Last week I talked about Polar Capital’s Global Healthcare fund and this week its technology trust caught my attention. I was struck by the contrasting fortunes of Polar Capital Technology (PCT) and RCM Technology (RTT), both of which announced results recently.
PCT’s results, covering the year to end April 2013, saw its net asset value (NAV) rising by 5.1% – marginally behind the 6% return for its benchmark, the Dow Jones World Technology Index.
RTT released half-year results for the six months to the end of May 2013. Its NAV was up 27.3%, while the same benchmark was up 15.8%.
The trust has had a good time recently. To give you some directly comparable numbers, RTT’s NAV is up 40.6% over the past year against 22.8% for PCT. Longer term, however, Polar’s fund still comes out on top – up 167% over 10 years against 113% for RTT. The two funds have similar investment objectives. Both portfolios are heavily skewed towards the US, and have the same largest holding, Google.
Neither fund is geared to any great extent or pays a dividend. PCT is managed with a longer tail of holdings but the percentage allocated to the 10 largest holdings is about the same for both funds. The fees are similar; ongoing expenses were 1.2% for both funds in their last accounting year.
The biggest difference between the two seems to be that RTT has a higher weighting to medium-sized companies than PCT.
Same location as stocks
RTT has been managed by Walter Price since May 2007. He is based in San Francisco, which is where a fair proportion of the stocks in the portfolio have their headquarters.
RCM think this gives them an edge (though, as I have discussed before, there does not seem to be much hard evidence that a manager’s location makes a difference to their investment performance). The approach to managing the fund is to try to anticipate which sectors of the technology industry are going to be the future drivers of growth and invest to take advantage of that. This should give them a bias to medium-sized companies at the expense of the mega caps.
They also say they want to be invested in the Microsofts, Apples and Ciscos of the future. Given this, you might find it odd that all three of these stocks are held in the portfolio and that Cisco was one of their top 10 holdings at the end of May 2013.
The reason for this is that RTT is run on a ‘benchmark aware’ basis which translates as ‘even if we do not really like a stock, we are wary of not holding it if it is a large component of our benchmark’.
I have always disliked this approach, as I think it encourages a herd mentality and was a cause of the tech bubble. PCT’s portfolio exhibits this trait to an even greater extent. Its portfolio has large but underweight positions in a raft of major index constituents. This served it well when investors seemed to be favouring those stocks in 2011 and 2012 but lately it has been unhelpful.
The more than sevenfold increase in Apple’s share price between spring 2009 and its peak late in September 2012 made it the largest company by market capitalisation in the world. Apple also represented almost 19% of the benchmark.
Both managers were underweight Apple relative to the index but RTT more so. Apple’s shares have fallen by 38% from its high and this has had a large impact on the relative performance of the two funds. PCT also has more invested in Samsung Electronics than RTT. Samsung’s shares have tumbled since early June on worries that its smartphone sales would disappoint.
Apple and Samsung may have hit an inflexion point. Their sheer size makes it hard to find new transformational products that can have an appreciable impact on their bottom line.
Microsoft hit this point more than a decade ago. It is still a very large and successful company but, even after a strong run recently, its shares are still the same price as they were in 1999 and a long way off the high achieved at that year.
The key to driving the performance of a tech fund ever higher must be to do as RTT professes and identify tomorrow’s mega-caps today.
Polar see the adoption of smartphones as an important driver of the tech sector over the next few years and this could bode well for Apple and Samsung. However, there are plenty of other exciting investment themes: cloud computing, on-line advertising, e-commerce and remotely hosted software for example.
Polar believes ‘big data’ – the ability to store and manipulate vast amounts of information efficiently and cheaply – could be the next big thing. RCM identifies many of the same themes but also highlights touchscreen computing, LED lighting and electric vehicles – its holding in electric carmaker Tesla Motors has made a significant contribution to RTT’s recent performance.
PCT is trading on a tighter discount than RTT (1.7% vs. 8.8%); the gap seems anomalous given RTT’s recent performance and RTT’s buy-back programme (operating at discounts in excess of 7%). RTT has been buying these shares into Treasury and, if continues to outperform, deserves to re-expand.
The difference between RTT and PCT may become less marked soon, however. Polar is worried about the fragility of some of the large cap stocks’ business models. It has decided to make the portfolio ‘less benchmark aware’ and, as it shifts into mid caps, PCT’s portfolio and, possibly, its performance may start to resemble RTT’s.