Tap tech returns at a bargain with Polar Capital

When investment trusts do well - and investors notice - they tend to trade at premiums to the value of their assets. Conversely, when a trust with a good record swings out to a discount of the value of its assets it can provide an opportunity to get in at a bargain. But the price needs to be viewed in context of the discount and premium history.

Polar Capital Technology often trades at a tighter discount than 5 per cent, and sometimes at a slight premium. Since Ben Rogoff took over the management of the trust in May 2006, it has delivered net asset value (NAV) total returns of 128 per cent compared with 120 per cent from its benchmark, the Dow Jones World Technology Index, according to broker Stifel.

The trust's NAV also beat this index over one and five years, and is level with it over three. However, this is not reflected in its share price which underperformed the benchmark over three and five years due to market falls, and negative sentiment towards the technology sector, which investors consider to be more volatile and higher risk. Concerns on individual companies are contributing to the overall impression of the sector, although not all are in the same position.

However, if Polar Capital Technology's good performance is recognised then this could be reflected in the share price and the discount could tighten.

The trust is positioned to capture newer areas that its manager feels will generate returns going forward. "It is clear to us that this technology cycle has entered a more disruptive phase, where newer/cheaper technologies and cloud computing are becoming increasingly the norm and are capturing all of the incremental spend," says Mr Rogoff. "As such, we have continued to pare our exposure to larger (ex-growth) incumbents with the most to lose from new cycle deflation, emerging market weakness and foreign-exchange headwinds."

And following the news that PC maker Dell is to acquire data storage group EMC (US:EMC), Mr Rogoff commented: "Other than the travails at IBM (US:IBM), we believe this is the best evidence so far that the legacy, enterprise-centric computing model is broken as cloud computing becomes the default choice. This view is perfectly framed by the fact that today's deal was accompanied by another negative EMC's earnings pre-release. Financial engineering like this says more about how inexpensive debt is, and in the case of Dell - how bad the PC market is - than the attraction of core EMC."

Key areas of investment for Polar Capital Technology include cloud computing, expressed via holdings such as Amazon (Nas:AMZN), Red Hat (US:RHT) and Arista (US:ANET); broadband applications via holdings such as Google (Nas:GOOGL), Baidu (Nas:BIDU) and TripAdvisor (Nas:TRIP); and big data via Facebook (Nas:FB).

But the trust still has a good proportion of its assets in large-cap incumbents. "This strategy served the fund well during the tech/growth downturn in 2014 and reduces volatility relative to the benchmark," comment analysts at Winterflood. "However, given the manager's view of the sector the continuation of a shift away from the benchmark would be positive over the longer term."

Polar Capital Technology Trust has performed better than Allianz Technology Trust (ATT), also an IC Top 100 Fund, over one year, but not over three and five.

Polar Capital Technology does not have a formal discount policy which might hinder its ability to tighten its discount.

It also has a performance fee which it did not levy in its last financial year so its current ongoing charge of 1.08 per cent could rise if it continues to perform well. But while there is a performance fee the trust has cut its base fees from 1 per cent of gross assets, to 1 per cent of NAV up to £800m, and on assets in excess of that 0.85 per cent.

So with a strong historic performance record, and the potential for improved share price performance and discount tightening, Polar Capital Technology Trust looks like a good way to get exposure to growth areas of technology at a cheap entry point. Buy.

Source: Morningstar, *Polar Capital & **Winterflood

Performance

Source: Winterflood, as at 12 October 2015

Top 10 holdings, as at 30 September 2015 (%)

Sector breakdown