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The new tech story, at a discount

Created:

2 July 2009

Written by:

Moira O'Neill

REWARDS:

■ Underlying secular growth story

■ Experienced manager

■ Attractive discount to NAV

RISKS:

■ Technology industry suffers in economic decline

■ Portfolio heavily weighted to North America

■ Performance fee

The technology industry is cyclical and will likely experience falling profits as economic activity declines, but one specialist technology fund manager is predicting an underlying secular story that will change the tech story fundamentally.

Ben Rogoff, fund manager of Polar Capital Technology Trust (PCT) explains: "Whilst recent sector outperformance has been marked, we believe investors have largely embraced technology stocks due to their cyclicality rather than the secular story - a new cycle - that we believe is emerging. This cycle will be about leveraging internet infrastructure in order to better utilise IT assets whilst reducing complexity and cost."

The cycle he dubs "distributed computing" should reduce the cost of computing, so expanding the industry's addressable market. However, he thinks this will come at a price to incumbent suppliers who have most to lose and little to gain from a cheaper form of computing. "As such, we continue to reduce our legacy exposure in favour of next-generation names that do not have incumbent positions and mature operating models to defend."

The investment trust's highest geographical exposure is to North America - making up 71.5 per cent of the portfolio, with Europe (9.9), Asia (9.7) and Japan (6.3), also making up significant chunks of the balance.

Mr Rogoff has been a technology specialist for over 12 years, and was a senior technology manager at Aberdeen Fund Managers prior to joining Polar Capital in 2003, where he took over the responsibility for PCT in May 2006, following three successful years running the US portfolio.

Polar Capital Technology comes highly recommended from stockbrokers Killik & Co, who think the fund could benefit from the huge emerging markets demand for IT infrastructure. The stockbroker also points out that the strong balance sheets and diversified income streams of large-cap names (which dominate the PCT portfolio) leave them well positioned to lead consolidation in the industry, reducing competition and raising profit margins.

The stockbroker also likes the attractive valuations of companies in the PCT portfolio. The top-10 holdings trade at relatively inexpensive valuations - at an average prospective price-to-earnings (PE) ratio of 14.5x. In contrast, the S&P 500 Index currently trades at a PE ratio of about 15.2x, making the PCT portfolio look relatively attractive, given the greater long-term earnings-growth potential.

Another bonus is that the fund trades at a 17 per cent discount to NAV. Although this is in line with its 52-week average it still makes an attractive point of entry for investors looking to gain exposure to the technology sector with a long-term investment horizon. Killik & Co believes that the discount seems too wide, given that the majority of its holdings are highly liquid large-cap or mid-cap issues and PCT has low levels of net leverage at both the fund level and the underlying holdings level.

The annual management fee is 1 per cent of net asset value, but note the manager also charges a performance fee of 15 per cent of NAV performance in excess of the Dow Jones World Technology Index, subject to a high water mark. This has bumped the total expense ratio up to 1.38 per cent - but it does align the manager's interest with that of investors.

Source: Polar Capital, Thomson Reuters, *Morningstar

TOP TEN HOLDINGS

SECTOR BREAKDOWN