Will tech investing come in from the cold with the Polar Capital Technology Trust?
If the UK tech sector was a country, it'd be Belgium. You could name a couple of native success stories, but the stars hail from elsewhere.
That's not to forget Autonomy (LSE: AU), the FTSE 100 giant that's on a tear, or its Cambridge neighbour Arm Holdings (LSE: ARM), which dominates mobile chip design.
But by and large, UK companies are minnows, also-rans, start-ups, and plodders.
Google, Apple, Nokia, Sony, eBay -- nearly all the big players in technology and most of the excitement is overseas, especially in America, whose NASDAQ is the Holy Land for tech devotees.
If you want to invest in these companies from the UK but don't want to buy specific stocks, you're not overburdened with choice. There are only a handful of London-listed technology investment trusts and UK funds, plus an ETF from Deutsche Bank (XS8R) -- a far cry from a decade ago.
Contrarians should welcome this disinterest. Investing in hot sectors is seldom a good idea -- ask anyone who bought commercial property in 2007.
Revulsion at investing in technology has given way to disdain. Next stop rediscovery?
Underweight and over there
Personally, I bought the Polar Capital Technology Trust (LSE: PCT) last October, run by veteran technology investor Ben Rogoff.
One reason was the sector's underweight representation in the UK. If technology booms again, our indices won't feel it.
Another reason -- believe it or not -- is rock solid balance sheets. Thanks to years of caution and paying low or no dividends, big U.S. tech companies are awash with cash.
Back in spring, Fitch Ratings estimated the U.S. tech sector held $260 billion in cash. IBM had $13 billion, Google $16 billion, Microsoft $21 billion, Apple $26 billion and Cisco Systems $31 billion -- almost a third of its market cap.
Some have been urging these companies to pay better dividends -- Microsoft and Intel began paying out their hoards a few years ago. Others want to see acquisitions.
However the cash is deployed, it makes technology companies a more attractive proposition than debt-ladened manufacturers and retailers.
Also, despite their solid balance sheets, many technology companies have been cutting costs and jobs like any other. As the technology sector is inherently cyclical, its constituents are used to slumps (another reason why they hold plenty of cash).
Tech looks set to emerge from the downturn leaner and meaner despite not going through so much pain, at least so far.
Growing for it
Another reason to favour technology at present is it's synonymous with growth.
While the slowdown of behemoths like Microsoft and IBM has shown that even tech companies eventually become cash cows, the sector as a whole is almost by definition innovative, with new companies and opportunities constantly emerging.
Without the tailwinds of record global GDP and generous dollops of leverage, the companies and sectors that set the pace before the bear market will struggle to grow earnings in the same way anytime soon. For companies like banks, miners and property developers, rebuilding balance sheets and staying alive is the name of the game.
Technology companies offer their customers ways to cut costs and boost productivity, which could play much better in the deleveraged economy of the future than in the cheap money era we've passed through.
Genuine growth shares are often favoured in slow environments, which makes technology a rich hunting ground. And all that cash should provide some downside protection should the recession prove prolonged or especially savage.
A new, new era?
Finally, a more speculative attraction. Polar Capital's Ben Rogoff puts it this way:
"The reason we are so upbeat is entirely secular, based on a belief that a new technology cycle is unfolding. […]
The basic notion behind what we dub the 'distributed computing' cycle is that it is no longer necessary to compute locally now that bandwidth is plentiful and cheap, thanks to the advent of Internet protocol (IP) and telecom deregulation."
It may sound like dotcom gobbledygook, but what Rogoff is saying is that due to the Internet, computing technology is moving off our desks and into data centers.
From a consumer perspective, instead of loading Microsoft Word or Outlook on a PC or playing a game on Xbox 360, we'll use Web applications and play games running on distant machines.
From a corporate point-of-view, it will mean a return to the 'dumb terminals' of several decades ago -- except those terminals could be anything from mobile phones to a bank network.
The trend is going that way, but whether Rogoff is right to say it means a new technology cycle is obviously uncertain.
Technology has previously followed cycles, however, and they've been mirrored in the markets.
A cool investment
In my view, Rogoff's investment trust looks well-placed to benefit either way. Priced at 183p and on a 15% discount, it includes holdings in most of the main players plus some interesting start-ups.
In his annual report to Polar Capital Technology shareholders last month, Rogoff argued tech's valuation multiple of 1.1 times the main market's was below its long-term average -- even excluding the bubble years.
Then there's all that cash. Strip that out and Rogoff argues that: "at recent lows the sector may have traded at its lowest ever relative valuation point on a cash-adjusted P/E basis."
Technology has had a good run since those lows, with the Dow Jones World Technology benchmark falling 5.5% in Sterling-adjusted terms to the end of April 2008, compared to an 18% drop for the Sterling-adjusted FTSE World Index.
But I suspect there's more to come as the recovery gathers pace and the economic landscape is reshaped.
Do remember that as most of its investments are in the U.S., any holding in Polar Capital Technology will swing in value with the U.S. dollar.
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Owain owns shares in the Polar Capital Technology Investment Trust.
