Future of technology sector in doubt as assets dwindle

Jupiter has become the latest group to merge away a technology fund as assets in the sector continue to dwindle.

The £28m Jupiter Global Technology fund will be merged into the Global Managed fund next month if unitholders approve the plans.

This will take the number of funds in the Investment Management Association (IMA)’s Technology & Telecoms sector to 10. It also raises questions about the viability of the shrinking peer group.

In November 2008 M&G announced it was to merge its Global Technology into Global Growth after assets dropped to £13.7m. The merger officially went ahead last week. In 2004, Aegon closed its fund after two decades running money in the tech space.

When the IMA created the sector in 2001 it had £2.57 billion in total funds under management. Today the total is under £450m and the size of the average fund is £53m, excluding telecoms funds. In 1997 there were only three tech funds serving the retail market, run by New Star, Henderson and Scottish Equitable, which later became Aegon.

The collection of technology vehicles mushroomed as the tech media and telecoms (TMT) bubble in the late 1990s began to build and a rash of “me-too” funds came to the market. There were about 35 tech funds at the height of the boom, just before the bubble burst in early 2000.

The IMA says in general the lowest number of funds a sector should have is 10, so the tech sector remains viable.
The Performance Category Review Committee (PCRC) makes the decisions relating to each sector on a case by case basis, but has not said anything yet about what will happen to the peer group if it gets any smaller. It seems likely that if it did shrink further, pure technology funds would be integrated into the Specialist sector to sit alongside its mix of offerings including Latin America and biotech.

Jupiter claims the closure of its technology fund is in the best interests of unitholders, who will be able to get their exposure to the asset class through the more diversified, broad-based Global Managed vehicle. If Jupiter thinks this is the best option for its investors, why should any investors choose a pure tech fund over a broader product that includes some technology stocks?

Stuart O’Gorman, the manager of the £160m Henderson Global Technology fund, says the complex and evolving nature of the tech industry means there will always be a need for specialist managers.

“There is no-one in the [fund management] industry with 10 years of experience in technology – they were all sacked when investors fled the sector [after the TMT bubble burst],” he says.

“What is there to know about the oil sector? It just depends on the oil price. Getting the stocks right in tech matters much more than getting the big macro calls right.

“The sector changes a lot more than many others, and these changes are harder to understand,” he adds. He uses the example of changes ­affecting the competition between rival companies, such as the degree to which “smart phones” such as Apple’s iPhone might affect Microsoft’s
PC sales.

O’Gorman says one problem for generalists such as North American fund managers is that they may misunderstand the dynamics of competition by focusing on one region rather than taking a global view.

It is crucial to understand this sector, he adds, because of its size and importance. Technology companies make up 18% of the S&P 500. Between December 31, 2008, and March 11, 2009, the S&P 500 Information Technology index fell 5.54% compared with a much sharper 20.14% fall in the S&P 500.

“Tech is the biggest sector with the cleanest balance sheets. For example, Apple has 35% cash on its balance sheet, and Nintendo has 40%,” ­O’Gorman says.

In a recessionary environment technology companies tend to fare better than other sectors in his view. Firms are unable to cut their technology budgets as much as they can cut other budgets, such as travel, the manager says.

In addition, falling prices throughout the sector are common and enables technological gadgets and gizmos to maintain their appeal among consumers. “The tech sector is used to prices falling all the time,” O’Gorman says, pointing to the Apple iPhone, which has come down significantly in price since it was launched.

This characteristic in particular makes technology stocks a defensive play, the manager argues. “The things that lead us into a bubble do not lead us out. If the economy gets worse, tech gives more downside protection than any other sector,” he adds.

However, these positives are being overlooked by investors who continue to ignore the unloved sector. Technology fund managers would argue this signifies it is a perfect time to invest. “Tech funds are shutting, everyone hates the sector, and usually if retail investors hate it that means it is a great sector,” O’Gorman says.

He expects the number of funds to fall further until there are just five in the IMA peer group. “Small funds never come back – the big institutional investors can’t deal with the small ones. These funds really will start to die now,” O’Gorman says, adding that funds under about £20m in size are generally loss-making.

The two largest funds in the sector by far, Henderson Global Technology and New Star Technology, together run two-thirds of its total assets. With the Henderson-New Star deal due to be finalised in the second week of April, it seems unlikely the newly merged firm will keep both tech funds open. If the two vehicles merged they would have a total of £315m under management.

O’Gorman says the IMA sector does not hold much weight as far as he is concerned. “The peer group has been flawed for ages. You have telecom funds, European and UK tech funds competing against each other. We compare ourselves against a Morningstar peer group and the MSCI Technology index. There are other places people can look for meaningful comparison,” he says.

IMA Technology & Telecommunications