Identifying the key tech themes for growth

Ben Rogoff, lead manager of Polar Capital Technology Trust, is cautiously optimistic for the sector. He says that the current crisis has shown that today's world is built on technology and that there is nothing quite like a crisis to spur innovation. And although valuations across the sector are materially higher than they were at the start of the year, on a relative basis they are only 5 per cent higher than the broader market. This is partly because the low cost of borrowing has pushed up asset prices across sectors.

Although the introduction of stricter regulations on technology companies is a risk associated with technology, Mr Rogoff does not think that it will result in the break-up of the big tech companies, which some US politicians support. Instead, he expects a slightly tougher environment for mergers and acquisitions, and perhaps higher taxation in future.

“When we model our companies' [profits] we naturally assume an increasing tax rate,” he says.

Rising Sino-US trade tensions also make him less worried about regulatory threats. “The idea that tech companies will be kneecapped by regulators just when the Chinese are coming on the outside rail seems highly unlikely,” he says, as the two superpowers appear to be on a collision course for technology supremacy. And he is “fairly sanguine” about the risk posed by trade tensions because the big US and Chinese companies are fairly distinct and tend not to operate in each other’s markets.

Some telecoms companies, meanwhile, such as Ericsson (SWE:ERIC), look well placed to benefit from the removal of Huawei from building 5G networks.

Investment approach

A problem for active fund managers has been that tech megacaps, which dominate indices, have been the main drivers of performance, making it hard to beat indices. But Polar Capital Technology Trust holds about 100 stocks and is managed with a close eye to its benchmark index, Dow Jones Global Technology. It is managed with a low active share of 40 to 50 per cent, which means typically 50 to 60 per cent of what the trust holds are constituents of this index. Some investors have a preference for benchmark-agnostic funds because you can buy an index tracker fund for a much lower fee and no performance charge. However, Polar Capital Technology Trust has consistently delivered on its target of outperforming its benchmark by 2 to 3 per cent every year. And Mr Rogoff says that the large number of holdings reflects “how much we like the very largest companies in our benchmark and the availability of good ideas at the right prices elsewhere”.

The trust has many small holdings, some of which are relatively new companies, so it could benefit from getting in early because some of these may turn out to be outstanding investments. Mr Rogoff gives the example of Apple (US:AAPL), which he reckons he has owned more of than anyone in the UK. “In 2003 you couldn’t find a person that would buy this stock, but I bought it because it was in the index and was doing a bit better than the benchmark,” he explains.  

He concedes that his benchmark-conscious approach may mean he owns less or more of a stock than he might otherwise – Amazon (US:AMZN), for example, is not in the benchmark so is a much smaller holding in the trust than Microsoft (US:MSFT), Alphabet (US:GOOGL) and Apple. “There are times when I think if the benchmark had Amazon I might have held more,” he says, adding that Amazon is the single largest relative bet the trust has against the benchmark. 

However, he says: “In the round the benchmark has delivered very strong returns. It has outperformed most – certainly many – of my peers and we have pretty much been beating [the benchmark] by 2 to 3 per cent a year for the past decade.”

Mr Rogoff approaches stockpicking by identifying key themes that offer new technology poised for growth. “The way I attack the tech space is to think about thematically where I need to be invested and also where we don’t need to be invested,” he says.

Consequently, the fund is overweight software companies and companies related to cloud computing and underweight older-breed hardware companies. The tech space is evolving rapidly as it moves through changing transitions such as cloud computing. 

Mr Rogoff also looks to invest in a broad sweep of companies that come under an attractive theme: “It would have been very difficult to know which of the automotives to own at the turn of the automotive era, but much easier to not own anything that is to do with horses and carriages,” he says.

A theme the trust has increased exposure to recently is 5G, as Mr Rogoff and his team feel as though it is increasingly a national imperative that wireless infrastructure is upgraded. “Particularly with a backdrop of US-Sino relations deteriorating, the need for a 5G network to underpin things such as autonomous driving and the internet of things looks very exciting,” says Mr Rogoff.

However, he will not invest in unquoted stocks because being able to sell stocks quickly for him is really important. “We need to make sure that if we’re wrong, or if technology change occurs in ways we couldn’t or didn’t see, that we can change our minds,” he says. 

He adds that if that means he ends up with a slightly smaller investment universe “then so be it”. People tend to remember the small unquoted companies that go on to be great successes but forget about the majority which end up in the graveyard of history. 

Mr Rogoff’s liquidity imperative is reflected in the trust’s turnover, which was 87 per cent over the year to 30 April, up from 70 per cent in the previous year. “We are paranoid tech investors and we understand that change happens all the time and there is very little permanence in tech,” he says. 

The trust has no gearing – debt – which Mr Rogoff says may be one of his failings. But his view is that when tech companies do well the incremental margins are very high and they do not need structural gearing.The trust has a net cash position of 5 per cent and some put options to soften the impact of a sell-off, should one occur.

View on individual companies

Microsoft, Alphabet and Apple account for 24.5 per cent of Polar Capital Technology Trust's assets. Although these are very large holdings, the trust is underweight each of these relative to the benchmark. Apple has rerated meaningfully this year, Google owner Alphabet faces increasing regulatory risks and Microsoft is “well owned” so the trust has been reducing its allocation to these companies at the margins.

But Mr Rogoff still really likes all of these “wonderful” businesses. He says that Apple should be thought of as a mass-affluent consumer brand rather than a tech company. “The app economy that Apple has created is mind-boggling and will be of huge value to us [as 5G is rolled out]," he says.

He thinks that Google is a very attractively valued company and that Microsoft is the company that disproves the theory that tech companies can’t reinvent themselves.

Ericsson and Samsung Electronics (SMSD) are two companies that the trust has been increasing exposure to recently. He thinks the withdrawal of Huawei in many countries will provide a boost in demand for Ericsson and he’s added to Samsung, which could benefit from Intel's (US:INTC) decision to start outsourcing chip manufacturing. 

Nvidia (US:NVDA) is another stock that the trust is overweight in that has had exceptional performance. Nvidia used to make graphic cards for computer games, but now uses the same process with its graphic processor to manipulate neural networks for machine learning and artificial intelligence. Mr Rogoff says Nvidia is one of the core ways the trust plays the artificial intelligence theme. 

Advanced Micro Devices (US:AMD) also operates in this space, developing computer processors and related technologies for business and consumer markets. Mr Rogoff says it has been one of the fund’s best investments over the past five years.

[Listen to the full interview with Ben Rogoff at www.investorschronicle.co.uk.]