Money: E-eek! Techs plunge

By PHILIP MACALISTER

Less than a fortnight ago investors were scrambling for a piece of the technology sector action.

Those who bought may well be wondering if they are the biggest fools. Those who held back are probably thanking their lucky stars that their money is still in a good solid investment such as a bank or a well-diversified international equity fund.

The United States Nasdaq index, the international benchmark for the tech sector, has had a wild ride unprecedented in modern investment history.

The Nasdaq plummeted 12 per cent this week, to close below 4000 for the first time since January 31. Since reaching its all-time high on March 10, it has fallen 27 per cent.

If the fall itself is not bad enough, the ride in the market's day has been wild, swinging from big falls to big rises. In one trading session alone the market travelled 1040 points. The volume of shares traded has been huge.

Around the world, tech stocks in many other markets have been falling as well.

This, some would say long-overdue correction is one time New Zealand investors may be glad their local sharemarket lacks much in the way of tech.

As Tower Managed Funds equity manager Wayne Stechman says: "New Zealand has been left behind."

A survey of fund managers investing in the New Zealand sharemarket shows significant differences in the way the issue is handled and in the definition of a tech stock.

The general view is that an investor can take a broad approach and encompass stocks that are in the technology, media and telecommunications sector (TMT), or they can look for the pure tech plays.

Under the TMT definition, companies such as Telecom, Baycorp, Sky TV and INL are included. These stocks make up close to 50 per cent of the market's capitalisation. But Telecom, which accounts for about one-third of the total market, distorts this picture.

When it comes to pure technology plays, the market is made up of about 18 stocks ranging from Advantage and Force through to the tiny companies such as Beauty Direct and E-Force.

DF Mainland analyst Bruce McKay says the companies in this pure group have a combined market capitalisation of about $880 million, which represents 1.8 per cent of the NZSE-40's market capitalisation.

While it is small, it is growing, with new offerings in the pipeline including Walker Wireless, and Wilson Neill with RadioNet.

Mr McKay says that while our tech sector is small, it has outperformed both the Nasdaq and an Australian tech index run by Deutsche Bank.

This outperformance is likely to be clear when New Zealand fund managers report their performance figures for the quarter ending March 31.

Those who take a more aggressive approach to tech stocks are likely to have produced far better returns than those who ignore it.

One of the clear trends in New Zealand is that most managers ignore the pure-tech-play sector as it is too small, too volatile, and many of the businesses have questionable business plans.

AMP Asset Management equity manager Stephen Walker says he has looked at New Zealand tech stocks, but "we haven't seen anything in New Zealand which is worth investing in, besides Telecom.

"A large amount of it I would call speculative, especially at these prices."

Tower's Wayne Stechman takes a similar view.

"I can't find any value in any of them. Some are too small to be of interest to us."

Mr Stechman says Telecom is the biggest holding in his portfolio, and in total about 40 per cent of his investments are Telecom, Baycorp, INL and Sky TV.

He does not like to pigeonhole companies into the tech sector. Rather, he prefers to stick with the bottom-up approach of finding companies that represent good value. If it is a tech stock, so be it.

Mr Stechman attended a two-day Society of Investment Analysts meeting last week where most listed tech companies made a presentation.

"It made me think how speculative some of the stocks in this sector are," he says. "I feel quite comfortable we don't hold any of them."

Likewise, Colonial First State has a low-key approach. Chief investment officer Mike Gibbs-Harris suggests the tech bubble has burst.

The Tasman Shares portfolio he runs, which invests in Australian as well as New Zealand, has 9 per cent of its investments in the broader tech sector.

Mr Gibbs-Harris says if medical technology companies are included in the definition of tech, then 28 per cent of the Tasman Developing Companies fund is in this sector (nearly all Australian-listed companies).

"The technology bubble is looking as though it is ending," he says. "We like good, dull industrial companies now."

At the other end of the spectrum is New Zealand Funds Management - probably now the biggest institutional investor in the tech sector, holding significant stakes in companies including Strathmore, Advantage Group and Baycorp.

Likewise, AXA is starting to be more technology-focused. Chief investment officer Barry Lindsay says he holds Force (a cinema operator that will become a tech stock on Monday if shareholders agree to the purchase of internet service provider Ihug), and Advantage. More recently, unlisted company Wellington Drive Technologies has been added to the portfolio.

Using the wider definition, he includes shareholdings in Sky TV, INL, Telecom, Telstra and Pacific Retail Group as technology plays.

"The first group [the pure tech plays] represents 4 per cent of our New Zealand portfolios. The second group represents another 40 per cent [of which Telecom is 32 per cent]. Therefore, arguably 44 per cent of our New Zealand portfolio is tech/telecommunications related."

Mr Lindsay says AXA is spending time looking at businesses that can adapt to the internet and e-commerce.

"The banks impress us in that regard. We have been purchasing both ANZ and Westpac partly with that growth opportunity, business strategy in mind."

BT Funds Management's Andrew South is similarly keen on the broader tech stocks, with about half his portfolio tied up in the sector.

BT recently changed the mandate of its New Zealand fund so it can invest up to 10 per cent in Australian stocks.

Mr South says most of the investments on the other side of the Tasman have been in telecommunications.

The companies he buys are "quality defensive technology stocks," he says. That is, companies such as Telecom that have sound businesses and produce lots of earnings before interest and tax. He has no interest in the smaller dot.com companies based around the internet.

Armstrong Jones chief investment officer David McClatchy's broad-based approach perhaps sums up the importance of technology.

It works on the premise that technology is here to stay and will change the way the global economy operates. Instead of looking for pure-tech plays, Armstrong Jones hunts for businesses that have good management and are prepared to use technology to foster business and profits.

In many cases that will be an "old economy" business that "deconstructs" itself then rebuilds using technology. Baycorp is one example, but others include retailer The Warehouse and transport operators such as Mainfreight.

This approach does not mean Armstrong Jones ignores the small tech players. It has substantial stakes in businesses such as IT Capital and Advantage.

Mr McClatchy says he has to keep talking to the companies at the smaller end of the market to find out what is going on.

"You can't be too informed while this revolution is going on."

* Philip Macalister is the editor of online money management magazine Good Returns, which provides news and information on managed funds, mortgages, superannuation, insurance and financial planning.