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How to access the tech sector

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01/11/2015
The high price of leading tech stocks has left many investors wondering how to access the tech sector.

Many of the world’s largest stocks are technology companies. Their share prices reflect their dominance, for instance Apple’s share price today is £118.84. For many investors, this represents a preclusive barrier to directly investing in the company and even the wealthiest investors may view it as too high a price to pay.

Secondary markets

Michelle McGrade, chief investment officer of TD Direct Investing, recommends investors consider companies further down, or across, the supply chain.

She notes, for instance, 240 Dixons Carphone shares are the same price as 12 Apple shares. As the UK’s biggest smartphone retailer, investors stand to secondarily benefit from the success of Apple’s 6s and 6s plus and sales of other competitors, such as Samsung’s Galaxy series.

David Coombs, head of multi-asset investments at Rathbones, however is wary of seeking exposure via secondary stocks.

“If you do go the secondary route, be disciplined in your selection process. Every company on earth now uses technology, so it’s possible to broaden the definition of ‘secondary market’ as much as you like,” he says.

“Look for stocks that are profiting from the big themes in technology right now such as the internet of things, cyber crime and sensor technology and robotics.”

Coombs tips VISA, which has been a primary driver of the contactless payment trend. So far, contactless payment is yet to take off outside Europe, but the company is aggressively pushing the technology in North America and Asia.

If contactless payments are embraced in those markets, VISA stands to benefit significantly as the company gets a small cut of every contactless transaction.

“Another good idea is Tritax Big Box, a real estate investment firm. They’ve done very well in the last 12-18 months by leasing ‘dark stores’ to Amazon,” he says.

Expensive, not overpriced

Coombs says investors should not be deterred by the hefty price tags of major tech stocks. In fact, he believes a good tech company should be expensive.

“You should be careful when valuing a tech stock, if you use a typical value screen you’ll be kept out of the best companies,” he says.

“With tech, you need to be prepared to pay a premium for a quality growth company, and you need to consider what its price/earnings ratio will look like in three years’ time.”

Max King, portfolio manager of the Investec Multi Asset Protector fund, is likewise sceptical of arguments that tech stocks are overpriced. In fact, he notes many of the best opportunities in the technology equity market have been stocks that were dismissed as expensive, yet went on to deliver “phenomenal” returns.

“A classic example is Google, which was widely regarded as over-valued when it came to market 10 years ago, yet has multiplied in value more than 13 times since IPO,” he says.

“Think also of Facebook, which went from a start-up to a billion users in less than 10 years.”

King similarly warns against using traditional yardsticks to assess the ‘value’ of major tech stocks.

“The use of conventional valuation metrics is often a liability. The key to valuing tech stocks is to understand the potential market, the uniqueness of the proposition, the competitive threat, the scalability of the offering and the potential to monetise it,” he says.

Funds

Rather than buying shares in tech companies directly, investors could alternatively invest via funds.

Coombs believes most UK investors are best-served by buying collective investments.

“The best opportunities in tech are to be found in the small cap end of the market, where you may find the next Apple, Google or Facebook. Many of the largest tech stocks are well-franchised and thoroughly researched, so it’s hard to add value, Microsoft, for example, I would regard as an ‘ex-growth’ company,” he says.

“However, don’t buy small caps directly. As these stocks tend to be illiquid, trusts are the perfect vehicle for investing in them. The Allianz Technology and Polar Capital Technology trusts are recommended.”

McGrade tips the Henderson Technology Global fund.

“Apple is the [fund’s] top investment, and they also invest in the suppliers, competition and other emerging technologies, making it an attractive choice,” she says.

King favours more general funds with technology exposure, rather than tech-specific vehicles.

“Expert specialists often suffer from having their heads in the clouds rather than in the market place,” he explains.

“A potentially better option is to go for a general fund whose manager is not afraid to pay up for innovation when the potential justifies it.”

In respect of more general recommendations, McGrade tips the JPMorgan US Equity Inc. and Invesco Perpetual Global Small Cap funds.

“They both lean towards the technology sector and reap the benefits of growing companies and technologies,” she says.

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