Tech is back, says Schroders

And it''s only going to get bigger.
When it comes to clear and precise presentations about investment strategies, Michael Grant, the global technology head at Schroder Investment Management, is your man. He makes periodic trips back to Hong Kong, where he joined Schroders as an equities portfolio manager in 1990, to talk about investment in tech with both clients and the Fourth Estate. His events offer reliable and articulate insights into what fund managers in America and Britain are thinking about now when it comes to this once-sexy sector now laid so low.

With his buzz cut, slender three-button suit and square-rimmed glasses that are part money and part geek, he looks the part of a Generation X executive in a sleek television ad for a wireless company.

Last week he brought the Hong Kong news hounds up to speed on why technology – which we all thought was so twentieth century – will continue to add the most growth to an investor’s portfolio over the next decade. Currently, Schroders manages $34 billion in tech portfolios worldwide.

Grant’s first point is that investors need remember that tech is a cyclical phenomenon, and corporate spending on tech reflects corporate profitability, which is in turn dictated by business cycles. Second, that since the end of the Second World War, it has steadily grown as a share of United States capital expenditure, a trend that he says will continue over the medium term – or even sooner -- as US tech stocks’ 12-month valuations have historically risen on average 47% in the wake of easing monetary policy at the Federal Reserve Bank.

While the number of tech companies is quickly dwindling, creating awful headlines, Grant notes this is perfectly in line with precedent. He says the industry structure of the PC industry in 1984 is analogous to the automobile industry in 1900. Whereas the auto industry by 1920 had gone from nearly 500 carmakers to just a handful – just as the PC makers dwindled to five in 1989 – the size of the auto and PC markets had also increased. These few survivors nonetheless made more money than before, or than any other sector at the time.

Tech is the same, with networking continuing to dominate the market even if the number of companies dedicated to it falls to a handful. “It will take another 10 years to instil the infrastructure” and mentality in the US before this trend wears out, Grant says.

He foresees the US economic slowdown turning a corner now, gaining steam into a new recovery next year. He is bullish on a range of tech sub-sectors, from computer services to software to wireless (wireless is “where the PC business was in the late 1980s despite problems at Nokia”), but neutral on semiconductors and negative on computer hardware or communications equipment, except for data networking.

Grant also argues (of course) that an active manager is necessary to avoid the pitfalls of tech. He notes in the 1980s, the biggest market cap tech plays were dinosaurs such as Digital Equipment and Data General; passive investors would have had very little exposure to the likes of Intel and Microsoft. Today an index play will expose an investor to legacy businesses, the equivalent of buying a lot of IBM in 1985. “Winners change. Benchmarks miss the best opportunities,” Grant asserts.

His current top 10 holdings include AOL Time Warner, BEA Systems and Check Point Software; his biggest underweights include Microsoft, IBM and Intel. Companies that were recently trendy such as Nortel, Lucent and Cisco are unlikely to see the amazing growth of the past three or four years, he adds.

Dismally for Asia, Grant says this region is largely missing the boat. Except for Taiwanese companies, almost none are globally competitive – and the Taiwanese are too focused on the PC. “The rest of Asia has some good tech companies, but versus global peers in terms of quality and valuation, inevitably you go elsewhere,” he says. Japanese companies that could be players are hampered by lack of corporate expansion or are embedded in bigger, problem-plagued concerns. Grant has a 10.6% weighting to Asia Pacific, compared to a 9.3% weighting for Israel. Europe fares only a little better, given its size, with a 17.5% weighting, leaving the lion’s share, 62.7%, for stocks in the US.

Overall Grant gave an excellent presentation that should get investors fired up about tech. The pity is that in today’s market, investors are too squeamish to take advantage of even bargain prices. Schroders is preaching tech but flogging a guaranteed fund with one slice in Grant’s tech portfolio and the rest in Treasury bonds. Its target customer is the conservative investor whose bank deposits are getting squeezed by falling interest rates, or the punter who was recently burned but wants to “sleep at night and still catch the rebound”, says John McLaughlin, Schroders’ head of structured investments.

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