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Small cap tech trust Herald increases company size limit

Small cap tech trust Herald increases company size limit

Herald (HRI) investment trust is increasing the size of the smaller technology companies it can hold after substantial growth in a number of its investments.

The trust has increased the size limit of investee companies from below £2 billion to below £3 billion.

Julian Cazalet, chairman of the £816 million trust, said it ‘has always been the policy to make investments below the size limit but the manager has continued to hold some positions that rise above the threshold’.

‘Following strong performance, 15 companies have a market capitalisation exceeding £2 billion with an aggregate value of £79.5 billion,’ he said.

‘This limit has not been changed for a number of years, and a higher limit offers more flexibility as the size of the company grows.’

The change comes after Herald reported a 26.9% total return on net assets in 2017 although shareholders enjoyed a total return, including dividends, of 32.7% as the discount - or gap between share price and net asset value - narrowed to just under 15%.

Over the year, the top performers were semiconductor wafer manufacturer IQE (IQE), where the trust made a total gain of £29.8 million over the year. This far outstripped the second best performer Bango (BGO), a billing and payment company, which added £15.4 million to the trust.

Netherlands-listed BE Semiconductor contributed £11.6 million to the portfolio, document validation company GB Group (GBG) added £10.4 million, and videogame company Frontier Developments (FDEV) added £8.7 million.

The fact that four of the five best performers over the year are UK-listed is testament to the ‘sparkling’ performance seen in the UK over 2017, said manager of the trust Katie Potts.

The UK portion of the portfolio returned 35.2% over the year and 17 UK companies have returned more than 100%, including cloud distribution company Zoo Digital (ZOO), which has appreciated 550%. Potts said the trust supported Zoo Digital through its ‘darkest period’, providing cash to ‘enable the company to survive’.

‘Although still a small company, based in Sheffield, it has an impressive customer list with Netflix adding to long-standing customers such as Disney and Warner,’ said Potts.

Engineering technology creator Versarien (VRS) has seen its shares increase 442%.

‘Collectively these companies delivered a total return of £104 million, and only one, IQE, was a top 20 holding at the start of the year,’ said Potts.

‘Arguably the performance of the smaller holdings reflects the fact that we are in the later stages of the bull market.’

Potts said the takeover of smartphone technology company Imagination Technologies (IMG) by China-backed private equity firm Canyon Bridge in 2017 was a ‘sad end for a highly innovative company’.

The company was one of Herald’s most profitable holdings, with realised profits of £32.9 million.

Potts said the board of Imagination failed to ‘optimise the outcome and were not helped by frustrated shareholders’.

Over the year Potts said a few companies had been ‘anomalously strong’ but said tech was not in a ‘frothy irrational market’.

In the UK, the tech sector has not shrunk by the number of companies but ‘in practice larger companies have gone and smaller companies emerged, so it has shrunk by value’ but she argued that ‘AIM is vibrant’.

‘There is a surprising level of entrepreneurialism in the UK relative to other countries,’ she said, adding that the technology sector was still growing despite the ‘gloom’ of Brexit and politics.

‘The UK continued to benefit in 2017 from sterling weakness in 2016, and there is likely to be a relative headwind this year,’ said Potts.

‘Nevertheless, the price/earnings of the portfolio at 23x does not seem expensive relative to bonds and other sectors with lower growth prospects. The sector remains exciting.’

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