Are you one of those who sank thousands of pounds into hi-tech stocks just ahead of the 5 April tax deadline? If so, you are not alone. An estimated 100,000 or more investors put many hundreds of millions of pounds in a range of hi-tech funds throughout February and March this year. Then the market dropped.
The result has been a bloodbath. Some of these funds have plummeted by up to 45% in little more than two months. What went wrong? And perhaps more importantly, what should investors do now?
Among the many statistics that stand out in relation to the collapse of the past three months is that in the run-up to the end of the tax year, almost 80% of hi-tech funds bought over that period were through independent financial advisers (IFAs). The implication is that IFAs were either wrongly recommending them or, at best, didn’t actively dissuade them from buying.
Not in every case, however. Jason Hollands, deputy managing director at Best Investment, a firm of independent financial advisers in London, says: ‘In a newsletter we published in February, at a time when a lot of brokers were peddling these funds, we warned that the bubble would burst.
‘A lot of brokers will sell what is easy to sell. And in the case of dot.com stocks, valuations were running well ahead of profitability. The problem was, however, many investors believed these stocks were a one-way ticket to make money.’
Ian Millward, a financial adviser at Chase de Vere, based in Bath, adds: ‘What we have generally found is that what performs best sells the most. In the case of hi-tech funds, the most we can expect from even serious investors is that they will look at past performance and invest on that basis. Anything with a good past performance number is attractive and that’s what gets sold.
‘That’s not the best way to invest. By the time investors notice high out-performance in a fund, it may be too late.’
While some funds have delivered poor performance in the past three months, their longer-term track record is good. For example, Henderson Global Technology Fund, which has been in existence more than 10 years, suffered along with the others in the April/May fallout that affected the sector.
Over the longer-term, its performance has been stellar, delivering 610% over five years. Similarly, although Framlington NetNet, an internet fund, has dropped by 37% since March, it is still 87% higher than at its launch in April 1999.
Craig Walton, group marketing director at Framlington, says: ‘If one plots the way Nasdaq has performed, one can see that it rose fairly steadily until October last year. Then it went absolutely crazy.
‘We shifted the balance of our investments quite sharply in February, away from pure dot.com companies and more into those that use or enable technology. For example, we sold Baltimore quite heavily and bought Northern Rock, whose internet strategy is quite good and Ryanair.com, which has a good web presence.’
The same cannot be said of all hi-tech funds. Many experts have been particularly critical of the way fund managers deliberately launched funds in the run-up to 5 April in a bid to vacuum up funds – even through they had no previously-known experience in this sector. Jupiter Global Technology was launched in February this year and rapidly pulled in several hundred million pounds. It has dropped 21.5% since 17 March this year.
Millward says: ‘From the viewpoint of the fund management groups, they look for what is in vogue. In previous years it was high-yielding corporate bond funds and before that it was emerging markets.
Perhaps not surprisingly, the advice of all financial advisers to those who have invested in hi-tech funds is to stay put. Ian Millward says: ‘Technology is a new arena and is bound to carry a heavy risk. But no-one would deny this is an area with excellent long-term prospects.
‘Unlike direct share investors, who can only select a few stocks for themselves, hi-tech funds will be able to choose between 60 and 200 funds. This gives them far greater spread and less risk.’
Hollands agrees. ‘The hangover is pretty bad. But we are starting to see a recovery in hi-tech stocks, so current investors should stay in.
And for those prepared to accept a higher degree of risk on between five and 10% of their portfolios, it makes sense to start investing since the price is quite low. My advice would be to think in terms of regular premium savings over the year rather than one large lump sum.’
As for the funds to choose, Amanda Davidson, a director at London-based adviser Holden Meehan, says the choice must be based on what exposure to various stocks one wants to accept within the technology sector. She recommends four funds: Framlington NetNet, Aberdeen Technology, Henderson Global Technology and Societe Generale’s Technology fund.
– Nic Cicutti is head of content at www.FTyourmoney.com For updated performance figures for hi-tech funds sold in the UK www.trustnet.co.uk
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