Tech growth Heralds narrower discount

Valuations aren't the only driver. Growth might be in short supply elsewehere, but our appetite for new gizmos shows no sign of waning, and companies are still spending on areas like cloud computing and cyber security. Mergers and acquisitions (M&A) might provide an added boost, as the latest machinations around Misys show. Last year, there was an acceleration in technology takeovers and M&A should remain a key performance driver this year and next, according to Tom Tuite Dalton, analyst at broker Oriel Securities. Read more on tech bargains.

One way to capture technology growth is through a technology investment trust, as these are running at discounts to net asset value (NAV). If the technology sector continues to do well, both the underlying assets and the trust's shares could rally, so investors get double the benefit.

Mr Tuite Dalton picks two: Herald Investment Trust and Polar Capital Technology Trust. "They provide exposure across the market cap spectrum, but with a bias towards under-researched small and mid-cap stocks, some of which may well prove to be tomorrow's Google or Apple."

Of the two, Herald is our preferred option. It trades at a discount to NAV of more than 17 per cent, while Polar Capital Technology Trust trades at a discount of less than 5 per cent. And Herald has around 60 per cent of its assets in UK smaller technology companies, which have experienced a sharp rally since January after a poor 2011. Iain Scouller, head of investment funds at Oriel, thinks that if smaller shares continue to recovery, then the discount on Herald's shares will narrow.

Technology is a fast-moving sector where today's darlings can quickly become tomorrow's duds, so active specialised management comes into its own. Generalist managers, for example, have failed to sell out-of-favour names long after technology managers have exited, while trusts such as Herald have positioned their portfolios accordingly before other investors realise the potential in certain shares.

Herald Investment Trust has been run by Katie Potts - previously an electronics company analyst - since launch in 1994. She is backed by a team of six investment professionals and three consultants.

The team selects shares by meeting with companies and by using independent and broker research. Herald generally invests on a long-term basis, and mitigates the obvious risks of small technology shares by holding a lot of them: the portfolio is very diverse, with 240 holdings. Within that, there is only modest exposure to the UK consumer and government.

This strategy has succeeded to date, with the trust up more than 140 per cent (both NAV and share price) over the past three years, well ahead of major indices. The trust is also well regarded by professional investors such as Unicorn's Peter Walls.

Herald is not a good option for income seekers, as its shares yield virtually nothing, while its focus on smaller companies in one sector means it is likely to experience high volatility. But if you have a long-term investment horizon and high risk tolerance, this could be an opportunity to participate in some of the best growth of the coming years. Buy.

Source: Morningstar, *Herald Investment Management.

Performance data as at 20 February 2012

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