There are only so many hours in a day that people are willing to spend staring at a flickering screen. So as more and more people around the world spend time surfing the Web, television may become less important. Advertisers should take note of that trend. Ian Warmerdam, comanager of the $262 million Henderson Global Technology Fund in Edinburgh, Scotland, thinks that they're a little behind the curve. "The Internet is consuming more and more of our media time," he says. "But Internet advertising accounts for less than 10 percent of advertising budgets in most western companies." It's only a matter of time, he believes, before companies fix this discrepancy—which means higher values for some of his choice stocks.
Warmerdam touts the Henderson fund, at 55 stocks, as the largest in Europe that works exclusively on technology. This has been the fund's strongest year in the past four, seeing it rise 32 percent vs. 10 percent for the Standard & Poor's 500 index. Granted, it's been a strong year for the technology sector as a whole, but Henderson is still beating its category by 7.4 percentage points, according to fund watcher Morningstar. Over the past five years, the fund has notched an average annual return of 20.7 percent (8.8 percentage points over the S&P) and 14.7 percent over the past three years (5.6 over the S&P).
Warmerdam attributes this strong performance to two main factors. First, he and his colleagues have been able to find high-growth companies with undervalued stocks. Stocks catch his eye "when strong earnings growth hasn't been reflected in stock price." For example, Priceline.com is the fund's third-biggest holding at 2.98 percent. When he was first attracted to the company early this year, the stock's earnings were in the triple digits, he says, but its price-earnings ratio was in the low 20s. So far this year, Priceline.com's stock is up 135 percent. Warmerdam, who started adding the stock to the fund in June, says that meeting with management is equally important to him as analyzing a firm's growth potential on paper.
Second, the fund's international focus, Warmerdam argues, gives it an edge over competitors who miss out on companies that don't get enough attention. Non-U.S. holdings make up about a third of the portfolio. "The competition is somewhat shortsighted regarding international opportunity. Many small-cap tech companies only trade on local markets."
One such company is NHN, a Korean Internet service operator that Henderson bought into in October of 2003. This is one of Warmerdam's key holdings related to Internet advertising. "They're the Google of South Korea," he says. "Several years ago, the No. 1 position was held by Yahoo. NHN focused on local needs, now they have 78 percent of search market. They've returned over 800 percent since we purchased them."
Another technology trend that Warmerdam hopes to cash in on is the growth of global positioning systems and digital mapping. (Think of all the Google Maps and Mapquest searches that have made road trips much easier). In June 2005, he bought into TomTom, a Dutch manufacturer of GPS devices for use in cars, as well as software for PDAs and cellphones. He thinks this company will be especially important in the future as it is poised to acquire Tele Atlas, a Dutch digital mapping company that is one of the sources of maps for services like Google Maps.
But while these companies exemplify the emerging technologies he's interested in, Warmerdam also fills his portfolio with some names that are more well known stateside. His top holding is Nokia (3.2 percent), followed by Cisco Systems (3.1 percent).
Cisco's role in the portfolio brings Warmerdam to another Internet trend: the massive growth of data, which Cisco supplies the infrastructure to support. "YouTube has more data today than the entire Internet did in 2000," he explains. That's a lot of information to lure you away from the TV set.