for investing in tech

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Good Returns editor Philip Macalister outlines some of the reasons for investing in technology and some the rules people need to heed.

Monday, May 29th 2000, 12:00AM

by Philip Macalister

Technology is not new - in fact astute investors have been focussed on this sector for some years.

The change is that people have suddenly realised the impact technology is having on business and they have seen the astronomical returns that have been achieved by investing in this sector.

Getting tech expose to the tech sector is on the minds of most investors and advisers these days. There is a general acceptance technology is playing a fundamental role in changing the way the global economy operates. That is it is being used to lower costs, increase sales and consequently improve bottom line earnings.

One of the difficulties facing investors is working out what part of their portfolio is already in tech, and how much, if any, should be invested in specialist tech funds.

The definition issue is particularly difficult as many industries or businesses have been reclassified, and tech has become so enveloping. For instance, a chip maker used to be called a manufacturing stock, now its tech. Likewise, a telecommunications company or a cable tv operator is now a tech stock.

Using the broader definition of telecommunications, information technology and media, tech is a big sector. Under this description the New Zealand sharemarket is tech laden with the likes of Telecom, Sky TV, and Baycorp. On top of that there is a small portion of the market that is specialist tech companies from the bigger groups like Advantage through to the tiny dot.coms, E-Force and Beauty direct.

The important point is the impact technology is going to have on investment returns.

Armstrong Jones chief investment officer David McClatchy says technology will have an impact on the historical earnings of companies. He says that over the past few years global share market returns have been much higher than their historical average, due in part of the unprecedented US bull market. However, he expects as global economic growth slows the level of returns will fall closer to their "normal" level.

The important difference though is normalised returns are likely to be higher than in the past because of technology.

Recently all the attention has been focussed on the Internet and its dot.com stocks, however following the shake out of the tech sector in April investors have made two fundamental shifts in their approach to technology.

Firstly they have recognised the need for quality, that is companies which have a good business case, sound management and strong franchise or market position.

Secondly, there is a growing awareness technology's impact isn't just on those companies which operate in that area, rather the so-called old economy, or smoke-stack businesses are adopting technology to lower costs and improve their bottom line.

This has lead to a convergence between the so-called new and old economies.

BT Funds Management portfolio manager David Mills says managers are still trying to come to grips with the "tech gyrations".

"The overall view is we still believe in the productivity-driven low inflation environment. The US Federal Reserve is clearly trying to take the excess heat out and that is causing some compression of the multiples of long duration stocks.

"This is occurring despite accelerating fundamentals. Clearly the market got a bit ahead of itself in February and the work-out from that is still occurring."

The technology wave has also coincided with a fundamental change in the way investments are packaged up and promoted to investors. Instead of the traditional, broad geographic international equity funds, theme or sector funds are being born.

While the concept is not new, the momentum of the concept is increasing and more and more funds are being provided in this manner.

Investec Guinness Flight managing director Royce Brennan says people are approaching their investments from a thematic angle these days as that is one way they can better understand them.

"They see something happening and ask how they can be involved in it."

He says they are bored with the regional investment approach to investing as it is so hard to relate to.

Part of the problem in the US and overseas is that research houses like Morningstar and Micropal have constrained the market by trying to put everything into little black boxes.

"Investors couldn't care less about Morningstar and Micropal," he says.

Brennan says the Wired Index fund is an example of the type of product investors now want. "Basically it's a global equity portfolio which has a very distinctive theme."

There are a number of simple rules about investing in technology

• Be prepared for volatility.

Brennan says in the old days much of the volatility investors had to cope with was a function of currency movements.

"There's not a lot of volatility in currency now," he says. "The volatility has moved into the stockmarket."

He says the volatility has been amplified in the tech sector as investors are not sure which companies or technologies are going to succeed. The general trend is that the take up of a new technology is overpriced, then it is scaled back which undermines the share price. This is a trend, he predicts, which will go in waves.

• Take a medium to long term approach to the sector

Because of the volatility investors need to take a long term approach, and dollar-cost average into the sector.

• Make sure your portfolio is not top-heavy with tech. If you are going to buy into a tech fund, check to see what portion of your investments are already in this sector.

The case for having technology in a portfolio is quite compelling, but the immediate question people ask is this: is it too late buy into the sector?

According to Brennan the answer is no for two reasons. The take up of technology is still in its early phases, and the take up isn't going to something that will be smooth. Clearly then, the market in the past two months has hit a rough spot.

Fund/ Service	Fund type	Manager	Distributor	Active/ Index	Benchmark
TechStocks	NA	TechStocks	TechStocks	Active	NA
TIME fund	Aust unit trust	BT Funds	Financial Planners	Active	MSCI-BT TIME
Wired	UK unit trust	Investec Guinness Flight	Public Trust	Index	Wired
Henderson Technology Trust	UK listed investment trust	AMP subsidiary Henderson	Craig & Co Sharebrokers	Active	FT
Technology Select Spider	US listed share		Craig & Co Sharebrokers	Index	S&P 500
NZ Funds		Wellington Investment Managers	Money Managers or Lodestar	Active	Goldman Sachs Tech
HCM Global Technology Fund	UK listed investment trust	Henderson, HCM and K&S Global Inc	Financial Planners	Active

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