Best ways to invest in tech companies

The date 21 March 2006 is linked to the first ever Tweet sent out. On 15 July 2006, however, the service became available to the public.

Perhaps it won't get as much attention as the March anniversary but, given Twitter has made its name as "a global platform for public conversation in real time", the July "birthday" is equally relevant. For investors, it makes a useful analogy about buying tech stocks: sometimes the story is more complex than it seems.

As a business that pushes the boundaries of social, political and technological interaction,Twitter's ethos is all about simplicity. Its founders talk of giving everyone "the power to create and share ideas and information instantly, without barriers". In this it has excelled.

The platform is credited with enabling massive social uprisings such as the Arab Spring in 2011 and helping put Barack Obama into power in 2008.

A shareholder's perspective

From a shareholder's perspective, another anniversary looms later this year, which Twitter may not be so keen to promote: its three-year mark as a listed company.

If you'd bought shares in Twitter's initial public offering (when it launched on the New York Stock Exchange) in 2013, you would have paid $26 a share. At the time of writing (13 June 2016), it was trading at $14. If you'd bought in at the height of the hype, in January 2014 when Twitter's shares hit $69, you'd be down 80% from that point.

This would be particularly unlucky, given global technology stocks over that same period from January 2014 until today are up 23% (in US dollar terms, for relevant comparison). But the trouble with Twitter is that for all its impressive user and engagement metrics, it continuously misses one crucial component - a profit.

Mind you, that doesn't always seem to worry shareholders. Amazon provides the most famous example of a tech stock worth billions, which has previously delivered annual losses without losing its shine. Founder Jeff Bezos's ballsy story of growth potential is obviously more compelling than Twitter's democratic rhetoric.

Risky business

For me, it reinforces what I've long believed regarding technology investing, which is that unless you have a lot of knowledge and experience in the industry, trying to pick your own stocks can be pretty risky. There are too many pie-in-the-sky companies whose big ideas sound exciting, but whose management and business models are unproven.

A global technology fund with an active manager who knows the industry inside out may help you get the benefits of some established tech stocks, while avoiding the duds. Plus, you can be part of the exciting growth story of a select range of smaller start-ups with solid fundamentals.

I like the AXA Framlington Global Technology fund, whose manager Jeremy Gleeson has specialised in tech investing since 1998, steering investors through both boom and bust cycles. He has a focus on avoiding what he calls "old world" technology, by which he often gives the example of IBM, a company he feels hasn't evolved to capitalise on the next wave of digital disruption.

Another way to invest in tech companies is to look at actively managed US funds, as US companies comprise the biggest weighting in any global technology index. To look again at the period since Twitter launched, US tech stocks have outperformed the broader US market.

What this means is that by finding a good, actively managed US equity fund, you can aim to both beat the US market and get exposure to high quality tech companies. The Brown Advisory US Flexible Equity fund has consistently beaten the American stockmarket index Standard & Poor's 500 (S&P 500) over long periods of time and holds more than a third of its total fund in the information technology sector.

Schroder US Mid Cap is another interesting fund, as it avoids the big names that dominate tech talk - Google (Alphabet), Microsoft and Facebook - and instead looks further down the scale. New York-based manager Jenny Jones has around 11.5% of the fund in technology.

Darius McDermott is the managing director of Chelsea Financial Services and FundCalibre.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.