The outlook for technology

Does the technology sector remain in good shape?

Walter Price, Manager, RCM Technology Trust

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The technology sector has now largely recovered from its flash crash in April of this year. The Nasdaq is back up to near its March highs and the valuations of many technology stocks have largely recovered. However, the wobble should alert investors to the importance of discernment in the technology sector, which remains perennially vulnerable to 'fashion-led' investing.

The April sell-off brought much-needed realism back to the valuations of some technology companies. It also introduced greater scrutiny to the IPO market, which had seen its fair share of 'irrational exuberance'. Technology companies often create a buzz around them and this in turn can create a feeding frenzy. This, for the time being at least, appears to have abated.

Although many were quick to draw parallels, there are some notable differences between the situation in April and the last technology crash in 2000 and this is part of the reason technology valuations have recovered so swiftly: Companies are not bleeding cash, for example. In general, where valuations are high, they appear to be matched by punchy earnings growth. However, there were some companies where expectations had become excessive and prices rightly corrected.

We think the technology sector, at heart, remains in good shape as the earnings of many of the bellwether technology companies have shown. At a time when earnings in many parts of the market are weakening, technology companies continue to make hay - Amazon saw revenue growth of 23% in the first quarter, Facebook also beat expectations. This shows that many technology companies are executing on their business plans with considerable skill and success. That, ultimately, will prove an important support for valuations.

The sell-off also created some opportunities. As is so often the case, the good companies were indiscriminately sold-off alongside the bad ones. There are some exciting, high growth parts of the market benefiting from structural change, in our view, and here, we could buy in at lower prices.

In particular we would highlight the security sector. There have been a number of high profile breaches of security at large corporations over the past 12 months. Target was just the start, with Amazon and eBay among the most recent targets. These companies rely on the personal data they collect from their users. If that data proves vulnerable, so are they. A number of companies have emerged to address this data vulnerability and protect companies. The services provided by groups such as Palo Alto Networks are now business-critical.

A key part of our process is finding companies that address 'big problems', reasoning that they will have the opportunity to make super-normal profits. Security services are an important example of that, mobile internet is another. In this case, the problem it solves is clear: ecommerce is convenient and offers a means for consumers to access the best products and services at the best price. In a globalising world, the lure of shopping at the touch of a button is irresistible.

Ultimately, we believe technology investment is about growth and we are, philosophically, looking for companies that can grow very rapidly. The technology sector provides an embarrassment of riches, but the technology lifecycle is growing shorter. Companies may be able to generate extremely strong revenue growth very quickly, but equally obsolescence can also hit suddenly.

From our position, running the RCM Technology Trust from the heart of technical innovation in Silicon Valley, we see many of the new technologies before they even come to market. Many are potentially exciting, but we need to ensure that the right management team and operation infrastructure are in place to match a company's growth ambitions. Technology is about more than just a good idea. A company needs to be able to execute on its business plan, transforming a good idea into tangible profits.

The recent rout in technology companies is a timely reminder to ensure that growth expectations are realistic. The technology sector always has some exciting stories, but it is important those stories have substance as well as glamour.

Disclaimer

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Competition among technology companies may result in aggressive pricing of their products and services, which may affect the profitability of the companies in which the Trust invests. In addition, because of the rapid pace of technological development, products or services developed by these companies may become rapidly obsolete or have relatively short product cycles. This may have the effect of making the Trust’s returns more volatile than the returns of a fund that does not invest in similarly related companies. Past performance is not a reliable indicator of future results. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. A security mentioned as example above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. This is issued by Allianz Global Investors Europe GmbH, an investment company with limited liability incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42/44, D-60323 Frankfurt/M. Allianz Global Investors Europe GmbH is registered with the local court of Frankfurt/M under HRB 9340 and is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Allianz Global Investors Europe GmbH has established a branch in the United Kingdom, Allianz Global Investors Europe GmbH, UK Branch, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. RCM Technology Trust PLC is incorporated in England and Wales. (Company registration no. 3117355). Registered Office:199 Bishopsgate, London, EC2M 3TY.