It's a funny old world. Twitter is currently valued at $43.98 a share, making it worth $24bn. By my calculations, that makes it worth a bit more than our very own British Aerospace, which is likely to make a £1.6bn profit this financial year. Twitter is unlikely to make any proper, taxable profits for some time.
However, my value and fundamentals-driven cynicism isn't entirely justified. BAE Systems is a hi-tech firm doing clever things, but its core customers are few and not very varied (the US and UK government) and both are spending less on defence. I think BAE is a decent bet as a value investor, but that's a separate issue. Twitter, on the other hand, is a classic growth story, surfing an astonishing wave that has only begun to build. The potential positives of harnessing a global social media network are vast.
To grasp this we need concepts such as the multi-scaling of power laws', where simple business products can suddenly hit not just hundreds of millions of customers but billions overnight. In this worldview (which is not one I entirely share, I must emphasise), conventional investment metrics are of little use. Business valuations suddenly become multiples of things like revenue estimates' and customer acquisition growth rates'.
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The cynics will no doubt be rolling their eyes now and muttering dotcom', but even I accept that we can be too cynical. Microsoft, Apple and Google all once stood accused of the same hubris. Yet all three have now become colossal cash-generating machines remarkable technology can sometimes produce remarkable businesses. And the technology sector has all the makings of a classic growth sector the sector you'd want to have some access to if you believe global growth will continue its slow but remorseless increase. You could argue that today's tech giants may be tomorrow's dependable defensive consumer firms (ie, Unilever and Diageo). Any hint of a slowdown has investors running for these names, safe in the knowledge that consumers will still buy their products even if spending is tight.
Might this eventually be the case for the likes of Apple, with its premium-priced consumer products, and Google's cloud-based services? I'd bet on my family continuing to spend on Apple products (especially the teenagers) and Google services, even if our budget started contracting. So I think some and I emphasise some' exposure to the tech sector makes sense, alongside the occasional flutter on some amazing firm that might just be tomorrow's ten bagger call the latter fun money'!
If you're willing to invest a little in the tech sector, you'll probably be forced into investing in the largest, most developed market, America. I'd use a fund that focuses on the bigger US firms with global reach, with some side exposure to the racy stocks of tomorrow. (I've included a brief guide to these new tech trends in the box on page 30, courtesy of a report from the HSBC Equity team.) But understand that these are absolutely not bargain stocks you are buying. Even the lowly rated' Google trades on 29 times current earnings, Microsoft (far from a bargain) on 14 times, Yahoo! 30 times, and Facebook on 102 times profits.
There are 41 technology-sector tracker funds in the US and the choice is growing by the month. All are easily accessed via your British stockbroker, so you may as well use an American fund. And because investing in tech is largely about capital gains, many of the administrative hassle around US tax treatment of dividend pay-outs melts away.
The biggest US tech exchange-traded fund (ETF) by far is State Street's Technology Select Sector SPDR (NYSE: XLK) with $12bn in assets. The ETF is up 20% this year. Its largest holdings consist of Apple at 14.5%, Google at 9%, Microsoft at 8.7%, IBM at 5.9%, AT&T at 5.8%, and telecoms giant Verizon at 4.5%. By contrast, the best ETF performer has a much sharper focus on internet firms alone. This is First Trust's Dow Jones Internet Index Fund (NYSE: FDN), which is up by more than 40% over the last year. The big holdings in this ETF consist of Google at 11%, Amazon on 8.7%, Facebook on 6.2%, Priceline on 5.9%, eBay on 5.4%, Yahoo on 4.9%, and Salesforce on 4.5% nary an Apple share in sight. So if you believe in the transformational network-driven power of US broadband-based tech, I'd start with this ETF although you should go into it understanding that the average stock in the fund trades at an eye-watering 31 times profits and 15 times cash flow!
If you'd rather avoid US markets, you can buy technology companies through European tech sector ETFs (Amundi and Deutsche have ETFs in this space). But it means you're buying into the rather less exciting European IT sector. Elsewhere you have the even-less-glamorous emerging-markets IT sectors (Deutsche db-X trackers or Lyxor for Asia excluding Japan), or the positively dull MSCI World InfoTech sector (covered by Deutsche DBX and Lyxor). In my view, the best bet for a London-listed ETF is probably the Source US Technology Sector ETF (LSE: XLKQ), which uses the S&P 500 as its reference index, and invests in the likes of Apple at 14% of the fund, Google at 8%, Microsoft at 8%, and IBM at 6%.
I'd also suggest you look at the three UK-listed investment trusts that operate in this area. The big face off is between Polar Capital Technology Trust (LSE: PCT), led by the enthusiastic Ben Rogoff, and RCM Technology's (LSE: RTT) phlegmatic West Coast-based Walter Price. Polar's fund is probably the more widely held by British institutions. It trades at a small premium to net asset value and has a bigger share of conventional bets on technology and the internet in particular. The RCM fund, on the other hand, has had a stellar last 12 months (it's up 71%), largely driven by its focus on a smaller number of bigger, riskier bets, including Facebook (5.2% of the fund), electric car group Tesla Motors (3.3%) and solar group SunPower (at 4.2% of the fund). It trades on a small discount to net asset value. Last, but by no means least, Katie Potts over at Herald Investment Trust (LSE: HRI) is the British alternative. Her widely admired fund invests in UK small-caps with a strong tech and media bias it's currently trading at a 16% discount, which seems a tad unreasonable given her record.
Nine big trends that will change the world
HSBC's highly rated equity strategy team dusted off its crystal ball in a recent report to work out what might be the next big thing in technology. In particular it focused on disruptive technologies': defined as "any innovation that is liable to revolutionise an industry and challenge the dominance of its incumbents", with a major focus on the convergence of "telecoms speed, data capacity and network effects".
The analysts warn that "the winners [in a disruptive technology] take many years to emerge and it is well-nigh impossible to identify them early Conversely, the losers tend to be both more obvious, and more obvious at an early stage". Quite.
Spotting the winners in the technology sector early on is incredibly difficult. But at least if you know where to look, you have a better chance of getting on board a trend early. The report pinpoints a long list of potentially disruptive technologies. I've pulled out some highlights here, many of which are developments that the big tech companies mentioned above are benefiting from, or are well-placed to capitalise on.
The internet of things
The "always-connected internet of things" will enable sensors and new interfaces to digitise the analogue world (ie, everyday devices will be equipped with sensors that enable them to share data with one another).
Cloud/big data/analytics
"Cloud computing is an all-encompassing concept used to describe a technology shift to centralised computing as a service Beyond services, cloud has implications for hardware, software, infrastructure, storage, security, and big data' analytics." You can read a lot more about big data' specifically in this week's cover story.
Mobile payment and near-field communication
This is about the rising use of mobile phones in making and taking payments. "A dramatic increase in the use of mobile devices for financial transactions is creating a complex new ecosystem."
Insurance telematics
Telematics is the use of black boxes' in cars to track individual drivers' behaviour. This "should lead to more accurate pricing as insurers rate individual risks based on detailed driving habits, and could result in significant premium changes for mis-priced drivers".
Flexible screens
"We expect competition to start shortly with the release of smartphones with curved screens. Apple, Nokia and HTC may find this new technology difficult to commercialise quickly."
Biosimilars
In the pharmaceutical sector, these will open the way to "more affordable generic' versions of highly effective biologics for severe diseases".
Stem cells
"Stem cells offer curative treatment for severe diseases that could previously only be treated supportively. In Korea, heart attack, degenerative cartilage and Crohn's disease patients [already] have access to regulator-approved stem cell treatments."
Fully automated driving
"By 2025, driverless cars will be in widespread operation, which could revolutionise individual mobility. This will enable people to drive until an old age; fuel efficiency will increase; and accidents will be reduced to close to zero."
Small mobile telecoms cells: This is all about handling the rapid growth in telecoms traffic. "Diminishing network efficiency gains steer focus towards small cells as a solution to the global mobile data capacity crunch'."
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