Tech sector entering age of the small caps, says AAA-rated manager

Recession aftershocks have now fully hit the tech world as anticipated global economic slowdown will see large cap firms struggle while small cap groups have reached a new dawn of sustained growth, according to Polar Capital’s Nick Evans.

The situation has reached a tipping point as large cap tech firms are at a stage where their core markets are saturated and the only option open to them is diversification into the expanding data storage market. This bodes well for investors in successful of new tech driven small caps as many large firms are looking to capitalise through M&A.

‘The macro situation is obviously softening at the moment and if you’re a large cap company, like IBM for example, if the GDP growth figures are revised down then the IT budget will also,’ says Evans, who runs the Polar Capital's €223 million Global Technology fund and is AAA-rated by Citywire.

‘We are coming off the bottom of the economic tailwind which lifted all the boats and the large and small caps all benefited.

‘But the big groups are finding it more challenging, not only with their growth but also with their earnings. There is a new period starting in technology and the catalyst has been the recession.’

Over the next six months there will be a real pick-up in M&A, according to Evans, and the war of attrition developing between many of the large firms for new tech industries, such as cloud computing, is creating a volatile market environment.

One such example Evans highlighted is the recent takeover of data storage company 3PAR by Hewlett Packard (HP). The company was originally valued at $10 per share but as Dell and HP locked horns to win it over the final sale price tripled to $33 per share.

‘This technology is in the hands of Hewlett Packard and they will now be going directly for the market that groups like EMC and Hitachi are in. It’s bad news for everyone else.’

According to Evans, the large firms are now being attacked from all angles as they attempt to broaden their product range. Although some large groups’ share prices, such as Dell, IBM and Cisco, are relatively cheap, the combination of a lower income due to reduced IT budgets and accelerating M&A competition increases the risk of their value stagnating.

‘I would rather than be on the holding side of M&A activity, than on those paying for the it,’ says Evans. ‘The large caps core markets are being challenged by these disruptive technologies. On the face of it they [large caps] look like attractive investments, but they might not be as attractive as they seem.’

The London-based fund manager is currently betting on a number of small caps, including data warehousing firm Netezza which he sees as having strong five-year growth figures, cloud computing infrastructure firm F5 Networks and wireless network group Juniper Networks.

Since Evans took over the fund in January 2008 it has returned 10.3% while its Citywire benchmark, MSCI World/Information Technology TR, fell 9.1%.