Henderson Horizon Fund – Global Technology Fund Q&A with Stuart O'Gorman, Director, Technology Investments

Q: What are the current investment themes and examples of stocks in the Henderson global technology portfolio? A: Our investment themes are as follow:

(Note: * References to individual companies or stocks are for the purpose of illustration only and should not be construed as a recommendation to buy or sell).

Q: What’s your view on Asian technology stocks?
A: We are positive on Asian technology, particularly in the Internet theme and this is reflected as an overweight position in the portfolio. Chinese Internet names were sold off hard, and this has resulted in compelling valuations. Broadband internet access continues to grow rapidly, especially in emerging economies and we believe this will drive an acceleration of internet usage in these markets. Key holdings include Baidu, Netease, NHN, Ctrip, Tencent.

Given that the Fund is managed by bottom-up stock selection, what’s been your strategy year to date?
We continue to own those names with strong market positions, clean balance sheets and compelling product offerings that we believe will dominate their markets. Oracle, for example, has 50% of their revenues recurring and more importantly 70% of their profits. The Fund has a focused list of around 50 stocks and has a large cap bias.

Can you comment on Smartphone?
It is a highly competitive market with many companies launching new products. As such we are becoming concerned over pricing in this market. Many such as Nokia, Samsung and HTC are launching models to try to steal the mid market below the Apple iPhone, where Research in Motion had a strong hold with their Blackberry device. We think few handset companies will prosper in this environment and believe Apple will be the main winner. We prefer to play the handset theme through the chipset suppliers such as Qualcom and Mediatek. As the number and sophistication of devices increases and their prices decrease we believe there will be growing pressure on mobile data networks. Thus we can play this theme by looking at equipment companies such as Starent and Tekelec who will facilitate this increased traffic across the networks.

Any particular view on US$ and how it may affect the portfolio?
We have no strong near term views on the US dollar but IT tends to be priced in US dollars globally so acts to a degree as a natural hedge – in other words, if the dollar falls then technology products become cheaper, benefiting demand and vice versa.

Interesting facts about technology stocks
1. Year to date (as at 9 July 2009, in USD terms), technology stocks within the S&P 500 have outperformed the broader market (represented by the entire S&P 500) with a 19.3% gain (including dividend reinvested) compared to a 1.22% loss (including dividends reinvested) in the S&P 500.

2. Moore's Law continues to hold (i.e. semiconductor half the price, half the size and twice as fast every 18-24 months) – this means (1) new products and (2) mass adoption. E.g.: A reduction in price of the old iPhone by Apple from US$199 to US$99 (with contract) and the introduction of a new iPhone with higher functionality at the old price of US$199.

3. Companies in the technology sector have the healthiest balance sheets – high cash balances and little debt.

4 .Spending on technology is at depressed levels – historically this has been an excellent time to buy the sector.

5. Technology is on a free cashflow basis, one of the cheapest sectors globally.

6. Consolidation has reduced competition in many areas and we believe there is more to come in the technology sector. We like companies with strong barriers to entry as they can retain some of the cost savings of Moore's Law, maintaining or increasing margins. Those with low barriers to entry eventually have to pass on all of the cost reductions to customers.

7. Technology usually leads the markets higher as the economy recovers. In this cycle, the case may be even stronger as technology spending was heavily suppressed during the credit bubble, while most other areas of the economy were spending freely. Thus the ageing IT infrastructure built during the bubble is coming increasingly under strain and will need to be replaced in all but a dire economic environment.

8. Internet advertising still only accounts for under 9% of total advertising spending in the USA in 2008, despite the rapid growth of online media, suggesting that there is still a large amount of growth to come from the sector even in a "mature" market like the USA. (Source IAB)

9. The average American spends nearly US$300 per annum on semiconductors embedded in a variety of electronic goods. The average Chinese person spends under US$15.

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