Technology: a bubble? RCM Technology Trust’s Price replies

Walter Price, manager of the RCM Technology Trust, comments on the recent results from Apple and Facebook and assesses the risk of a bubble.

The fears of a second bubble in technology had been mounting: there were once again hints of exuberance on the part of investors after the NASDAQ hit highs not seen since the giddy days of 2000, and the IPO market for technology companies attracted headline-grabbing debuts from, among others, Twitter and the interactive entertainment for mobile company, King Digital. The market appeared ripe for a reality check and this is what we’ve seen since the beginning of March.

Some high profile stocks were sold off, and in some cases this sell-off was dramatic. Investors have been quick to extrapolate this sell-off to a long-term change in sentiment towards the high-growth companies in the technology sector, but having lived through the last technology bubble, we believe there are some important differences. For example, companies are showing good progress against tangible metrics. There are some where valuations look high, but they may still be growing sales at 50% to 100% per year. Where there are very high valuations – 10x sales or higher – it is generally matched by an exceptionally high growth rate.

That said, there are a number of IPOs in which the Trust has not participated because it believes valuations allow little room for strong returns to investors. There are those IPOs where companies have demonstrated high growth in the past, but need to make some kind of transition in their business model to shore up future profitability – Twitter or King fall into this category.

Then there are those that are good, high growth companies, but where the valuations are simply too high, in our view. We have reassessed some of the holdings in our portfolios in line with a more risk-averse environment. In response, we have moved out of some positions in higher multiple companies where valuations looked over-extended; these have performed well in a climate of buoyant sentiment towards technology names but are likely to face challenges in the current environment of greater caution.

However, it should be said that there are parts of the technology sector that have been largely untouched by the recent weakness, notably the large technology companies, which remain on low valuations. We have increased our portfolio exposure to this area, but still maintain our conviction in the core, secular growth areas of technology.

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