Latest Investment Review – CF Techinvest Technology Fund
CF Techinvest Technology Fund: Investment Review (Year to April 30 2009)
Conditions on world stockmarkets over the past year have been extremely volatile and very difficult, certainly the worst since 1973/74 and arguably even further back than that to 1929/32. All stockmarket sectors have suffered, with small cap stocks on AIM faring worst of all, as investors sought sanctuary, albeit with limited success, in larger companies thought to be better able to absorb the many shocks to the world’s financial systems.
Against this background, it is pleasing to report that shares in the Fund ended the year to 30 April 2009 at 109.55p, a fall of 13.32% over the twelve months. This is in line with the decline of 13.52% by the techMARK AllShare index over the same period, but is substantially better then the falls recorded by the FTSE 100 (30.29%), the Nasdaq Composite (28.83%) and the FTSE SmallCap (29.87%), while the AIM AllShare index collapsed by as much as 50.94%. It is worth keeping in mind that most of London holdings in the Fund are both small cap and on AIM.
In our half year Investment Review to shareholders, dated 22 November 2008, we wrote “The market action on Wall Street on November 20/21 was strongly suggestive of a very important market low, if not the ultimate low of this bearmarket”. While this turned out to be true for most of the North American stocks in our portfolio, many of which have since turned in stunning performances, it wasn’t quite true of markets overall which went on to make new lows in early March.
Nonetheless, we are pleased to report that the second half of the year to April 30 saw an increase of 11.69% in the value of shares in the Fund, with the North American holdings very much to the fore. This gain contrasts with a fall of 3.05% by the FTSE 100, while the Nasdaq itself was down 0.21%. The AIM AllShare was ahead by 7.86%.
Since its inception almost six years ago now, the Fund’s total gain over the period is 9.55%. This is ahead of the 7.67% increase by the FTSE 100 and far ahead of the 20.90% decline in the AIM AllShare. It is however behind both the techMARK AllShare (+53.38%) and the FTSE Small Cap (+12.38%), while the advance in the Nasdaq is 15.04%.
At the time of the half year report, we observed that the period was one of relatively limited activity by the Fund Manager. “With falls in very many stocks bearing little or no apparent relationship to newsflow, there seemed little point jumping out of one to buy another, only to find that it in turn eventually fell too”, we wrote.
This policy continued until towards the middle of March when, particularly in the case of North American tech stocks, we sensed the beginnings of a return to reality. Accordingly, the pace of our dealing activity has picked up since. In London especially, it is noticeable that some semblance of a two-way market has finally re-appeared in many smaller stocks.
We ended the year with a cash content of only 4.3%, down from 10.2% in mid-February. North American content amounted to 36.2%, down a tad from the record 36.3% of a couple of days earlier.
The ten largest London holdings, in alphabetical order, at April 30 were: Alphameric, Alterian, Autonomy, Avanti Communications, IDOX (the largest at 3.2%), KBC Advanced Technologies, Microgen, SQS Software Quality Systems, System C Healthcare and Vialogy.
The ten largest North American holdings, also in alphabetical order, were: 3Com, Arcsight (the only software IPO on Nasdaq in 2008, now up some 260% from its low last November), Art Technology, Bridgewater Systems (we have since added again, following exceptional results on May 1), ClickSoftware Technologies, Local.com, March Networks, Openwave Systems, Sandvine and Sycamore Networks. Nine of these have doubled or more from their 2009 lows. In each case the gain is even greater from the late-2008 low. Unbelievably, as subscribers to the Techinvest newsletter already know, three of the above were selling at less than their net cash and equivalents on January 1, while a fourth was going for 81% of its cash value.
Nine of the ten were on attractive PSRs (price-sales ratios) and PRRs (price-research ratios) too. As we said in our half year report, “while these factors were not considered back in Ben Graham’s time, we’ve no doubt that if he were still around today, he would find much of compelling fundamental appeal in many of today’s small-cap tech stocks.”
We continue to unearth enticing undervalued small caps, particularly in North American markets. Just one week before the year-end for the Fund, we acquired an initial position in Westell Technologies at an average of 39.9 cents a share, well below the net cash of 73 cents per share shown on its December 31 balance sheet.
For as long as we’ve known the Company – and that’s going back several decades – it has operated out of Aurora, Illinois as a manufacturer of telecommunications access equipment for use at the interface between telephone exchanges and subscribers. Through the years it has passed through a myriad of corporate hands, eventually returning to the stockmarket (again!) in 1995. Since then, it has struggled to stay consistently profitable. Right now, it is going through one of its loss-making phases. Nonetheless, at 40 cents the PSR is a mere 0.13 and the PRR 1.54. On top of that, a new experienced CEO came aboard near the end of February and a new CFO joined in the middle of April.
Interesting shareholders include top US microcap specialist Royce and Associates, with a 6.3% stake per a January 30 filing, while on February 13 Renaissance Technologies (controlled by James Simons, reputedly the world’s 55th richest individual) revealed a 7.5% stake.
Why such a level of interest in a tiny company (market cap: $30m)? Presumably because, in addition to its turnaround potential, Westell is a likely beneficiary of the $7 billion part of the Obama stimulous package intended for rural broadband applications.
Another glaring example of how out-of-kilter small cap US valuations had become is data networking solutions specialist 3Com, which has also been around for a long time in one form or another. The Fund bought the shares last July at $2.02. During the subsequent autumn panic, the price sank as low as $1.43, despite no visible change in its prospects.
At that level, based on annual sales of as much as $1.4 billion, the PSR was 0.41 and the PRR 3.0, while net cash per share was 87 cents or 60% of the share price. The prospective P/E for the current year to May 2009 was only 3.8. Yet this is a Company which derives a large and rising portion of its telecoms sales from China, has an intrusion prevention software subsidiary growing at over 40% per annum and in its last two reported quarters had total operating cash flows of $157m (40 cents a share).
Since then, some semblance of reality has returned with a 190% rise in the shares. The Fund sold 30% of its holding before April 30, releasing cash to increase its position in Sandvine and to acquire its stake in Westell.
In the most recent issue of the Techinvest newsletter posted to subscribers on May 1, we quoted data underlying the growing recognition in the US of the relative attractions of the technology sector compared to other sectors of the stockmarket. In particular, we noted the debt-free nature of most balance sheets in the sector and the relatively low valuations of most stocks compared to the market at large. We also drew parallels with the years after the end of the protracted 1973/74 bearmarket, up to then the worst since the 1930s, when tech stocks far outperformed the general market indices for a period of over eight years.
Based on all this, we went on to write: “And with the rapidly rising importance of the Mobile Internet likely to fuel the next tech boom, the tech sector could outperform for some considerable time to come.” A copy of the May newsletter can be downloaded from our website (www.techinvest.ie). Click on the newsletter banner on the home page and then download the sample newsletter.
Our focus here at Techinvest remains as ever on the longer term. Our many years of experience have taught us to remain largely indifferent to short term stockmarket movements, be they up or down. Typically, we hold stocks for two to three years, often considerably longer.
That doesn’t mean we don’t top slice a holding where the price has raced ahead of the underlying fundamentals; or, alternatively, add to an existing holding whose value has fallen to what seems to us an unduly depressed level.
We believe the Fund is the only UK authorised one of its type available to the general public that offers significant dual exposure to both the London and North American small cap tech sectors. At 30 April, over 95% was invested in these, with 36% in stocks primarily traded on North American exchanges.
The Fund is valued once a week at 10:00am each Wednesday. The latest price is normally posted by 5:30pm that day on the Techinvest website home-page at www.techinvest.ie
6th May 2009