By Rupert Steiner
Technology stocks are difficult to value but are unlikely to crash, according to one of Europe’s best known fund managers .
Terry Smith, who has been dubbed the English Warren Buffett , because of his investment approach, wrote a letter to investors questioning whether companies such as Facebook should be considered a communications service or technology company.
The largest investment of the £23 billion Fundsmith Equity Fund is the techn sector accounting for 28.9%. For the year, the top five contributors to the fund’s performance were: PayPal /zigman2/quotes/208054269/composite PYPL -0.52% +5.1%, IDEXX /zigman2/quotes/205324043/composite IDXX +0.19% +3.1%, Microsoft /zigman2/quotes/207732364/composite MSFT +0.22% +2.8%, Intuit /zigman2/quotes/203136605/composite INTU +1.40% +1.5%, and Facebook /zigman2/quotes/205064656/composite FB +0.45% +1.4%.
The bottom five were: Amadeus /zigman2/quotes/208774062/delayed ES:AMS -0.90% -1.1%, Sage /zigman2/quotes/200179567/composite SAGE -1.60% -0.6%, InterContinental Hotels /zigman2/quotes/202865596/delayed UK:IHG +0.74% -0.6%, Becton Dickinson /zigman2/quotes/205527610/composite BDX +1.32% -0.4%, and Philip Morris /zigman2/quotes/201611010/composite PM -0.24% -0.2%.
Smith wrote: “Some commentators have attributed our recent outperformance to the performance of technology stocks accompanied by warnings that a ‘bubble’ is building in technology stocks rather like the Dotcom Bubble and that it may burst with similar ill effects.”
The valuation, however, is different for companies with intangible assets.
“The return on intangible assets is higher as they mostly need to be funded with equity not debt and attract an appropriate return. Lenders seem to crave the often false security of lending against tangible collateral. 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 figuring out its real returns.”
Smith, who is founder and chief executive of Fundsmith , wrote “What do the following companies have in common?” citing Amadeus, Automatic Data Processing /zigman2/quotes/207661132/composite ADP -0.71% , Facebook, Intuit, Microsoft, PayPal, Sage and Visa /zigman2/quotes/203660239/composite V -0.48% .
“They are all owned by our fund and they are all labeled as technology companies,” he wrote. “Yet they span airline reservation systems; payroll processing; social media, digital advertising and communications; accounting and tax software; operating systems, distributed computing (the ‘cloud’), software development tools, business applications and videogaming; and payment processing.
“I would suggest that the secular drivers of these businesses have some distinct differences and that their prospects are not governed by a single factor — technology. This one-size-fits-all label does not help much in evaluating them.”
Estimated to be worth £300 million ($411 million), Smith established his reputation at Barclays de Zoete Wedd and UBS Phillips & Drew, becoming chief executive of Collins Stewart, which became interdealer broker Tullett Prebon before separating again.