April 08, 2004

A Basket of Nanotechnology

When Britons first started holidaying in the then exotic Spanish costas, back in the early nineteen seventies, many were surprised to see that German holiday makers were already well established. While the British were struggling to find a plate of egg and chips with a pint of Watneys Red Barrel to wash it down with, Germans were dining on paella and vino tinto. Thirty years later the Germans are still ahead, with baskets of publicly traded nanotechnology funds going back to 2002.

The German approach is a little different to the recently launched indices, being more of the traditional actively managed fund rather than producing an index upon which you can base other products. For this reason they tend to reveal only the top ten performers of the 40 to 50 stocks in the fund, while switching in and of stocks.

So, of the seven publicly traded baskets and indices already out there, the visionary prize has to go to Thiemo Lang and his team at Activest in Munich whose Activest Lux NanoTech fund was launched in November 2002.

This was followed a year later by Hauck & Aufhäuser and their Lux DAC NANOTECH-FONDS in September 2003 (The Lux refers to Luxembourg, the location of the funds, which has tax advantages compared to Germany).

Then the onslaught began with Punk Ziegel in February, First Trust in Match, and Merril Lynch in April. Also to be launched on April 19th are two nanotechnology baskets from Credit Suisse Private Banking Group.

So that’s seven different funds tracking nanotechnology involving almost a hundred publicly traded companies according to the list pinned to the office wall – Phew! But how are these companies selected, some have very little to do with nano, and some are small companies.

There are two issues, and we apologise to the professional investors reading this but we promised to explain to non professionals a little more about how funds work.

The first is that if you want to have a basket of pure play publicly quoted nanotechnology companies it would be more of a thimble than a basket, and it would be foolish in extremis to base an index on a handful of publicly traded small cap companies, so you have to throw in some large corporations, an IBM, or a Veeco to balance the portfolio, which then lays you open to accusation of not being a particularly nanotechnology sensitive index, but there’s no way around this.

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Consider a couple of the companies in the Merrill Lynch index, say Cabot Microelectronics and JMAR. Cabot is actually down since the launch of the index, 20% down at one point. Why is this happening when JMAR leapt 20%? The answer, and the second issue lies in the liquidity of the stock. Cabot has a 10 times bigger market capitalisation than JMAR, and traded over the last year at $40.49 - 68.83 rather than JMARS somewhat volatile $. 0.82 - 4.72. Now look at the bottom part of the JMAR chart where we see the volume of shares traded. Before January which, as our nanoBarometer predicted, is where the current wave of hype began, volumes were around 30,000 shares at $1, so $30,000 a day. Recent volumes are 600,000 at around $2,50, so $1.5 million a day. Other small cap nanotechnology companies are experiencing similar surges in volume, a classic bubble phenomenon?

Well as long as momentum keeps building that’s fine, but what happens to a fund manager who has 4% of his assets in JMAR if the bubble bursts and we go back to volumes of $30,000 per day? How do you get rid of these shares and at what price? Hence the inclusion of a company such as Cabot Microelectronics.

But why is Cabot Microelectronics down on the week? Wasn’t the Merrill Lynch fund supposed to give all the nanotechnology stocks a boost? The answer lies not in nanotechnology, but the fundamental performance of the company. All the nanotechnology boosters in the world can line up on Wall Street and sing the praises of Cabot Microelectronics, but it won’t stop them reaching a 52 week low. While their inclusion may help balance the index, as far as the markets are concerned Cabot Microelectronics simply isn’t a nanotechnology company, and is affected by more than its inclusion in an index.

The winds of nanotechnology may blow, but investors in large companies are far less likely to be swayed by fashion than by fundamentals.

Posted by Cientifica at April 8, 2004 04:38 PM | TrackBack
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