Technology funds 10 years after the crash

Published: 11:03PM GMT 17 Dec 2009

Then a sprightly 27-year old, Mr Rogoff was on the road with Aberdeen,
promoting its top-selling technology fund to would-be investors in
Singapore. He was asked to run on stage to the theme tune from the popular
Sixties and Seventies television series before giving his presentation.

“I should have known then that we were at the top of the market,”
says Mr Rogoff, who since 2003 has been ensconced at Polar Capital running
various technology funds.

Yet, in late 1999, investors were mad for technology funds. If a fund didn’t
have the word technology in it, investors gave it the cold shoulder.

Rationality went out the window as fund management groups fuelled the fire
with new funds going by such names as Wired and Techtornado. In January 1999
investors put just £5m in to technology funds – in January 2000 they
ploughed in £238m.

Jupiter famously launched its Global Technology fund in February 2000, six
weeks before the dotcom crash. Within a month an investor who put in £7,000
into the fund would have lost £1,000. The message at the time was clear: if
you shun technology, you will miss the revolution of the decade and bumper
gains.

Mr Rogoff says: “In early 2000, Aberdeen Technology was taking in more
money a week than it had attracted in almost 20 years. It was a feeding
frenzy. Everyone got caught in the hype cycle and I feel quite bad about
that.”

Not that fund managers were entirely to blame for the stampede. Investors
lapped up the story, busily taking share tips from taxi drivers to the man
behind the counter in the kebab shop.

“I remember almost every call we were getting from investors was about
investing in the latest technology fund,” says Meera Patel, at
Hargreaves Lansdown, one of Britain’s biggest fund brokers.

Darius McDermott at Chelsea Financial Services, said: “Investors only had
one thought in their mind – technology.”

Sadly, pundits and investors could not have got it more wrong. Within months,
the technology bubble had burst and funds fell to earth. Ten years on and
the best-selling fund of 1999, Aberdeen Technology (now New Star
Technology), sits fourth from bottom out of more than 2,000 funds in the
10-year league table, having fallen by 63 per cent in value since.

Stuart O’Gorman was just 26 years old when he was recruited from the
successful Scottish Equitable Technology fund to run the equivalent fund at
Henderson. He recalls: “I moved just in time for the market to
collapse. I went from being the most loved manger at one firm to being the
most despised at the next.”

It was easy to see why everyone bought the technology dream. Mobile technology
and the internet were beginning to be a part of our everyday lives. Amazon
was taking the book world by storm and Martha Lane Fox and Lastminute.com
were revolutionising the way we booked our holidays. It seemed nonsensical
that the tech story would disappear.

Unfortunately every technology stock and his dog were deemed to be sure-fire
winners. Valuations went to unsustainable – and what many would say were
ridiculous – levels. “Valuations were around 60 times earnings,
it was a train wreck waiting to happen,” adds Mr Rogoff.

Mr O’Gorman says: “Technology over-promised and under-delivered. Do you
remember 3G in 2000? Everybody was expecting an iPhone and what we got was a
ghastly NEC/Vodafone ‘Live’ product.

“Valuations had been driven to stratospheric levels by the flood of money
into the sector. It was made worse by the overcapacity that had built up
during the bubble, when there were far too many technology companies that
sadly were well-funded and irrational and so took a long time to die –
causing the hangover from the technology party to last much longer than it
should have.”

Prior to 1999, there were just three technology funds – by March 2000 there
were more than 28. The bursting of the bubble caused funds to close or merge
with other funds (these included Jupiter Global Technology and Scottish
Equitable Technology) and today there are just nine dedicated technology
funds remaining.

Edward Bonham Carter, chief executive of Jupiter, says: “Technology
stocks clearly have not lived up to the expectations we had when we launched
the fund in 2000. As a personal investor in the fund (Jupiter Global
Technology), I appreciate the dissatisfaction investors must feel but we are
confident that merging the fund into our Global Managed fund will prove the
right decision for investors long term.”

That said, many investors in tech funds cut their losses and ran – Mike Webb,
the then chief executive of Invesco Perpetual, said: “We have lost a
generation of investors.” Given the plummeting Isa sales ever since, he
may have been right.

Yet, 10 years on, technology funds are causing a stir again. The IMA
Technology and Telecoms sector is up 41pc year-to-date, but demand from
private investors has not picked up to the levels last seen during the
technology bubble.

Ms Patel says: “Over the past 10 years, however, the sector is down 50pc
so it is still a long way to go before investors who invested at the peak of
the bubble actually make a profit.”

Mr Rogoff argues that many of the reasons why fund managers, such as himself,
enthused about the sector in 1999 have come good – just 10 years later than
originally anticipated.

“3G is only just happening, so too is online advertising,” says Mr
Rogoff. “My fund has almost doubled in value since I joined Polar
Capital in 2003, even the fund I left behind, Aberdeen, is up by around 30pc
over that time frame.”

Mr Rogoff says he was one of the few London-based managers to buy into the
Google IPO while he has been a long-standing fan of Apple – a stock that
remains his biggest holding today.

“Technology companies today have proven track records and are on cheaper
valuations. We would never invest in companies with blue-sky thinking.”

Mr O’Gorman reckons that companies “have grown up” and are focusing
on profits and cash flows rather than just revenue growth. The technology
sector is the only sector globally that does not have any debt, he says.

“Technology, the unloved ginger stepchild of the world, was basically the
only sector not invited to the credit bubble party and many products are
currently in shortage. We believe, if we do manage to escape from this
economic mess, that the tech sector will be the thing that leads us out,”
adds Mr O’Gorman.

Technology is all around us but understandably investors who had their fingers
burned will be wondering whether there is money to be made in the sector.

Mr O’Gorman says: “Technology is now a dirty word among investors –
despite the fact that it has strongly outperformed most other equities over
the past five years.”

Likewise, Mr Rogoff has been making money in technology funds for the best
part of six years now, but does he feel a tinge of regret that it all went
horribly wrong for investors?

“Everyone got caught in the hype cycle and I feel quite bad about that. I
wish I had not done as good a job at promoting the Aberdeen fund, but I was
invested in it, my family were invested in it and so were my friends. We all
lost money.”

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