Technology shares could be set for a good run in the next few years.
I went to a presentation given by two technology fund managers this week, and guess what? They were both very excited about prospects for their sector. Now, there's a surprise!
Perhaps I'm being a little harsh. Sure, I wasn't surprised by the managers' conclusions, but I was impressed by some of their arguments. So I reckon now might be a good time to return to the tech sector.
Broadband
Much of the sector's current potential stems from broadband. Ben Rogoff, manager of the Polar Capital Technology Trust
(LSE: PCT)
, told journalists that 70% of US homes are expected to have broadband by the end of the year, while in the UK, it'll be 50%.
The widespread adoption of broadband has enabled several other technologies to take off including the delivery of software by the web and VoIP (internet telephony). Rogoff believes 10% of US cable customers will be using VoIP by the year end.
3G mobile technology is also finally making an impact. Rogoff claimed that 3G will have achieved 10% penetration worldwide by the end of the year. Rogoff likes to invest in technologies that have just hit the 10% mark; he sees that as an important tipping point. Content providers could be the best way to play the 3G trend.
Under-loved
Rogoff also thinks technology is an under-loved sector. He cited a recent survey by Merrill Lynch which suggested that your average fund manager is more than 20% underweight in technology right now. (In other words, the average manager owns a lower proportion of technology shares in his fund than if he were just tracking the market.)
For all these reasons, Rogoff reckons we're at the start of "a stealth tech boom."
On the downside, some investors may be worried by recent troubles at US tech giants such as Dell
(NASDAQ: Dell)
and Intel
(NASDAQ: INTC)
. The crucial point here is that older technology companies may be burdened with "legacy" products such as the simple PC where growth prospects may not be that great.
Younger tech companies look more attractive. One example on the London market is Renesola
(LSE: SOLA)
, a Chinese company which reconditions scrap silicon wafers from the semiconductor industry. These recycled wafers are then used in solar energy equipment.
Renesola is already in the black and made an operating profit of $5.2m (£2.8m) in the first half of this year. It looks like there's lots of potential for further growth, so I can understand why the company is Polar's largest holding. On the other hand, Renesola's market cap is now £142m, so it doesn't look stunningly cheap at first glance.
So what might spark a tech revival?
The other fund manager at the presentation, Michael Bourne of the Finsbury Technology Trust
(LSE: FTT)
reckons it'll be merger activity. He highlighted recent bids for Fibernet
(LSE: FIB)
and Radstone Technology
(LSE: RST)
.
I think he could be right, but the big risk is that the market as a whole takes another tumble. If shares are hit by an economic downturn or fresh Middle Eastern wars, I'd expect tech shares to fall faster than the market as a whole.
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