There is a strong feeling on Wall Street that the horrors of 1984 that brought investment interest in the high technology sector to a grinding halt have now worked themselves out of the system, and that the sector is overdue for a rebound. The rebound has begun in earnest with the raging bull market in New York, with almost all players bar punch drunk IBM participating. Is there more to go for? CitiCorp believes so, and is backing its belief with the Cititech fund, which it has been touting around UK investment managers in the hope of raising anything up to UKP50m. CitiCorp has several arguments to back its belief that the sector still has a ways to go. Factory sales of electronics are growing at a compound rate of 15.9% – 1976-1985 – (all figures for the US) compared with a Gross National Product growth rate of only 6.1%. Within this environment there are numerous growth markets to be identified. Cititech puts T-1 multiplexors which tie digital equipment directly to digital lines, at the top of the growth league, followed by local area networks, workstations and superminis. The lowest growth areas currently are printers, semiconductors and analogue telephone exchanges.
Although these figures are for 1985, it’s this sort of narrow market identification that is a necessary precursor to effective investment. The Cititech managers dismiss the notion that the industry is maturing, citing its growth rate in excess of the growth in the general economy, and also minimise the Japanese threat, saying that the yen/dollar relationship should help, and that the Japanese do not compete in all sectors. Software stands out as the one sector which is both insulated from Japanese competition and from the tendency toward shortening product life cycles. The effects of constant technological change will always create new winners and losers and so the sector will never run dry of new players and opportunities. Knowing about them in time is the key and here Citicorp claims advantages: the sector, just as in the UK, is inadequately researched further down the capitalisation scale. This tends to mean that share prices tend to sit still for long periods – usually from one results announcement to the next – which offers good opportunities. The Cititech team then claims that with its personal experience in the market and intimate knowledge of the sector, it will be able to identifiy precisely what is happening to whom, and so into which companies to best put the money they raise. The chartists are catered for too in the Citicorp sales pitch, which presents graphical representations of relative price-to-book figure for the last 20 years, as well as price-to-sales, and price-to earnings – all three graphs peak in the late 1960s-early 1970s and then plummet. The message is that the sector is the victim of dated investor attitudes – that the sector as a whole is slowing, that there are no more super-growth stocks around, that the risks are still enormous, and that the technology market is still in a slump. Citicorp argues that this has changed: that the sector is still in a high growth phase and that with careful enough scrutiny, high quality growth stocks can be identified and that excellent returns can be made, and that returns can be even greater precisely because the sector is underrated. The Cititech fund will be listed in the UK and US and managers hope to raise up to $100m from both UK and US institutions – eventually it is hoped that the investment in the fund will be opened to private investors. The portfolio will be confined to US stocks – Cititech does not feel the UK sector has the scope of companies to run such a portfolio, estimating that there are around 1,500 emerging high-tech stocks in the US, and around 150 in this country – and the US is the market it knows best.