“Cloud computing” will be an increasingly important driver for the technology sector, according to Ben Rogoff, the manager of Polar Capital’s Technology investment trust. The concept, where processing power is supplied remotely via the internet, will benefit companies such as Apple, Google and Cisco Systems. However, Rogoff expects hardware firms – his biggest underweight bet – to suffer.
“New technology will be driven by the move away from local area networks and towards wide area networks,” says Rogoff. “It is like electricity consumption – someone else produces the electricity and distributes it to the end user.
People misunderstand IT budgets; 40% of budgets are people, and using wide area networks turns IT from a fix-ed cost into a variable cost.”
Rogoff points to the growing use of Google Mail and netbooks – low-end laptops designed to access web-based applications – as signs that cloud computing is gaining wider acceptance. “People are realising that they do not need a powerful laptop,” he adds. “All of the processing is done on Google’s servers. It is the way we are headed – the computers we use will become dumb devices.”
Another technology set to benefit from the shift to wide area networks is “smartphones” – products such as Apple’s iPhone which offer a range of functions, including mobile internet access.
Rogoff says penetration of the mobile phone market remains relatively low and other firms – including Palm, a brand that is “back from the dead” – may challenge Apple’s dominance.
Apple, Rogoff’s biggest holding, on February 24, is a good example of why technology stocks displayed resilience in recent months – the Dow Jones World Technology index fell just 2.5% in sterling terms, compared with a fall of 9.2% for FTSE World, in January. Investors looking for firms with strong balance sheets and low gearing are being drawn to the sector – Apple has about one-third of its market capitalisation in cash, while Google has 14%. The two firms account for about 10% of the Polar fund.
However, Rogoff’s focus is increasingly on opportunities further down the cap scale, particularly in mid caps. The fund held 64% of its assets in large caps, 23% in mid caps and 13% in small caps last week, but he aims to get closer to his 40/30/30 model portfolio.
“I am disinclined towards large caps,” he explains. “IBM and Hewlett-Packard are extremely good places to park money while you are waiting for the storm to pass, but big companies are not going to benefit from the new cycle.”
Mid cap stocks in the fund include Polycom – an American video-conferencing services provider founded in 1990 – and Riverbed Technology, which supplies wide area network solutions to businesses from its headquarters in California. Both firms meet Rogoff’s criteria of being “solidly profitable businesses with 20-40% of their market caps in cash”, and contribute to the fund’s 70% weighting in American stocks.
Japan forms the next biggest geographical allocation, with 7-8% of assets under management. Britain accounts for just 3% of the portfolio, partly as a reflection of Rogoff’s bearish views on sterling. However, the fund has invested in some British winners, he adds, including Aveva – an engineering software prov-ider, whose share price fell from more than £15 last summer to under £5 last week.
“We sold it on the way down but we recently put a toe back in,” says Rogoff. “It is a good business and one that might be acquired.”
Despite a generally cautious stance on global stockmarkets, Rogoff is upbeat on the prospects for technology equities. He points to Feb-ruary’s Merrill Lynch Fund Manager survey, which showed that European inv-estors remain underweight technology.
“The important thing is that tech stocks have gone into this down cycle very unloved,” he says. “The price/earnings de-rating has already occurred, and spending on technology as a percentage of GDP has not participated. The sector will enjoy the upturn when it comes.”
Polar Capital Technology has performed relatively well against its peer group over the past year, according to data from Financial Express.
The trust fell by 21% in sterling terms for the 12 months ending February 20, compared with a sector decline of 37%, although the average was skewed by a fall of 65% for Ambrian Capital.
Simon Elliott, the head of research at Wins Investment Trusts, says Polar Capital Technology is an attractive investment on a 20% discount.
“When technology funds were launched, there was a lot of blue-sky thinking in the sector and they struggled in 2001-2002,” says Elliott. “In this downturn, you can see that the sector has changed massively and there are a lot of good tech companies – the world has moved on. For investors who want exposure, the Polar fund is well-researched and has a very experienced team.”