A full decade after the Nasdaq peaked and then toppled dramatically from investor favour, clearly the wounds of technology investors are still taking their time to heal.
Flows into technology funds are still very poor in most cases (at Henderson New Star we think we are seeing most of the net inflows into what has become over the years a sharply diminished sector). Yet this is despite the fact that technology as an investment has more recently beaten pretty much any investment outside of emerging markets and commodities, both of which are continuing to seeing massive inflows, despite their volatility.
So why has technology failed to recover its reputation? Perhaps because people still do not understand what drives the sector. Today's technology companies are perhaps still suffering, in investors' minds at least, from the reputational damage that came out of the dotcom bubble, when companies such as broadcast.com were purchased for at $5.9 billion by Yahoo without having ever turned a profit in its four year lifespan.
The continued unpopularity of technology encourages us. Indeed, many of the companies within the sector, both the consumer-focused firms and also the corporate IT firms, have continued to do very nicely without the support of retail investors, and emerged from the global recession in a position of relative strength.
In fact, consumer spending within the technology arena has held up much stronger than most analysts forecast, and better than in other consumer related areas. Firstly, there is a proliferation of compelling technology products in today's marketplace which are either helping to revitalise existing markets (e.g. netbooks, LED televisions, smartphones) but also others that are exploring hitherto uncharted markets, such as the Kindle and the iTunes Apps Store. Secondly, because of technology's ability to reduce prices of products whilst still producing faster and smaller internal processor chips such products are offering increasingly compelling value to cash-constrained consumers. This is not to mention the internet removal of retail middlemen across a number of products not just technology (Amazon, Priceline, Vistaprint to name a few examples).
In terms of technology business spending, while it is fair to say that corporate demand for technology items has been hit hard by the recession it was not hit as hard, or as sharply, as other capital goods areas. Technology spending has long been constrained since the collapse of the IT bubble so when it came to cutting departmental costs there was a lot less fat to trim within IT than in other areas. It is also worth pointing out that as IT spending has been delayed for so long, the cost savings and productivity improvements that firms can now get from upgrading their infrastructure are significant
Sentiment may still be against technology, but the sector has shrugged off the irrational valuations of earlier in the decade and what remains is much more attractive: namely well-managed businesses in growing markets and little or no balance sheet debt. The technology sector looks attractively valued when compared to most other sectors. For the same price to earnings valuations that the beleaguered S&P 500 trades at you can instead get a sector where most companies have healthy balance sheets, are generating significant cash flows and are set to benefit from pent-up demand following years of underspending.
Whilst there is little doubt that corporate spending will remain patchy in the year ahead, global technology appears to be one of the few areas with genuine growth potential. Perhaps this will be the decade when the technology sector is no longer thought of as the enfant terrible of the investment world, but finally comes of age.
Stuart O'Gorman and Ian Warmerdam co-manage the Henderson Global Technology and New Star Technology funds
