The bursting of the dot com bubble in 2001 left many shareholders vowing they would never again invest in technology. But there is no denying the tantalising returns the sector has produced over recent years.
This summer, Apple (AAPL) became the first company in the world to reach a market capitalisation of $1 trillion with Amazon hot on its heels. Indeed, technology has been one of the top-performing sectors over the past decade.
The MSCI Information Technology index has delivered a hefty return of 28.2% over the past year alone compared to a return of 11.2% from the MSCI World. Over ten years, the MSCI Information Technology has delivered an annualised return of 14.9% and the MSCI World just 8.6%.
But the focus within the industry is regionally focused; big Silicon Valley names such as Facebook (FB) and Amazon (AMZN) or the fast-growing players in China such as Tencent and Alibaba get the attention.
That’s understandable given that almost 30% of the S&P 500 is made up of tech firms, and almost a quarter of the MSCI China. Meanwhile, the FTSE 100 is dominated by oil giants and industrial names, with technology accounting for a measly 0.6% of the index.
But the UK is a hub of innovation and there are tech opportunities in the region for those willing to look for them. Now could be a particularly timely moment to look for these lesser-known names as the recent market sell-off has caused concern about just how long the tech stars can keep shining.
UK Tech Stocks Offer Growth Potential
Leigh Himsworth, portfolio manager at the Fidelity UK Opportunities fund, says: “There are more tech companies in the UK than you may think, they are just smaller than the US and Asian giants. I think this is great news for stock pickers – with a bit of leg work, we can find companies with enormous potential further down the market cap scale.”
The fund, which has posted losses year to date but has annualised returns of 7.6% over the past three years, has around 8% of assets in tech firms. These include robotic process automation specialist Blue Prism (PRSM), which produces robots that can carry out monotonous tasks, on factory lines for example, as they can keep working tirelessly with no effect on productivity or accuracy. Blue Prism says this means employees can be freed up for higher-value work. The business reported revenue growth of 145% in the six months to 30 April.
Himsworth says the key to British tech success stories is finding companies that don’t already have an obvious large US competitor. He explains: “We don’t want a small UK search engine or a social media company – that’s been done already.”
Another favourite holding is GB Group (GBG), a Chester-based business which provides ID verification and fraud prevention software. It’s a lucrative area of business as companies are increasingly spending more and more on protection as the threat of cyber-attacks ramps up. GB’s software is already used by five of the top 10 banks in China.
Chris Ford, manager of the Smith & Williamson Artificial Intelligence fund, agrees that thinking outside the box is important. While Tesla (TSLA) and Google parent company Alphabet (GOOGL) are obvious investments in AI, for example, he is looking for opportunities in the finance, healthcare and media sectors.
He likes Relx (REL), which provides analytics to businesses in industries including law and science. Its LexisNexis product identifies patterns from huge amounts of data to help companies decide which actions to take.
Phil Harris, manager of the EdenTree UK Equity Growth fund, has around 10% of assets in technology companies. Among the portfolio of the four-star performance rated fund is an investment in video games developer Sumo (SUMO).
Big companies such as Microsoft (MSFT) and Sony (6758) outsource aspects of their games titles to the company and it takes a royalty on sales. Harris says: “The games software markets is growing at almost a double-digit rate, but this co-development space is growing even faster.” The Sheffield-based firm has worked on titles including racing game Forza, LittleBigPlanet, and Crackdown. The fund is down 4.2% over the past year.
Not All Investors are Bullish on Homegrown Tech
But Stephen Yiu, manager of the Blue Whale Growth fund, is more sceptical about the opportunity within technology in the UK. While there have been major success stories, he points out that a lack of ability to scale up means most of these companies end up getting bought out, with recent examples including micro-chip maker Arm Holdings and Imagination Holdings.
Meanwhile, a lack of innovation or investment can see former market-leaders get left behind as new competitors overtake them. Here he names accountancy software firm Sage as a prime example. Yiu says: “The new world is all about technology, data and artificial intelligence. We have had a few good names in the UK, but they all get bought and so we are left with a lot of poor companies instead.”
