The performance of technology stocks are a law unto themselves. Rarely do they reflect the ebb and flow of share prices on the wider stock markets. In Europe during the past two years, for instance, software and services companies have outperformed the Financial Times Stock Exchange 100 index by almost 50%, according to Broadview Associates. Taken as a whole, IT companies in Europe have underperformed the FTSE100 by 7%. Not surprisingly, the rapidity of change in the technology industry has prompted several stock market groups to produce indices tailored for IT stocks, and aimed at winning the hearts and minds of those investors made nervous by the sector’s volatility. These are specialist versions of the more common stock indices such as the FTSE in London and the Dow Jones Industrial Average of Wall Street, sometimes compiled by an individual broker, or by a particularly technology-focused stock exchange. In the last year, technology indices have begun to proliferate. Sea-changes in hi-tech investing – such as outlandish valuations of Internet company listings – have sent users looking for clearer guidance. Among scores of such indices, five stand out: technology indices from Hambrecht & Quist, the Chicago Board of Options Exchange (CBOE), the American Stock Exchange (AMEX), the Philadelphia Stock Exchange and the Pacific Stock Exchange. The reason for these groups’ enthusiasm is a combination of direct and indirect commercial interest. In the first case, indices are launched when an exchange perceives sufficient demand among investors for an industry index against which options can be bought or sold. At its simplest, an option gives a buyer the chance to purchase a stock for a pre-determined exercise price at a specified future date. If the underlying share price rises beyond the exercise price of the option during that time, the buyer will make money; if the price falls below the exercise price, the buyer will simply walk away. Using an index to offer an option becomes a cost effective way of investing in a basket of stocks or of hedging existing portfolios, says CBOE vice president Richard DuFour. CBOE has a set of four IT-related indices, most recently adding its Internet Index.
Internet index
The list of 15 names in CBOE’s Internet index is unsurprising: America On-Line, Cisco, PSINet, Oracle, Netscape, Spyglass among others. Most of these also feature in a new Internet index launched by AMEX, the New York-based future and options exchange. AMEX’s Internet index, however, is broader based, pooling the performance of 38 companies which are involved in providing digital interactive services. Away from the Internet, AMEX also offers its High Technology 35 Index, the Computer Technology Index and the Networking Index. Elsewhere, North America’s oldest securities exchange, the Philadelphia Stock Exchange offers the Semiconductor Sector Index, affectionately known as SOX, which is a measure of the share performance of chip designers, developers, manufacturers and distributors. The use of such indices as a hedge against price declines – so protecting the value of existing portfolios – has recently been underlined by much increased trading volumes. As expectations of flat revenues and earnings from the chip companies began to emerge during the spring of this year, the SOX volume record was smashed first in February and then again March, with volumes up 59%. But not all indices form the backbone of investment products. Hambrecht & Quist, the specialist IT investment bank, maintains an array of indices tracking high technology companies with no options available against any of them. Mike deWitt, the head of H&Q’s indices department, explains that the indices really play a marketing role. They’re mainly for observing the trends of the industry. H&Q’s indices are also distinguished by the fact that its analysts regularly redraw the list of companies that form the basis of each index. The stocks used to calculate the indices must be representative, say deWitt. A fixed list might not be a problem in the chips or telecoms sectors – where the main vendors are established – but when you get into the Internet, for example, the problems of definition are complex. We want the whole index to reflect the industry, but the players and their activities change. This problem of definition seems to justify the absence of similar indices elsewhere. In the UK, says FTSE International managing director Mark Makepeace, no-one has come up with a satisfactory definition of high technology yet. Obviously, there’s a lot of public interest in technology right now. We’ve had a team of fund managers looking at it for some months now but they haven’t come up with anything conclusive in terms of a definition yet, explains Makepeace. The problem is that technology is involved in everything a company does now. So do you distinguish between those companies that design and develop IT or those that exploit it? And where does IT end and telecoms pick up? Also, the problem in Europe partly stems from there being so fewer technology stocks quoted here.
Too much, too little
His comments underscore the fact that the older stock exchange – the New York Stock Exchange (NYSE) and the London Stock Exchange – have lacked much of the raw material to produce technology indices. That comes mostly from the US NASDAQ exchange. Over a third of companies listed on NASDAQ are in the technology sector, by far the largest grouping on NASDAQ. That means that the NASDAQ Composite (all shares) index, though crude, is by no means an unreliable measure of high-tech growth. But there is clearly dissatisfaction – current technology indices seem to be either too broad of too narrow. With that in mind, Broadview Associates, a specialist in mergers and acquisitions consulting, has just launched its US IT Index, which tracks the share prices of 1,500 IT stocks, and the European IT Index, a measure of the stock performance of 350 companies. That may just be the right kind of breadth to fill the yearning for an accurate measure of the industry’s health – at least as perceived by equities investors.
