In our view, the drivers for technology will be the avalanche of change that we are experiencing and it will be most prominent in the following areas: Broadband audio and video, Semiconductors, payment systems, RFID, and interactive gaming. While many of these themes may or may not prove successful or long-lasting for the immediate companies involved, what is clear to us is that there is a tremendous momentum and a trend towards more investment dollars being spent on these technologies. Hence, we view that the best way to position our portfolios is in most cases to invest in those companies that will enable these technologies and provide the necessary infrastructure necessary for it to be viable rather than invest in the primary companies involved.

Broadband Audio and Video:
Be it VOIP (voice over internet protocol), digital audio (MP3), or digital video downloads, it is clear that year 2006 and beyond will bring more communications and media online through the internet. With more and more consumers having a broadband connection and with Municipal hi-speed wireless internet access already becoming a reality in a few major cities, we think that the trend towards consuming media in digital form versus physical form (CD or DVD) is definitely on the rise. Whether this trend will be commercially profitable for content owners (or service providers in the case of VOIP) is debatable and is yet to be settled but what seems to be clear is that there will be more investment in internet infrastructure and optimization software that makes this process more seamless and commercially viable.

Chips, chips, and more chips:
While in 2005 we favored the semiconductor sector over any other sector in technology, we believe that in 2006 it will be harder to pick individual companies due to our value investing style bias because of the increase in valuations that the sector experienced last year. As the functions of personal computers, MP3 players, and Cell phones become increasingly more sophisticated, its is clear that the chips that go into these devices will have to be increasingly more sophisticated and technologically advanced. This implies more capital investment by the chipmakers. For this reason we believe that the better investment opportunities (and better valuations) are found in semiconductor capital equipment makers as there are only a handful of players in this field compared to the huge number of players in individual chip makers. It is important to note that this evolution towards more sophisticated chips is not limited to consumer electronics devices, but it really encompasses a wide range of sectors and industries that include the video game makers, auto makers, and home appliance makers; just to name a few.

Payment Systems:
The evolution of payment systems will take on a big step in 2006 in our view. We think that both the means and the mediums will start to undergo change. By that, we foresee that payment options in the near future will not be limited to check, traditional credit cards, or cash. While the trend of cashless transactions will continue to strengthen, we think that e-checks and online payments will continue to replace physical checks. Furthermore, we predict that the major credit card brands (Visa and MasterCard) will lose market share to new and existing entrants. To that end, we think that MasterCard’s decision to go public is not a pure coincidence and that it is taking the IPO route at a rather opportunistic time. While in parts of Europe and Asia cell phones are often used as a means and a medium of payment, we think that this trend is certainly on its way to the US. Until that happens, we see the best investment opportunities in this sector to be in companies that make cashless and online transactions more secure and seamless. For the longer term, we are certainly opportunistically looking at the wireless carriers as we believe that while their main offering will continue to be voice communication, they will increasingly be the gate keepers and the beneficiaries of any new services going wireless.

Do you RFID?
Ever since Wal-Mart asked its suppliers to use RFID technology in their shipments, the technology has been almost exclusively viewed by many investors as a solution for supply chain management only. We think that this perception of RFID will evolve in 2006 as we see a trend in applying this technology in so many other industries that we will only begin to see in 2006. Some of these industries for example are security and biometrics, healthcare, and payment systems to name a few. In this space we favor those companies with the leading edge intellectual property (IP), and, as has been our theme throughout, those who provide the necessary infrastructure.

Interactive Gaming:
While the video game industry has experienced a huge success having achieved excellent growth over the last ten years, it did face some challenges in 2005 that we think it will overcome in 2006. More over, we think that there will be a continued big push towards online gaming and gaming on wireless devices. In the fourth quarter of 2005 for example we witnessed a relatively big takeover at a rich premium in the nascent wireless gaming and content industry. Again, infrastructure providers and those companies that provide enabling solutions and peripherals are the ones poised to be the winners in this space in our view. In addition, certain game publishers are starting to look attractive at this point.

The S&P 500 in 2005
The S&P 500 closed the year up 4.91% after having added 9.23% in 2004. Even though the fourth quarter was characterized by heavy profit taking in the Energy and Utilities sectors, which were both down 7.73% and 6.32% respectively, both sectors ended the year as the best performing sectors, up by double digits for the year. Energy was up better than 29% for the year followed by Utilities, up almost 13%, with healthcare coming in at a distant third with a gain of almost 5%. Telecommunication services lead to the downside by more than 9% while consumer discretionary was down 7.35% and the Consumer discretionary sector was almost unchanged barely advancing a mere 0.36%.