By Danielle Levy of Citywire
Star manager Neil Woodford has thrown his support behind a £150 million fund for the next generation of UK technology companies.
Legal & General Capital and the British Business Bank are also backing the fund, called Accelerated Digital Ventures (ADV), which will provide an initial £150 million in funding for digital businesses across all stages of development.
Woodford Investment Management has invested £50 million into ADV. Founder Woodford believes it can go some way towards countering the long-running issue of a lack of available capital for start-ups.
‘Early-stage businesses in the UK are frequently constrained by two weaknesses: the poor availability of capital and the short period over which it is provided. This twin problem often leads to a capital funding gap between the seed and scale-up investment stages, which can then lead to promising UK-based companies either failing to fulfil their potential, or having to sell out to larger, often foreign, businesses,’ he explained.
ADV will offer start-ups access to capital, coaching, customers and other companies. It will target existing digital technology hubs, including Belfast, Bristol, Cambridge, Edinburgh, London, Manchester and Oxford. The aim is to provide cash to help thousands of business start-ups to grow their businesses.
UK tech gap
The initiative will no doubt be welcomed by a number of UK equity fund managers, who speak of a lack of investable UK technology companies. SoftBank’s buy of ARM holdings back in September has caused the UK technology investment opportunity-set to shrink even more.
In order to gain exposure to the growth opportunities available in this exciting sector, a number of fund managers are opting to use their fund or investment trust’s overseas allocation in order to buy US-based tech stocks.
Robin Geffen, manager of the Neptune Income fund, believes that technological disruption will be one of the biggest drivers of returns over the next decade. As he sees few ways to play this theme in the UK equity income space, he is backing US tech giants Apple and Microsoft in his fund’s overseas allocation. He points out that these companies are cash-rich and returning cash to shareholders.
‘The world has changed. Technology disruption is going to be massive. Let’s benefit from some of those winners in an income fund,’ he added.
Microsoft also features in Murray Income’s top 20 positions, making up part of the investment trust’s international allocation, which can account for up to 20% of the portfolio.
Commenting on the rationale for holding 16% of the trust in overseas companies, manager Charles Luke explained: ‘It means you can invest in sectors where the UK is under-represented, so Microsoft in technology is a good example of that.’
Murray Income also owns UK mid cap Aveva Group (AVV), which provides engineering software, but the manager said it was harder to identify opportunities amongst larger UK technology stocks.
As technology accounts for only 2.3% of the FTSE All Share index, it appears to be a challenge for investors to find large tech companies trading on attractive valuations.
Accountancy software provider Sage (SGE) and NCC group (NCCG), which provides cyber security consulting, represent two FTSE 100 stocks that are viewed by some investors as looking expensive.
Liontrust fund managers Victoria Stevens and Matt Tonge believe that smaller technology businesses offer the best opportunities, particularly in the software space. This helps to explain why the Liontrust UK Smaller Companies fund +
, which they manage alongside Citywire AAA-rated Anthony Cross and Julian Fosh, currently has 33.9% in technology stocks. This compares to just 6.4% by the benchmark.
The team identify companies that have intellectual property, strong distribution channels and significant recurring income. Stevens notes that software companies often tick all three boxes, particularly once the software becomes embedded in a business, as this often means that management teams and staff will use it to make day-to-day decisions. Here, the team holds StatPro which provides asset managers with portfolio analysis tools, alongside Accesso Technology Group, which provides ticketing software to companies like Merlin Entertainments Group, which is behind Thorpe Park.
Outside of software, cloud computing company Iomart features in the UK Smaller Companies portfolio.
Regardless of whether you are looking at technology or not, Stevens suggests that investors still need to consider the impact of technology on any business.
‘Technology is all pervasive. You can’t eliminate technological advances on your assessment of any business. In our view, if you have barriers to competition from the start and strong intellectual property, you are going to give the business time to protect itself against disruptors,’ Stevens added.