Technology stocks are hard to value, but unlikely to crash, according to one of Europe’s best-known fund managers.
Terry Smith, referred to as England’s Warren Buffett for his investment approach, wrote a letter to investors asking whether companies such as Facebook should be considered a communications service or a technology company.
The largest investment of the £ 23 billion Fundsmith Equity Fund is the tech sector which accounts for 28.9%. For the year, the top five contributors to the fund’s performance were: PayPal PYPL,
+ 5.1%, IDEXX IDXX,
+ 3.1%, Microsoft MSFT,
+ 2.8%, Intuit INTU,
+ 1.5%, and Facebook FB,
+ 1.4%.
The bottom five were: Amadeus AMS,
-1.1%, sage sage,
-0.6%, InterContinental Hotels IHG,
-0.6%, Becton Dickinson BDX,
-0.4%, and Philip Morris PM,
-0.2%.
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Smith wrote, “Some commentators have attributed our recent outperformance to the performance of technology stocks, accompanied by warnings that a ‘bubble’ is emerging in technology stocks such as the Dotcom Bubble, and that it could burst with similar adverse effects.”
However, the valuation is different for companies with intangible assets.
“Returns on intangible assets are higher because they usually have to be funded with equity and not debt, and they have to provide an appropriate return. Lenders seem to crave the often false security of lending against tangible collateral. Intangible assets can also last indefinitely if properly maintained through advertising, marketing, innovation and product development, and the duration of an asset is an important factor in determining true returns. ”
Smith, who is founder and CEO of Fundsmith, wrote, “What do the following companies have in common?” quoting Amadeus, Automatic Data Processing ADP,
Facebook, Intuit, Microsoft, PayPal, Sage and Visa V,
“They are all owned by our fund and they are all labeled as technology companies,” he wrote. “Still, they include airline reservation systems; salary processing; social media, digital advertising and communication; accounting and tax software; operating systems, distributed computers (the “cloud”), software development tools, business applications and video gaming; and payment processing.
“I would suggest that the secular drivers of these companies have some distinct differences and that their prospects are not determined by one single factor: technology. This one-size-fits-all label doesn’t do much to evaluate them. “
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An estimated £ 300 million ($ 411 million), Smith established his reputation with Barclays de Zoete Wedd and UBS Phillips & Drew, becoming CEO of Collins Stewart, who became interdealer broker Tullett Prebon before breaking up again.