Uncertainty For Tech Sector In The Short Term
That's the assessment of Henderson's tech manager Stuart O'Gorman.
by Bharathi Rajan
"If the economy is going bad, a small cap tech fund is the last place you want to be. On average, small cap tech stocks have fallen twice as much as large cap tech stocks. Even if you have good, small stocks, the baby gets thrown out with the bathwater. A lot of small cap tech companies have good technology, but nobody is buying it at the moment. You have to get the big companies to buy your technology and get them to use it. Big caps are large and liquid, so investors prefer them in times like this," says the fund manager. MOSTLY BEARISH IN THE SHORT TERM As for the sector outlook, O'Gorman notes there are reasons to be both bullish and bearish on technology. Reasons for optimism include signs of a gradual economic recovery, stabilising capital spending, and more attractive valuations for technology stocks. However he points out the overall health of the sector is still highly dependent on the strength of a US-led global economic recovery. If for some reason US consumer confidence collapses, then the tech sector will be dragged down as well, says the London-based manager. Given the highly cyclical nature of the tech sector and the current risks to the global economic recovery - sluggish growth, corporate accounting scandals, terrorist attacks, and a possible war with Iraq - O'Gorman indicates that he's more bearish than bullish on the short term outlook for technology. And it's not just the poor macro-economic environment for technology that bothers him. He says there are also several problems within the technology sector that need to be addressed. They include: OVERWEIGHT LARGE CAPS, INTERNET & PRINTING COMPANIES Given the uncertainty affecting most of the technology sector, O'Gorman says the fund prefers companies that are cash generative, have high market share and practical expectations of their earnings. These companies should suffer less in a bleak environment, and more importantly, be well-positioned for a tech sector recovery. "You want to skew your investments towards companies that have more modest expectations, and preferably ones that have a strong franchise and a high market share. These are the companies that can better withstand the pricing pressure that we will see more and more in the tech sector." According to him, examples of companies with growing monopolies or high market share include large-cap names such as Microsoft, Dell, Nokia, Samsung Electronics and Hewlett Packard, and Lexmark (manufacturer of printing solutions), Expedia (online travel company) and Arm Holdings (semiconductor company), on a small-to-medium cap level. "We have quite a lot of exposure to printing companies like Lexmark and Hewlett Packard. They lose money on most of the printers they sell, but they make money on the ink cartridges. These are cash generative and 120% of HP's profits come from printer related business. We prefer Lexmark to HP because there are some accounting issues for HP and they also have exposure to the PC business. We own Dell because they are beating the competition." ANNUAL RETURNS OF THE HENDERSON GLOBAL TECHNOLOGY FUND VS BENCHMARK GEOGRAPHICAL ALLOCATION (as at 30 September 2002) US - 59.5% Top 10 Holdings (as at 30 September 2002) Microsoft Corporation
BEARISH OUTLOOK FOR TECH
IN THE SHORT-TERM
SAYS HENDERSON GLOBAL TECH MAANGER
(Fundsupermart) The small-cap biased technology fund underperformed substantially in 2001, returning -50.1% against the benchmark's -10.7% (see annual returns below). According to fund manager Stuart O'Gorman, the disparity should be seen in perspective. He explains that unlike other tech funds, Henderson Global Technology (click here for factsheet) is benchmarked against the FTSE World rather than a concentrated tech index like the Merrill Lynch 100 Technology. This means that in bear markets, it's almost impossible to beat the index, since the technology sector tends to significantly underperform the broad equity market, and small cap stocks tend to fare the worst within the tech sector.
O'Gorman says before a rally can take place, earnings estimates for this year and 2003 need to come down. That's because the current projections by analysts are too high. They assume technology spending will rebound next year, and this isn't likely to happen. O'Gorman thinks that if earnings estimates are reduced to reflect this, then tech stocks will become cheap enough to entice investors to get back into the market. "I think that once you get through the earnings then you might have a rally later in the year. But it does depend on where the US economy goes from here. If consumer confidence collapses then all bets are off and it'll be a downward spiral. I think we could get a rally later on, but we need clarification on the economy. But we should caution that its best not try and call the bottom."
Source: Henderson Global Investors (Singapore) Limited
*Benchmark is the FTSE World Index
CUMULATIVE PERFORMANCE* OF HENDERSON GLOBAL TECHNOLOGY FUND VS PEER FUNDS AS AT 11 OCT 2002
Source: Standard & Poor's Fund Services
*Returns based on bid-to-bid prices, returns reinvested, and in Singapore dollars.
**Year-to-date figure as at 11 Oct 2002
Japan - 6.0%
Korea - 5.1%
UK - 4.7%
Taiwan - 3.9%
Finland - 3.5%
Netherlands - 3.3%
France - 3.0%
Ireland - 1.3%
Israel - 1.2%
Singapore - 1.2%
Norway - 0.8%
Switzerland - 0.8%
Belgium - 0.5%
Canada - 0.5%
Sweden - 0.4%
Germany - 0.4%
Cash - 3.9%
Nokia
Samsung Electronics
Expedia
Hewlett Packard
Lexmark International
ARM Holdings
Symantec Corporation
Dell Computers
Nippon Telegraph & Telephone