Instagram: A changing investment landscape?

10th April 2012

But many of these new kids on the block defy traditional ‘rules' that asset managers have come to swear by –  are they prompting changing times in the investment world?

As Kevin Murphy, fund manager within the Schroders Specialist Value UK Equity team and co-manager of the Schroder Recovery Fund and Mindful Money blogger says:

"According to Howard Marks, the chairman of US fund manager Oaktree Capital Management, there are three "non-negotiable" requirements for accurately assessing investment performance – a record spanning a number of years; the inclusion of good and bad years to see how a manager performs in a variety of circumstances; and a benchmark or peer group to enable a relevant comparison."

But these requirements will fail when it comes to assessing newer companies.

Yet Kevin says: "Certainly you cannot properly assess a business's track record over just a year or two and you need to see how it does in both good and bad market environments. This is a key reason why we do not generally participate in IPOs – companies looking to float only have to offer details of the preceding three years – and, since management only float at the top, these are highly unlikely to include any bad years."

However, Facebook is clearly willing to take a punt on Instagram. The key is innovation – which is transforming society and the way businesses operate – particularly in the technology sphere. It is rapidly generating strong companies with superb growth prospects. The leaders are broadening out to include not only the likes of electronic companies but also social media and all that this entails.

Perhaps the power of technological change is soon to transform our notion of both what is good to invest in but also destroy much of what is perceived to be safe to invest in. In the past few decades the technology sector has been through periods of chronic overvaluation – tech boom – and undervaluation – post-credit crunch in 2008-09. Whether we are now in another stage with the inflating of another tech bubble remains to be seen.

Take the acceleration in tech sector takeovers over recent years where bid premiums were at record highs – such as Motorola being snapped up by Google at a 61% premium to market price. This suggests that a number of tech companies have strategic value that is not reflected in their market price. Given cash-rich balance sheets among tech majors like Apple, mergers and acquisitions will remain a key performance driver going forwards.

Yet while you might not want to be the next Seán Parker of Napster fame, who turned his investment in Facebook into billions, access to tech companies is simple. And a new idea can rapidly translate into worldwide sales: look at the success of the iPhone.

You only have to think about where they spend their money, and how you live your life, to see the potential that companies have in the technology, telecoms and social media sector.

But the risks inherent in the sector are also abundantly clear from the trends we see around us. Nokia, for example, had been one of the biggest players in the mobile handset market. However, its failure to capitalise on the touch-screen technology that has driven the smartphone market led to a significant decline in its sales, profits and share price.

Fortunately, there are many global giants to pick from rather than simply minnows on the market. Whereas a decade ago many technology stocks were risky start-ups, today the sector includes the likes of Apple.

And investors don't have to pile into higher-risk technology funds to gain exposure to these companies. Most global funds will have a significant exposure to this sector through Apple and Dell, say, or Asian giants such as Sony. Or you could pop a technology fund in your portfolio.

So it seems the ‘rules'  remain -buy technology stocks, but only when you understand the rationale for their success, and ideally, ensure that the company has a good record of delivering value for its shareholders.


More from Mindful Money:

IPOs: Doomed to fail?

Does social media need an ASBO?

Stockopedia – Steering away from story stocks

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