Polar Capital Technology Trust - An Update
Exciting times - In the short term, the technology sector has given back some of its considerable long-term outperformance of the wider market. Ben Rogoff, manager of Polar Capital Technology Trust (PCT), is unfazed by this.
The pandemic has accelerated many societal shifts that Ben believes will be permanent. Areas such as e-commerce, cloud computing, video conferencing, digital entertainment and telemedicine have benefitted. At the same time, advances in sectors such as electric vehicles (EVs) and artificial intelligence (AI) will revolutionise a swathe of industries.
Ahead of the recent sell-off, Ben saw pockets of overvaluation in the sector but no new technology bubble. The long-term potential that he sees for PCT’s portfolio does not merit today’s 7.9% discount.
Ben joined the team from Aberdeen in 2003, having started his career in the years running up to the technology boom. The events surrounding the collapse of the tech bubble have influenced the way in which he manages money. One important lesson is that there is no permanence in the technology sector; it is forever engaged in a process of creative disruption. Change in the sector is a non-linear process. Once-great companies can disappear and minnows can become giants.
Ben says that he was pleasantly surprised by the speed with which vaccines were developed and tested. The vaccines are an unequivocal positive for the global economy, but since November’s news, some sectors have benefitted disproportionately. Investors took profits from growth stocks and more cyclical stocks recovered. Rising long-term rates – a response to increasing concern about inflation – have also knocked long-duration assets such as technology stocks. Some investors also question whether behaviours that originated in the lockdowns and benefitted the sector will persist, the degree to which sales have been pulled forward and the sustainability of margin expansion.
Ben acknowledges that financial markets – for example the S&P500 – look expensive. However, whilst he sees the potential for further market volatility around inflation numbers, he is not expecting that inflation will be a persistent problem. The pace of technological advance is one of a number of factors that should continue to act as a long-term dampener. He did not believe that the tech market was bubble-bursting territory ahead of the recent falls. However, he says that there were, and in some cases still are, pockets of valuation excess, for example around SPACs.
The Technology sector can offer fantastic rewards and can also be unforgiving when you get it wrong. Avoiding the riskiest stocks and the savage adverse swings in sentiment that accompany missed profit or revenue expectations can make a big difference to long-term returns. For investment managers, it is as much about damage limitation as spotting the next big thing. The best returns can be made as a product or service moves from the early adoption phase to the mass adoption phase. One area that Ben thinks is undergoing rapid and exciting change is the field of artificial intelligence, AI. As advances are made here, this has significant implications for a number of industries. Ben highlights the progress made in natural language processing and the advances that this is leading to in areas such as translation, smart assistants (Alexa and Siri, for example) and automated voice calls.
The manager selects from a universe of more than 4,000 stocks and looks to construct a diversified portfolio with about 100 stocks in aggregate. These should represent the best opportunities within the investment themes that the manager has identified, and should come at the right price. The team looks at the value chain and identifies areas where it is possible to generate super-normal profits (where companies have an unfair advantage) and recurring revenue.
On average, the stocks that are selected for the portfolio should be capable of generating 30%–50% higher growth than the average stock in the benchmark index and the manager is prepared to pay up for this growth – roughly 20%–30% more than the benchmark, on average.
Ben thinks that it is important to run your winners, but do sell when you realise that you have made a mistake. Fair value is a moveable target and the potential upside and downside from any position needs to be reassessed regularly. The team has a bull, bear and base case for each stock, with a weighted probability to each of these scenarios. Holdings will be trimmed as they approach the team’s target price.
PCT is managed very much with an eye to risk. It is designed to deliver 3%+ annual outperformance versus its benchmark after fees on a consistent basis, with typical active share of 40–50%. It rarely makes outsized stock-level bets, preferring to add value by avoiding losers (often mature, or blue-sky companies) and correctly identifying the most important secular themes (and allocating between them where value is perceived to be most compelling). This means that PCT ends up holding 100+ stocks. Whilst this means that other, less risk-aware funds may perform better over shorter periods, this risk-adjusted/diversified approach has allowed PCT to deliver first quartile/first decile performance over almost every medium/longer timeframe.
PCT’s strong run of outperformance relative to its Dow Jones Global Technology benchmark over the past five years moderated a little earlier this year, but PCT is now outperforming again. PCT’s short-term underperformance of its benchmark came at a time when PCT’s two largest underweight exposures – Apple and Microsoft – held up reasonably well against a falling technology sector.
Polar Capital Technology Trust is included in the Irongate bespoke portfolios.
The value of an investment through St. James's Place may fall as well as rise. You may get back less than the amount invested.
Past performance is not a guide to future returns.
The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This marketing communication has been prepared for Polar Capital Technology Trust Plc by Marten & Co (which is authorised and regulated by the Financial Conduct Authority) and is non-independent research as defined under Article 36 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing the Markets in Financial Instruments Directive (MIFID). The note has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. This note has been compiled from publicly available information. This note is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this note is prohibited.