Stephen Peters: Tech investment 2.0

The technology sector is being looked at by many investors, both individuals and institutions, as an ‘early cycle’ investment option. It gives access to US equities, where many funds available to UK investors have struggled to generate sustained outperformance in recent years.

The constant desire for ‘killer apps’, whether Nintendo Wii, iPhone, or Spotify, and the use of the internet in products from mobile phones to fridges means the wider sector is enjoying new interest.

Herald IT  is the largest trust in asset terms, and is more focused on small-cap technology companies than its sector peers. It has a bias towards smaller capitalisation UK companies, with more than half its assets invested domestically. Launched in 1994, and run by the same manager since, it aims to invest at an early stage in small-cap companies run by entrepreneurial management. Herald IT is well diversified, holding about 250 different stocks.

The trust stands on the widest discount to net asset value in the sector, and has enjoyed excellent short-term performance, masking disappointing long-term returns. Because of the US-centric nature of the industry, we think the trust is more attractive to discount-based investors than those who believe in the wider sector.

Polar Capital Technology  is another option. It is managed by Ben Rogoff, a passionate proponent of the sector. He aims to invest in stocks that fit into how he believes the technology sector is evolving globally. The trust’s holdings have shifted recently from a focus on alternative energy towards stocks that will benefit from the move to ‘cloud computing’, increasing internet traffic and the network development required to support it, and mobile broadband growth.

The trust is relatively liquid, gives a broad sector exposure and, trading at a 14% discount to net asset value, offers some value to investors.

A third option is the RCM Technology Trust , which is run by Walter Price, who is based in San Francisco. Price has managed an open-ended technology trust in the US for years, which has generated annualised outperformance of its benchmark of more than 7% for the last 10 years. He invests in companies he thinks will deliver strong total returns, benefiting from secular growth themes such as the growth in data centres, outsourcing, and cloud computing.

We regard Price and RCM as the best trust available to technology investors in the closed-ended sector, although the trust is small and subject to potential NAV dilution due to its outstanding warrants.