Two excellent technology investment trusts to buy now
Tech focused-investment trusts Polar Capital and Allianz remain excellent investments in one of the few sectors growing strongly
![A doctor on a video call © Getty Images/iStockphoto](https://cdn.mos.cms.futurecdn.net/j3ZU8jTMRXchRc7nMB3uWk-415-80.jpg)
Despite dire warnings of imminent collapse from the investment Jeremiahs early this year, the technology sector has been a star performer. In the first half of 2020 the 28% return from the £2.6bn Polar Capital Technology Trust (LSE: PCT) and the 37% from the £800m Allianz Technology Trust (LSE: ATT) helped cushion investors from the market turbulence. So why did the bears get it so wrong?
Ben Rogoff, manager of PCT, says that the tech sector, with earnings growth of around 150%, has driven all the earnings growth of world markets since 2009. As for the pandemic, he agrees with Satya Nadella, CEO of Microsoft, who says: “We’ve seen two years of digital transformation in two months.” The sector’s valuation, with a forward price/earnings multiple of 23.5, may look expensive but is not much above the market average despite its higher earnings growth.
“The magnificent six” tech stocks deliver
Ed Yardeni of Yardeni Research points out that “the magnificent six” – Apple, Microsoft, Amazon, Alphabet, Facebook and Netflix – now account for $6.5trn of market value and over 25% of the S&P 500’s market capitalisation. But only the first two are in the information technology sector, accounting for 44% of it. Since the start of 2015, forward- earnings estimates are up 95% against a drop of 2% for the rest of the S&P. Profits have been boosted not only by revenue growth but by high margins.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
It is hard to keep up with the scale and speed of digital transformation. Rogoff quotes research findings that nearly 40% of couples now meet online. Around 96% of Generation Z, born between 1995 and 2015 (26% of the US population), own a smartphone and half spend more than ten hours a day online; 70% watch more than two hours of YouTube a day, 83% watch Netflix and their average attention span is eight seconds.
More broadly, the pandemic has resulted in $52bn of additional e-commerce as the migration of spending online, hitherto occurring at a pace of 1% a year, has accelerated. The quickening trend towards remote working, education and spending is expected to persist and new areas, such as telemedicine (remote healthcare) are opening up.
Walter Price, manager of ATT, thinks there is much more to go for: half of advertising is still spent on television, radio and print. Around 42% of his portfolio is related to “the cloud”, the delivery of software and services from the internet rather than via corporate networks, a key requirement for remote working. “Technology is the way out if we are to live through pandemics,” he says.
Racing ahead of the market
Both trusts have about a third of the portfolio outside the narrowly-defined sector, balanced by relatively low exposure to Microsoft and Apple. PCT, with over 100 holdings, has more than 70% invested in the US and ATT, with 64, over 90%.
Price is far more sceptical about Chinese companies and has cut exposure there to 2%. Neither owned Wirecard, once Europe’s tech flagship. Both have more than 80% invested in firms with market values above $10bn but ATT has less exposure to the $100bn mega-caps. Both trusts boast higher growth but also higher valuations than the sector.
Rogoff invests in the high- growth phase when “companies [seem] expensive but revenue and earnings forecasts are wrong” before selling out before maturity, when stocks become value traps. This is not easy as sceptics have regularly forecast the maturity of Apple, Amazon, Facebook and Microsoft and warned about the business models of Netflix, Tesla and Ocado. They may prove equally wrong about Uber. Rogoff tells the better story but Price has outperformed him over most time periods. Both trusts should continue to be excellent investments.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
-
Revolut finally bags a UK banking licence – what's next for the fintech?
Revolut has finally been granted a UK banking licence following three years of negotiations with the regulator
By Kalpana Fitzpatrick Published
-
Could Labour impose a “double death tax” of more than 50%?
Speculation is mounting that capital gains tax will be reformed in the Budget - and one option is to charge bereaved families the tax on top of inheritance tax. We explain how it could work
By Ruth Emery Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published
-
Diploma: a blue-chip set for strong growth
Diploma, whose niche products include seals and fasteners, serves an array of growth markets. Should you invest?
By Dr Mike Tubbs Published