IC Top 100 Funds update: Polar Capital Technology Trust

This applies to the technology, media & telecoms investment trust sector.

"For example, both RCM Technology Trust (RTT) and Herald (HRI) on discounts of 11.66 per cent and 20.28 per cent, respectively, offer attractive value in our view, relative to Polar Capital Technology Trust (PCT) on a 6 per cent discount," explains Mr Tuite Dalton.

Last month, Oriel downgraded its rating on IC Top 100 Fund Polar Capital Technology from 'positive' to 'neutral'. Polar Capital Technology has made impressive long-term returns leading its two rivals in terms of share price return over five years. But, more recently, its performance has lagged, not helped by its exposure to US technology company Apple, of which the share price fell earlier this year. Over one year, Polar Capital Technology's share price lags its two peers and its benchmark, Dow Jones World Technology Index, although its NAV is in line with the index.

"In spite of Apple's dramatic fall, we remain positive on the technology sector as a whole and expect its strong collective balance sheet to remain a major cash earner over time," says Mr Tuite Dalton. "That said, we have downgraded Polar Capital Technology Trust on the basis that RCM Technology currently offers much better value."

He also notes that Polar Capital Technology Trust has no discount control mechanism which could make it vulnerable to a relative de-rating, given its weaker short-term performance. This has already happened to a certain extent: in late April the trust traded at a discount of around 2 per cent, now it has moved out to nearly 6 per cent.

RCM, by contrast, has a discount control mechanism and targets 7 per cent.

And, while RCM Technology's subscription shares have expired meaning no future dilution to NAV, Polar Capital Technology still has subscription shares in issue which are a potential dilutive threat.

However, Oriel also concedes that Polar Capital Technology has outperformed its benchmark over the longer term (three and five years), while it also beats its sector peers over five years in line with its aim of long-term capital growth.

The trust's manager, Ben Rogoff, attributes recent underperformance to the re-rating of defensives and value, and the pursuit of yield. "However, we remain convinced that value investing within technology is a dangerous pursuit due to the relative lack of corporate longevity and the so-called innovator's dilemma that precludes incumbent technology companies from reinventing themselves," he says. "Unfortunately for us - at least recently - this finesse has been overwhelmed by investors reallocating to equity markets, looking for cash flow-generative, dividend paying alternatives to their money market, bond or gold investments. As a result, we have seen some of the poorest positioned technology companies (at least as we perceive them) generate some of the strongest year-to-date performances."

Mr Rogoff says he remains focused on identifying key beneficiaries of technologies and themes that are taking hold - for example, cloud computing, social media and mobile devices. "The difficulty for investors is that much of the secular growth is occurring outside of traditional IT budgets and is not captured by a large-cap, index-centric approach or an exchange traded fund (ETF), which we believe provides disproportionate exposure to legacy vendors closely tied to IT budgets and the economy," he adds.

Analysts at Investec say that on a discount of 6 per cent this could be an attractive entry point for Polar Capital Technology, though they add: "It is worth investors keeping an eye on the fund and taking advantage of any large move to a premium where investors could lock in the price outperformance. This could be achieved by switching to a comparable open-ended fund, ETF or another technology investment trust such as RCM Technology to get a different mid and smaller technology company exposure."

Open-ended options include IC Top 100 Fund GLG Technology Equity Retail.

Winterflood analysts say that Polar Capital Technology is still a good fund for access to the mainstream technology sector.

"The fund's medium- and long-term performance record is impressive, although recent performance has been closer to that of its benchmark. The manager makes a compelling case for the change that is under way in the technology sector and consequently his underweight large-cap position would seem logical. However, the fund's top 10 holdings are still dominated by large household technology names. Nevertheless, we rate Ben Rogoff highly."

Source: Morningstar, *Polar Capital.

Source: Winterflood as at 21 May 2013

TOP TEN HOLDINGS as at 30/04/13