According to the New York Times, venture capitalists want to put more money into technology investments, after parting with a mere $14 billion in 2009, compared to $36 billion in 2007.
Technology start-ups are doing everything from speeding up the Web to making office photocopiers more iPod-like, and as the article notes some will go public:
Venture capitalists make most of their money on initial public offerings of the tech companies they invested in.
But in each of the last two years, fewer than 10 companies have gone public, compared with 86 in 2007.
The new year could finally break the logjam, bringing more than 50 tech offerings, investment bankers say. That could include prominent companies like Facebook.
That is welcome news after a dark year, Mr. Dhaliwal said. “The mood is pretty optimistic, in that way that if you’re nearly killed in a car accident you’ve got a renewed positive outlook on life.”
Good news if you’re an investment banker, but what if you’re an investor?
Passive investors in equities won’t worry about what’s flavor of the month – they’ll just keep dripping money into the market. Index tracking will win against most ‘clever’ strategies.
However if you’re a UK reader, you might not have much exposure to technology stocks via the UK indices.
The UK has a couple of excellent companies like Autonomy, ARM and boring old Sage, but then there’s a long way down to the likes of Blinkx.
In comparison, most US trackers will have more money in technology stocks, including big names like Apple and Cisco.
Does it matter? Maybe not. Anyone who rode the tech bubble in the late 1990s only to see it burst might think they’re best out of it. Also, plenty of companies will benefit from technology, even if they don’t create technology. So your portfolio is still exposed to any advances.
Personally, I think technology is too important to ignore, and in early 2009 I judged it cheap, too.
Most of the big technology companies had stacks of cash, and were trading at multi-year lows. Everyone still remembers the dotcom crash, but today’s companies are the hugely profitable survivors.
I also think we may be on the cusp of a new technology cycle (my day-to-day business is linked to the tech sector, for what it’s worth). I’d rather be wrong about this when shares are still cheap!
As a result, I decided to allocate a little extra money in March last year.
How to invest in technology
If you also want to invest more in technology, there are several different ways.
Buy technology company shares
You could invest more money in the big UK names like Autonomy or ARM, or you could buy US stocks like Apple and Google. Obviously investing in individual stocks is the riskiest strategy.
Invest via a fund or investment trust
I wouldn’t bother looking at funds, which are often expensive and can be restrictive. I prefer investment trusts, and got my extra exposure via the Polar Capital Technology trust. Beware: It’s up about 80% since then!
Technology ETFs and index trackers
There are no technology ETFs issued by iShares, my preferred UK ETF provider (yet it finds room for water, timber and Shari-ah ETFs!) Legal & General provides an index tracking fund following a basket of 100 technology shares, though with charges of 1% a year, it’s expensive for a passive vehicle.
Track the Nasdaq
This is probably the easiest way for a private investor to ‘bolt-on’ extra technology exposure if you’re comfortable buying a US-based ETF. (If you know of a UK-listed Nasdaq tracking ETF, please let us know below).
Note: Technology investments are very exposed to the dollar, which will add currency risk to your portfolio. (That is, your technology investment may go up or down depending on the value of the dollar).
How much extra should you invest in technology? That’s the $37 billion question!
Personally, I put just 2% of so of my equity allocation into the Polar Capital Trust, which I intend to hold until the next ridiculous bubble for the long-term.
(Image by: Plutor
This is all good advice.
Tech has been pretty much ignored over the past ten years. The dotcrash is still fresh in investor’s minds. But, as you mention, the innovation has gone on unabated. Sooner or later the investments have to catch up to the innovation.
When, I may add, is part of that $37 billion quesions.
I started my first job at around the top of the dotcom bubble – they had an IFA advise us about how to choose funds with the pension provider we used, and he convinced my younger clueless self to put a bunch into the tech fund they had. That worked out well.
As I recall the reason he gave was something to do with the fact that I worked in a technology company. This seems like curious advice – my entire future income is dependent on this sector already; and I guess I’d ask the same of you – surely it would be better to diversify away from the sector you work in?
Awesome work on that 80% return, in any case 😉
Those piles of cash are all well and good but I’d be more inclined to invest if they returned some of it to shareholders, rather than just buying each other out all the time.
EQQQ is a London-listed ETF tracking the NASDAQ-100, closest I could find, and it’s from Powershares whose ETF info website is a pile of rubbish.
That’s a good question. It’s hard to know how much we should invest in a given sector.
@George @Matt – I was originally going to research the tech allocation in the FTSE All-Share versus various US indices, then I remembered I was supposed to be writing slightly shorter posts! I’ll look to do a follow up soon.
That’s not to say that the amount an American investor would put into tech is some Holy Grail, but at least it will firm up the comparison.
@Lemondy – Your experiences around 2000 mirror mine, a little… I’ve mentioned before how an online fund supermarket tried to put all my initial stock market money into a technology trust at the height of the boom! But I didn’t follow the advice (out of indolence, not wisdom) so I’m afraid I fared a little better than the younger Lemondy – entirely through luck and laziness!
Thanks for sourcing the NASDAQ ETF, awesome stuff. I’ll take a look at it later. I even more rarely stray from iShares offerings after discovering that the Lyxor ETFs are French-based and thus subject to unusual taxes, even if I recall correctly, if held in ISAs. (I believe that’s going to change with new legislation at some point. In fact, surveying the different ETF providers including a look at their websites, as you mention, might make a good article).
I had my eye on Polar Capital recently, but can’t help feeling it is no longer the great value it was a year ago. Same feeling about Autonomy, which is up 60% in a year and trading on a huge price-earnings ratio.
In what circumstances might Technology investments suffer a correction?
The thing that I have wanted to get into for a while technology-wise is the video games sector. But have not been able to find anything that I really like in the UK (or the US for the matter!) – in the end I plumped recently for Nintendo (and no, I don’t even own a Wii) which seems to be pretty much universally disliked at the moment which always gets me interested. Some of these big games companies are almost like ETFs as they’ve got their fingers in so many pies.
@SMSF – Ah the videogame sector, I could write a sequel article on that (and a sequel would be appropriate, since that’s what 80% of games are). Games companies are extremely risky investments over even the short-medium term in my view, and over the long-term – yikes!
Do you know there were 15 listed games-related companies on the London market in the mid-late 1990s (the Lara Croft years of Eidos etc). Now there’s just GAME, a not veru high tech shop!
The Lindsell Train Investment Trust (which I like) holds Nintendo as its games pick, but I’d be wary about the managers strategy of thinking that games brands are enduring like chocolate or drinks (it also holds Cadbury and Diageo, for instance). I remember when Sega and Atari made video consoles, too. It’s a precarious business!
Yeah I’d agree video games are risky: if you want to go into it I think it has to be a) big cap (for diversification of revenue streams) and b) medium to long term (because of the earnings cycle). Nintendo also has the advantage of paying you a quite decent dividend while you wait.
It’s such a huge and growing sector though it seems inconsistent to be in technology and not in games. I guess if you’re really risk averse but still want to be in there you can just buy Activision, Electronic Arts, and Nintendo, and that’s almost the equivalent of a ‘video games ETF’.
Along with the video games sector the US dollar is also pretty universally disliked at the moment so some USD sensitivity probably aint a bad thing – taking a bet on both probably isn’t such a bad idea. Actually the only currency that’s hated as much as the USD is sterling … (-: The general UK gloom is starting to look attractive to me from sunny Sydney given a 30% fall of sterling v the $A (lived in London for 20 years until recently).
.-= @SMSFs on: The volatile world of the video games investor =-.
@SMSF – Did you see the Game group results today? Pretty dire. Like for like sales down double digits!
As for your Aussie dollars, you lucky man! 🙂 If I was looking to buy shares and I had Australian dollars to spend, I’d consider backing up the truck on UK equities.
In case you missed it, I recently made the case for UK shares, and currency was one of the reasons.