Technology stocks have become great value again after the sluggish post- dotcom-bubble years, according to the manager of a new GAM fund - and this time, he says, broadband is the key.
What sort of multiple would you pay for shares in Apple? The world's most successful consumer technology company, with an extraordinary record of product roll-out, profits delivery and growth prospects. Twenty-five times? Thirty times? Fifty times?
Apple shot from under $85 in early 2009 to nearly $350 (#220) last week, so most of us would imagine we have missed the opportunity and coming in now we'd be paying a fancy price. But according to Mark Hawtin of GAM, on a "cash adjusted" basis, Apple is on a multiple of just 10.
Hawtin reckons that after years of underperformance following the bursting of the biggest stockmarket bubble of all time, technology stocks are great value. It's why GAM is launching a technology fund, with Apple as one of its core holdings, and has chosen Hawtin to manage it. Before joining GAM in 2008, Hawtin was a partner at Marshall Wace for eight years, managing one of Europe's largest technology, media and telecoms hedge funds, called Eureka.
He started running the fund at Marshall Wace in late 1999, so knows a lot about boom and bust in this sector. "The good times lasted another three months and then it became tricky," is how he puts it. "But as a long-short fund, we performed very well during the downturn."
The average technology fund lost 53% of its value between November 1999 and January 2007, the period Hawtin was at Marshall Wace. Yet his Eureka fund managed a gain of 108%.
Hawtin talks of the "technology hype cycle" in which massive exuberance is followed by a trough of disillusionment, but out of that some lasting trends emerge. "For most of those eight years [when] I ran technology, it was an underperforming sector. Now I think it is time for that trend to be seen as an investment opportunity."
The closure, merger and withering away of technology funds means that investors have relatively few choices in the sector. And among the investment banks, coverage of technology stocks stops fairly rapidly as you go down the market cap scale.
Hawtin also cautions against seeing tech stocks as a simple cyclical play. "If you look at the Nasdaq last year, the difference in performance between stocks was huge. Microsoft was down. Apple was up. Technology investing is not just about picking a basket of big names."
The new GAM fund, to be called GAM Star Technology, will focus on the internet, predicated on Hawtin's view that the roll-out of broadband is a global phenomenon that will have a huge impact on the way the world conducts business.
In this sector, it's easy to flourish amazing statistics, and Hawtin is not short of them. Ten years ago the average Chinese worker would have to work for 100 months just to earn enough to buy a personal computer. Today, he'd have to work seven months. And soon it will be just two months.
Hawtin predicts that we will see IPTV - television delivered over the internet - replacing traditional broadcast TV in countries such as China. That's why he's investing in Youku, a Hong Kong-listed stock that is mainland China's market leader in IPTV, mixing advertising and pay-per-view.
It's an interesting model in a country where piracy is ubiquitous. Yet Youku has managed to negotiate deals with Hollywood in which it legally streams blockbuster films such as Inception across its network at a price of just 40p per user. That's massively cheaper than in the West, but then China is a massively bigger market. It has 260m broadband users, more than all the internet users in America.
But Youku is one of those stocks that, like Netflix in America, is trading at incredible multiples. Indeed, it's difficult to calculate the multiple when profits are as yet almost invisible. Youku has a market capitalisation of $3 billion, but Hawtin reckons it can generate revenues of $200-300m in a few years' time, and on those prospects it has a value. Given his long experience of investing in (and shorting) net stocks, Hawtin works hard with investment bankers to try to develop valuation models in this sector.
The fund will be a mixture of well-established, almost "industrial" net stocks and tomorrow's possible Googles. For example, the initial starting portfolio of 60-80 stocks will include Cisco, a one-time favourite that is today seen by some as yesterday's company. "Yes, it is a sort of picks-and-shovels stock within this sector, but everything has a price, and there are still a lot of pipes to be put in place," says Hawtin.
He also likes Yahoo, which still holds on to a small share of the American search engine market but has crumbled elsewhere. In fact, what Hawtin likes is Yahoo's Chinese business, which he says is not reflected in its valuation. Yahoo has a 40% share in Alibaba, fast becoming one of the world's biggest business-to-business e-commerce companies. It also has a consumer-facing business called AliPay, which could become China's PayPal. Hawtin reckons you could value the entire Yahoo business just on its Alibaba holdings.
Inevitably, though, this fund, like all technology funds, is an American fund. Its benchmark is the MSCI World Information Technology index, and 75% of the companies in that index are based in America.
Are there any British prospects? Hawtin struggles to find many, although he does like ARM. Indeed, he reckons Intel is at severe risk from competition from ARM. But his concern is over valuation, not so much in absolute terms but in the prospects for a company that relies on royalty payments to outperform the broader market.
About the only other British company Hawtin holds is Yell.com, which he says is building an interesting niche as provider of websites and web hosting for small businesses. The door-stopper telephone directories may be fading fast, but the company may still have a future, he argues.
One surprise with this fund is that it will be long-only. There are some rather fizzy tech stocks around and some extraordinary valuations ($6 billion for Groupon), which will make some investors nervous. But in Hawtin you have someone who has seen it all before, and in this sector full of excitable whizzkids, a few grey hairs should come in handy.
PATRICK COLLINSON The Guardian Personal Finance Editor
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