Investment Special: Patently profitable

Here is something you may have missed if your eyes have been focused on the gyrations in bond and equity markets as euroland crises have come, gone and come again. The S&P 500 telecoms and IT index, the bellwether of digital stocks, has climbed 120 per cent from its 2009 low.

All of us who lived through the exuberance of the tech bubble of 2000, when all you has to do was add ‘.com’ to a company name and watch the fireworks, have a right to be sceptical about this latter-day boom. The rise and rise of Apple to become the most valuable firm in the world, with a market capitalisation of more than $600 billion, has led some analysts to quote the S&P minus Apple to get a better perspective.

However, as a recent traveller to the San Francisco Bay area which takes in Palo Alto and Silicon Valley, I could not but be impressed by the high levels of innovation, the cult of the patent and the constant creation of new value. Firms like Autodesk — pioneers in 3D printing, which can reproduce engine parts in your office — and Salesforce.com, winners in ‘cloud’ computing software and storage, dominate the skyline of San Francisco. Further south, social media players such as Facebook and LinkedIn dominate. What all of these companies have in common is a profound belief in research, new applications and patents.

Microsoft, IBM, Hewlett Packard and their ilk, the establishment of the sector, pay dividends to shareholders. But the newer players rarely do so, preferring to reinvest rather than distribute income and to reward investors by issuing shares because that also rewards skilled employees who are largely paid in equity, making them ever richer and more loyal to the cause.