TCS Daily


The Information War

By James K. Glassman - September 25, 2001 12:00 AM

As bad as the fundamentals have become for most tech companies, as sluggish as our economy has become, and as cautious as the U.S. consumer is right now, some very powerful trends could soon be driving a rebound in technology markets. The attacks of Sept. 11 stole innocent lives and wounded the world economy, but they may also have increased the need for information technology (IT) products.

Largely because of the slowing economy and in part because passengers are fearful, many corporations have cut back on purchases of airline tickets. Morgan Stanley recently called a short-term moratorium on travel. More and more companies are asking employees if plane trips could be replaced by telephone or videoconference calling. Moving ideas and images instead of people means more work for digital networks.

Beach resorts and Las Vegas casinos are hurting almost as much as the airlines. If people aren't traveling and spending their entertainment dollars out of town, that suggests they'll spend more of them close to home. Online entertainment - gambling, video games, etc. - is as close to home as it gets.

Now look at the nature of this war, described by President Bush last week. It will be a continuous effort to destroy a network of operatives hidden in countries around the world. There will be few fixed targets, and in destroying this enemy, tracing and seizing financial assets may be almost as important as pulling the trigger. And when the opportunities arise to send in America's trigger-pullers, they likely won't be massed troops and armor attacking hardened positions, but small teams with high-tech weapons able to home in on an elusive, mobile enemy.

In other words, this is a war of information. The decisive weapons in this war will be those that allow the United States to collect massive amounts of intelligence data, analyze them quickly, and then strike quickly with absolute precision. We need smarter law enforcement, smarter intelligence agencies and smarter bombs when it's time to drop them. All of which suggests that we need a more high-tech government and military, so the need for IT products is increasing.

The rebuilding effort will obviously require lots of new technology and telecom equipment in the New York area, but the bombing has also provided lessons for companies around the nation on the need for redundant systems, rock-solid storage of digital records, and information networks not dependent on one central location. Verizon routed many of its New York calls, even calls that did not begin or end in lower Manhattan, to a facility a few blocks from the World Trade Center. When it went down, much of Manhattan went without service. Companies that heed this lesson will likely have to spend money on upgrades.

So for many reasons, I believe that the United States - its government and its markets - will be looking to technology for solutions to confront the great challenges that we face. Therefore I think this may be a great time to make a broad bet on American information technology companies.

This suggests a technology index fund, a great way to allocate a portion of your portfolio to technology and achieve market returns. The Nasdaq composite is generally considered a great proxy for the tech market as a whole, and it is against this index that we frequently judge tech investors. It makes sense, because technology firms comprise most of the value of this index, but it's not a perfect IT investment. Not all great IT firms trade on the Nasdaq, for example IBM and EMC are listed on the New York Stock Exchange. And of course many Nasdaq companies are not involved in information technology. Among the largest 100 firms in the Nasdaq are biotechs like Amgen and Genzyme, as well as traditional businesses like Starbucks and Staples.

I have absolutely nothing against these companies, but if you want a pure investment in American information technology, you might consider buying shares in a fund that tracks the Goldman Sachs Technology Index. One way to do this is to invest in an iShares fund operated by Barclays Global Investors. Shares in Barclays' Goldman Sachs Technology Index Fund trade under the ticker symbol IGM. There's an annual expense ratio of 0.5%, which is more than some index fund managers charge, but that figure is still fairly low by money management standards. Buying shares in IGM gives you a small piece in each of more than 200 American IT companies.
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