A DECADE ago many investors were in the process of losing their shirts as the technology bubble deflated.

Some will have been pragmatic and sold out, some will have gritted their teeth and held on, convinced of an imminent recovery – others will have added to holdings to enhance the returns generated in this imminent recovery.

The imminent recovery didn’t come and a great many investors had to face the grim reality that they had purchased shares in hugely over-valued companies that didn’t make money.

One of the key functions of the stock market is to value assets and during the tech boom this was rather forgotten as the mania of buying ever- rising equities regardless of the good or bad value the prices represented took over. Consequently, when reality bit, share prices plummeted and the FTSE 100 Index lost many of its technology constituents.

Times have changed, however, and the technology that was once discussed in little more than conceptual terms has become useable with applications, customers and ultimately, profits.

High-street giants such as HMV and Currys have struggled to meet the challenge of internet-based competition; mobile phones have now been replaced by smart phones comprising a range of functions including digital cameras; and laptop computers are likely to be superseded by “tablets” such as Apple’s iPad.

Of course, the technology sector is very broad, encompassing a wide range of companies, many of which have grown profits at a faster rate than analysts had expected. As a result, the sector has attracted a great deal of attention from large institutions and private investors. Indeed, many technology funds are once again being advertised in the Press. In the FTSE 100, ARM Holdings has been much in focus and was highlighted by Evan Davis as one of the world’s leading technology companies in BBC2’s Made In Britain show last week.

ARM Holdings is the world’s leading semiconductor intellectual property company, designing and licensing the technology rather than manufacturing the chips themselves. ARM chips dominate the global mobile phone and smart phone market and the new and growing “tablet” market.

The news that Microsoft’s latest operating system will run on ARM- designed chips is potentially important to investors in the company too.

Chips are now being used in ever- more products. Rather than passing into obsolescence computer chips designed by ARM in 1993 for mobile phones are being used in washing machines and cars.

Shares in ARM Holdings trade at a premium price to the sector average due to expected earnings growth prospects, in part due to the expected growth from the tablet market.

Therefore, investors considering investing in ARM, or in the technology sector, should consider the valuation the shares are trading at.

Also, before investing individual circumstances should be considered and appropriate advice sought.

:: Fergus Westwood - fergus.westwood@brewin.co.uk