Fund Review: Polar Capital Technology Trust

The trust was launched in December 1996 and lead manager Ben Rogoff asserts that his investment style involves “a core belief in rigorous fundamental analysis”, where he hunts out early adopters in different areas of technology across a universe of more than 3,000 companies.

Mr Rogoff says he selects companies not on the basis of technology for its own sake, but rather for their potential for shareholder returns. His primary aim is to identify new growth markets, as well as “exploiting international valuation anomalies and sector volatility”, he adds.

Cybersecurity and mobile payments are currently piquing his interest, while cloud technology represents one of his major plays. One of the trust’s top-10 holdings is online retailer Amazon and the manager notes that its web services division already provides cloud services to companies such as Netflix, and even to the US Central Intelligence Agency. But as the cloud evolution gathers pace, he says it could spell “bad news for those that sell traditional information technology services”. He predicts that the fortunes of technology companies may diverge as some adapt and succeed, while others will fail to keep up and adjust to the market’s rapid revolution.

Technology giant Apple is Mr Rogoff’s top holding. But with 10 per cent of his portfolio invested in the iPhone maker, he is underweight the company which makes up close to 15 per cent of his Dow Jones World Technology index benchmark. The manager notes that Apple, with its robust pricing power, could ultimately be viewed not so much as a technology stock, but “as a luxury goods business with a mass affluent market share”. He adds: “An iPhone has roughly the same parts as a Samsung smartphone but Apple can charge a premium. The upside to Apple is pretty reasonable – it could become the first trillion-dollar company.”

Mr Rogoff is optimistic about the arrival of Apple Pay, which lets users of iPhone 6 and 6 Plus, some iPad models and Apple Watch wearers pay for goods via contactless readers. The service has been rolled out in the US and is set to hit the UK in July. It already has the backing of most banks and major high-street retailers, including Marks & Spencer and the Post Office.

Following the notorious implosion of the telecommunications sector at the turn of the century, technology-focused funds have made a stellar comeback. Since inception, the Polar Capital Technology Trust has achieved a total return of 503 per cent, against an AIC Technology, Media and Telecommunications sector average of 589 per cent, data from FE Analytics shows. But the portfolio is well ahead of the 274 per cent rise of its Dow Jones benchmark over the term. In the past five years, the fund is up 99 per cent versus the index’s 83 per cent.

Investors should note an ongoing charge of 1.16 per cent applies to the trust.

The vehicle underperformed the Dow Jones yardstick in 2014, delivering 19 per cent against the index’s 23 per cent. Mr Rogoff admits the 12-month period was “tricky” as large caps – which he is typically underweight – outperformed. However, he is optimistic going forward, saying: “At a minimum, the headwinds we experienced in 2014 – when large-cap incumbents rerated and many higher-growth, next-generation stocks underperformed – are unlikely to be repeated.”

Technology stocks overall have performed strongly so far this year with the Nasdaq index reaching an all-time high, but earnings from the sector have begun to disappoint the market.

Looking at recent performance, Mr Rogoff says that many of his “next-generation holdings” continue to impress with their execution. He notes Palo Alto Networks, which specialises in advanced firewalls designed to provide network security, has showed billings acceleration combined with standout profitability versus its high-growth peers.

He adds: “Alibaba, Electronic Arts and TripAdvisor all reported solid quarters. Other noteworthy reports included Splunk, Salesforce and Nimble Storage all of which delivered strong revenue growth, although this was not reflected in share price reactions. We have subsequently increased exposure to this group of stocks.”

EXPERT VIEW

Martin Bamford, chartered financial planner and managing director, Informed Choice

This trust has a good track record of investing in a variety of business cycles, managing a diverse portfolio of technology stocks worldwide. The portfolio is constructed and managed without reference to a specific benchmark, and risk controls ensure investors will not face undue levels of volatility. There is a limit on gearing of 15 per cent, but this requires board approval. The low management fee of 1 per cent, combined with a 15 per cent performance levy, is a reasonable cost for investing in technology stocks. The trust has delivered a strong performance on both share price and net asset value in the past five years, comfortably exceeding its benchmark.