31 October 1999

The FTSE introduces a new stock market benchmark this week which it says will give UK equity investors for the first time a solid and useable index of technology stocks.

The FTSE officials say that Techmark will index 170 technology companies and also facilitate a market listing for small start-up companies that do not have the three year trading record required for a full listing on the Stock Exchange.

Many fund managers have welcomed the index and also the opportunity to buy into fledgling companies that could be fast growing, such as Arm Holdings and Imagination Technologies (see Strategic Thinking, above).

The FTSE says that Techmark will act like a market within a market, featuring stocks as diverse as Vodafone Airtouch and Israeli-based BATM, which makes hi-tech switches to enable fast data transfer.

For investors, having a high-tech benchmark against which to gauge the performance of other technology issues will be a big bonus. In line with other global tech indicies, investors will be able to buy into the growth potential with new products linked to Techmark.

Close Brothers is launching its Close FTSE Techmark Fund, which will track the "growth tier" of the index, the Techmark 100 Index.

The Techmark allshare index includes the bigger companies such as Glaxo Wellcome, which, while still having a technological drive, do not offer the same growth potential as medium and small companies on the Techmark 100 Index.

The fund offers an easy way to get exposure to the growth potential of the stocks contained in the 100 index, which Close says has elicited a "phenomenal" response from investors ahead of Thursday's launch.

Before the launch of the Close Brothers fund, Richard Holway, a specialist research house, has released figures showing the combined weighted performance of all technology stock flotations since November 1989, as well as the 40 similar stocks that were already listed at the start of the tracking by Richard Holway. The result is that the "universe" of hi-tech stocks has surged almost 500%, while the FTSE 100 has advanced less than 200%.

FTSE, a joint venture between the Financial Times and the London Stock Exchange, is hoping that the market and its indicies will become as widely used as a benchmark for the performance of the hi-tech sector as the Nasdaq is in the US.

Competition between the Techmark, and the (only slightly) older Easdaq stock market for high-growth companies will no doubt intensify. One company, JSB, a software publisher has recently opted for a launch on Easdaq, rather than on Techmark.

Richard Holway's System House research points out that some of the small company, hi-tech flotations in the past decade have since become at least medium-sized winners - in the worlds of software, IT services, hardware and leisure applications.

Sage, for example, which publishes accountancy software, was placed at 26p and valued at £8m; the latest price is £31.12 and its market value is £3.8bn. Much the same can be said for Admiral, Eidos, Logica, London Bridge and dozens of others.

While the hi-techs have out-performed the FTSE 100 in the past 10 years, the question still needs to be asked, whether the same will happen in the coming decade. Richard Holway research points out that the surge in IT companies in the past decade has been a result of the integration of computing into every aspect of corporate activity.

Although there is concern that all the current internet service providers might not last the course, the Internet is here to stay. Fund managers are often keener on technology enablers - such as Cisco, Lucent and Compaq in the US - than the pure internet plays.

Analysts at Credit Suisse First Boston (CSFB), in a huge research publication called The New Millennium Project, assert that the next few years "have the potential to deliver perhaps the largest and eventually the most widespread jump in wealth ever experienced" through improvements in global productivity, by deregulation and globalisation.

CSFB admits it made some mistakes in the past decade. "We did not fully forsee the extent of the scale of the US technology boom and its impact on equity prices, nor the potential of the internet and e-commerce," says the report.

The analysts then set out a model for global growth that is largely predicated on the universality of information technology applications to almost every aspect of life.

While some of that bullishness may be priced into the US technology sector and, to a lesser extent, to the technology sector in the UK, there is still potential for new companies to make huge leaps and become the next Arm or Sage.

While the European competitors, including Easdaq and also the Neuer Markt, have in the past had a difficult time in persuading companies to go for a listing rather than seeking capital elsewhere, there are signs that more companies will return to offering themselves on the Stock Exchange.

Techmark's backers must be hoping that this trend will continue.