Tap into coronavirus solutions with Polar Capital Technology

A good way to tap into technology companies has been Polar Capital Technology Trust (PCT). Its investment team is led by experienced technology investor Ben Rogoff, who has run the trust since 2006, and has a good record of picking technology companies that go on to make strong returns. The trust has a track record of beating the Dow Jones World Technology index and broad equity indices such as FTSE World.

But even more importantly, the trust looks well positioned to navigate the current investment environment and take advantage of opportunities that should do well now and over the long term.

Mr Rogoff and his team started repositioning the trust’s asset allocation in early February for a tougher economic outlook, rotating towards stocks with strong financial positions.

“We are focused on maintaining a portfolio of high-quality growth companies with secular tailwinds, [and have] a strong bias to those with clean balance sheets in areas we believe will be less impacted by an economic downturn [and] are likely to emerge stronger once this challenging period has passed,” says Mr Rogoff. “Companies with high levels of recurring revenue and strong balance sheets should be able to withstand a couple of very challenging quarters.”

A key area of exposure for the trust even before this crisis has been software-as-a-service companies that deliver distributed cloud solutions. These include Microsoft (US:MSFT), which should benefit from the increase in home-working. “Software-as-a-service is a long-term core theme for us,” explains Mr Rogoff. “The current valuation reset should provide us with an opportunity to rebuild our exposure to these recurring revenue businesses.”

Holdings such as Advanced Micro Devices (US:AMD) and Intel (US:INTC), meanwhile, should benefit from increased cloud server demand and home PC refresh cycles.

The trust’s managers have added to ‘stay-at-home beneficiaries’ including Netflix (US:NFLX), Spotify (US:SPOT), Amazon (US:AMZN) and Alibaba (US:BABA), and added new positions in companies involved with content delivery and security.

The trust’s managers have also reduced exposure to areas that could be negatively impacted by the current situation. “We have rotated away from most cyclical areas, including travel, payments, small business and advertising, industrial/auto and associated robotics, and semiconductor stocks,” explains Mr Rogoff. “We have also reduced and/or sold stocks we felt would be directly negatively impacted by behaviour changes, such as less online dating, cinema going and Uber (US:UBER) usage, and software stocks that require big-ticket, upfront investment and/or long implementation cycles.”

Companies they have exited include Dolby Laboratories (US:DLB), which is reliant on consumer electronic sales and has some cinema exposure.

Polar Capital Technology Trust is not geared – ie does not use debt to invest more than its assets in the market. This is a good thing because in falling markets gearing can exacerbate an investment trust’s losses.

The trust was trading on a discount to net asset value (NAV) of 2.1 per cent at close on 30 March, but has traded at much wider discounts and could swing back out to these levels or further if the market environment worsens. For example, just recently it hit a discount to NAV of 15 per cent.

This trust only invests in technology shares, which are high-risk assets that have been very volatile. The trust is also geographically concentrated, with over 70 per cent of its assets in North American equities at the end of February.

It can also levy a performance fee, which makes it more expensive than many mainstream equities funds. At the end of its last financial year in April 2019 its ongoing charge of 0.95 per cent rose to 1.33 per cent when the performance fee was added on.

However, even if the trust experiences severe bouts of volatility in the short term it could make very strong returns over the long term. And even if its discount doesn't tighten, if its share price increases you will make good returns.

Although many of its holdings are listed in North America, they are global companies that source their revenues from a wider geographic area.

In May last year the trust changed its fee structure, meaning that its overall level of charges could fall. And the performance fee is only triggered if the fund meets certain hurdles, in which case the returns would more than compensate for the higher charge.

So if you want exposure to assets that could do well in the current environment and well beyond, and have a very high risk appetite and can tolerate some high volatility, a small allocation to Polar Capital Technology Trust could add some very strong growth to your portfolio over the long term. Buy.