A diminished sector highlights the dramatic fall and failure to recover 11 years on. But investors can find exciting opportunities as technologies, with global reach, advance and proliferate.
It was just over 11 years ago that the technology bubble burst and ushered in the second most severe bear market in nearly 50 years. They were testing times for investors as the new millennium got underway. The constituent companies within the FTSE 100 saw more change taking place than at any other time, first as the rise of technology was reflected in new joiners, then as the collapse saw them replaced by more traditional businesses.
Anecdotes abound as to what it was like. Lastminute.com floated on the dying wave of euphoria at a price investors never saw again. Cheap money, made possible by central bank's pumping liquidity into the system to head off any disruption caused by the advent of the new millennium, fuelled a feeding frenzy in shares with no track record and only promises of profits. The story that says a great deal about the attitude of both investors and the fund management groups during this period happened in February 2000, just before the rout in technology, media and telecoms (TMT) stocks. More than half of net sales of unit trusts were in the technology sector. Fund groups were falling over themselves to launch funds, regardless of whether they had the requisite skills in some instances. Greed ruled in both camps.
While the fall from peak to trough in the three-year bear market that followed was quite severe at more than 50%, the headline figures understated the collapse in technology shares and in the funds that gave access to the sector. America's Nasdaq Index, which contained many of the new internet and other start-ups in this field, fell by more than 80%. Many companies vanished altogether.
This was a time when analysts had needed to invent new criteria to value companies that were miles away from generating profits. Earnings Before Interest, Tax, Depreciation and Amortisation (Ebitda) a popular measure of a technology company's ability to generate investor return. The fact that no profit resulted was immaterial. Little wonder Ebitda became known as Earnings Before I Tricked the Dumb Auditor.
Today the technology and telecoms sector within the Investment Management Association's classification system is a pale shadow of its former glory. Just eight funds qualify. Only six were around when the bubble burst. And while performance has been encouraging, the scars of that collapse that started 11 years ago are still visible in the longer- term performance figures.
By the end of the first quarter of 2011 sharp falls in the share prices of many of those companies that had been ramped up during the later stages of the 20th century had already taken place. Worse was to come, though. Invesco's Global Technology fund is still only about half the value it was 10 years ago. Even the best performing fund - Axa Framlington's Global Technology - is only up by about a third over this period.
True, shorter time-frames have painted a much more positive picture. This same fund, which has stayed at or near the top of the tables throughout, has doubled over three years, putting it comfortably above the average performance of 65% and ahead of the relevant index, which is 67% up. However, only during one of the five periods examined has the average fund performance managed to outstrip the index - one year. Over 10 years the average trailed significantly - up little more than 2% compared with over 14% for the index.
The fact that only two funds have been launched during the past decade, while several have closed or merged, also demonstrates the weight of recent history hanging over this sector. Yet technology as an industry has prospered and remains core to many of the developments that are driving world economies. It is not unfair to say that it was the way in which America mastered this sector during the 1990s that allowed it to grow its economy and stockmarket so much more than Europe.
The overriding question must be whether technology should enjoy a specific place in a growth portfolio. With only eight funds from which to choose, it is probably more difficult to justify inclusion, but this is a sector that demands specialist knowledge and skills from the managers that operate in it. Technology is also truly global, with the rapid advancement of techniques conferring advantage and value more rapidly than in more traditional sectors, such as mining.
Of course, many fund managers with global mandates would expect to include technology companies within their overall mix, but there is an argument for sticking with a sector still likely to grow faster than many and remaining full of traps for the unwary. Twelve years ago, when the TMT bubble started to inflate, valuations were chased to unrealistic levels. Although the mood is calmer, technology, which has changed lives during the past generation, still seems likely to deliver some of the most exciting investment opportunities.
BRIAN TORA Contributor, Fund Strategy
Copyright: Centaur Communications Ltd. and licensors
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