Heralding good value

Rightly, the technology sector spent most of the 2003-07 bull market in the doldrums. After all, tech was the criminal that caused the horrendous dot-com crash that preceded that bull market. However, since share prices started picking up again in 2009, the attitude towards tech stocks has been much more enthusiastic. Indeed, since the London stock market bottomed out in March 2009 the FTSE All-Share technology hardware & equipment sector is up 202 per cent compared with a 49 per cent rise from the All-Share index, while the technology sector is up 93 per cent and software and computer services is 68 per cent ahead.

A key attraction for investors is that technology could prove to be one of the few parts of the global economy that can grow without the stimulus of growth elsewhere. That's partly because technology has become vital to the functioning of almost every company, so spending on IT can only be delayed for so long before it becomes a false economy. What’s more, many technological innovations aim to make organisations more efficient and save them money. And even on the high street, consumer technology seems to have a defensive quality as gadget addicts queue up outside Apple stores for the company’s latest releases and adorn their walls with ever-bigger and whizzier flat-screen TVs.

In this environment, there should be growing demand for shares in specialist technology investment trusts, of which there are only three listed in London. Shares in both Polar Capital Technology and RCM trade on single-digit discounts to net asset value of 4 per cent and 8 per cent respectively. Therefore it looks odd to see shares in Herald Investment Trust, the third technology specialist, changing hands at a 19 per cent discount to net asset value (NAV). This looks especially true considering that in the past year Herald's performance has been better than its peers - its NAV has risen 28 per cent, according to broker Numis, compared with 19 per cent for Polar and 21 per cent for RCM.

The key reason for Herald’s wide discount seems to be that it focuses on smaller companies and, while the discount is wide, it is a darn sight narrower than at its worst in 2009. True, there are other reasons for the discount, such as the comparative illiquidity of a portfolio of shares in smaller companies. And such shares tend to be more volatile - ie riskier - than shares in big companies. That said, Herald's portfolio is spread across 212 holdings, which should make it sufficiently diversified to compensate for these risks. Besides, Herald’s discount is wide even by the standards of smaller companies trusts: the average discount for these is 15 per cent. And Herald’s market value - £377m - is not so small that it drops under the radar of big institutional investors.