Technology stocks are difficult to assess, but they are unlikely to break, according to one of Europe’s best-known fund managers.
Terry Smith, who was nicknamed Warren Buffett, because of his investment approach, wrote a letter to investors asking whether companies like Facebook should be considered a communications service or technology company.
The largest investment of the £ 23 billion Fundsmith Equity Fund is the technical sector, accounting 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 five worst 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 forming in technology stocks, such as the Dotcom bubble and that it can burst with similar harmful effects.
The valuation, however, is different for companies with intangible assets.
“The return on intangible assets is greater, as they need to be financed mainly with capital, not debt, and attract an adequate return. Creditors seem to crave the often false security of lending against tangible guarantees. Intangible assets can also last indefinitely if they are well maintained by advertising, marketing, innovation and product development, and the duration of an asset is an important factor in calculating its real return. ”
Smith, who is a 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 all belong to our fund and are labeled as technology companies,” he wrote. “Still, they cover airline reservation systems; payroll processing; social media, digital advertising and communications; accounting and tax software; operating systems, distributed computing (the ‘cloud’), software development tools, commercial applications and video games; and payment processing.
“I would suggest that the secular drivers of these businesses have some distinct differences and that their perspectives are not governed by a single factor – technology. This one-size label does not help much in evaluating them. “
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Estimated at £ 300 million ($ 411 million), Smith has established his reputation on Barclays by Zoete Wedd and UBS Phillips & Drew, becoming chief executive of Collins Stewart, who became broker Tullett Prebon before breaking up again.