Polar Capital Technology Trust: August 2023 update

• The managers invest in companies they believe can benefit from some of the biggest technology trends globally
• The trust is backed by a well-resourced team with plenty of experience in the technology sector. Their focus on high-quality companies has delivered impressive long-term results, although past performance is not a guide to the future
• More recently, the trust’s NAV and share price has fallen, resulting in a widening of the discount

How it fits in a portfolio

The Polar Capital Technology Trust aims to grow investors’ money over time by investing in next generation technology leaders, which the managers believe have great long-term potential. The managers invest in technology companies around the world, including some of the higher risk emerging markets. Investing in a single sector like technology is a higher-risk approach compared to a more diversified one.

We think funds and investment trusts investing in a specific sector should usually only form a small part of a well-diversified investment portfolio. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to the net asset value (NAV).

Manager

Ben Rogoff joined Polar Capital in May 2003 and became lead manager on the technology trust in 2006. Over this time, he’s helped build the technology team to eight members, one of the largest sector investment teams in Europe.

Rogoff is also supported by Alastair Unwin, who joined Polar Capital's technology team in 2019. Unwin has worked closely with Rogoff since he joined and these efforts have been formally recognised through a recent promotion to deputy manager. Unwin’s day-to-day responsibilities haven’t changed, so he will continue to provide support with stock selection, idea generation and challenge.

Rogoff and Unwin can also call upon the experience of their technology team for further support. Each member of the team has an area of expertise but have vast amounts of knowledge across the technology sector. The managers sit down with each analyst once a month to discuss their ideas and hold weekly team meetings to examine market trends, portfolio positioning and investment ideas.

Alongside the technology trust, Rogoff is also the lead manager of the open-ended Polar Capital Global Technology and Polar Capital Automation and Artificial Intelligence funds. We are comfortable he can manage his commitment to both the investment trust and funds under coverage.

Process

The avoidance of early-stage or blue-sky companies is a key part of the manager’s process. They don’t want the added risk and uncertainty from these businesses, so instead focus on companies they deem of highest quality.

They want to invest in companies that are in strong financial positions and who are run by experienced management teams. Each company must also hold the potential to benefit from a technology trend or growth theme.

These trends, and the opportunities within them change quickly, so the managers split them into a number of core areas – cloud infrastructure / cyber security, connectivity (which includes the internet and 5G), digital advertising / ecommerce, software / digital transformation, mobility (including electric vehicles) / energy transition and artificial intelligence (AI).

Unsurprisingly, the most covered theme this year has been AI. This is a sector the team have been excited about for over five years, so the portfolio already contains a number of investments set to benefit from a rapid adoption of AI technology, including Google, Samsung and Snowflake.

Typically, turnover in the trust is low, which means buying and selling is kept to a minimum. But, given the transformative potential of AI and recent share price volatility in the market, the managers have made a number of changes to the portfolio.

During the second half of 2022, technology companies sold off quite aggressively. Interest rates hit decade highs, and growth multiples seemed to collapse, which made a lot of companies more attractively priced. The team therefore decided to sell a number of investments that were running at a profit, including Nintendo, Square and most of Paycom Software, in order to fund their new investment ideas.

They initiated a position in Uber Technologies, which many know offers a range of transportation modes, like taxis, but it also operates in the delivery and freight space. The team also wanted to ensure they recycled some of the cash into companies that would benefit more from AI, so topped up their investment in semiconductor manufacturer Nvidia, off the back of stronger than expected results and started a new investment in Braze, a next generation marketing software company.

Given the nature of how the managers view the sector, they may at times invest in some of the higher-risk small and medium-sized companies. They also have the flexibility to use gearing (borrowing to invest) and derivatives which can magnify any gains or losses and increases risk.

Culture

Polar Capital was founded in 2001 and prides itself on its collegiate culture. Each manager and investment team is afforded autonomy, allowing them to develop and apply their own investment process and philosophy.

Polar Capital also promotes a strong focus on shareholders' interests and ensures they align with those of fund managers. The managers see themselves as part owners of the trust as they may receive a bonus that can be deferred into shares of the trust over 3 years. This helps make sure the trust is run in a way that benefits all shareholders.

ESG Integration

Polar Capital’s investment teams are given the flexibility to integrate environmental, social and governance (ESG) considerations in a way that best fits their investment approach. The company also provides a range of centralised resources to help underpin the quality of ESG analysis across the firm, including third party ESG research and data. Fund managers frequently engage with the companies they invest in on a range of issues, including ESG-related issues like board make-up and remuneration criteria.

The fund managers themselves are responsible for proxy voting, and a summary of the firm’s overall voting activity can be found on Polar Capital’s website.

ESG issues have become increasingly prominent in recent years, and the Polar Capital Global Technology trust team believe technology companies have the potential to help alleviate some of these problems in the years to come. While the investment process is not driven by ESG factors, the managers focus on engaging with companies they invest in to help improve corporate behaviour and exclude those they feel are the worst offenders.

All Polar Capital funds and investment trusts exclude companies linked to the production or marketing of controversial weapons such as cluster munitions and antipersonnel mines.

Cost

The ongoing annual charge over the trust’s financial year to 30 April 2023, fell to 0.81% compared to 0.84% the previous year. Investors should note the trust also has a performance fee, though this was not levied over the past year. Investors should refer to the latest annual report and accounts and Key Investor Information for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% (capped at £200 per annum for a SIPP and £45 per annum for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The trust has outperformed the broader technology sector significantly since it launched in 1996 but has fallen behind since Rogoff took control of the trust in May 2006*.

One of the reasons for this is the trust’s investments in larger technology companies. The trust is structurally underweight in this area, versus the benchmark, so when the large companies like Microsoft do well, it misses out on a lot of the gains because they have less invested. Remember past performance is not a guide to the future. Investments and any income they produce can go down as well as up in value, so you could get back less than you invest.

Recent performance has also been mixed. Over the trust’s most recent financial year (to April 2023), its NAV and share price fell 2.8% and 4.9%, respectively. This has been reflected in the impact on the trust’s discount, which over this period, has widened to 13.4%. At the time of writing, the discount has narrowed slightly to 12.93%.

The technology sector has been on a rollercoaster ride over the last few years, highlighting to investors how volatile investing in a specialist sector, like technology, can be. A surge in demand for all things tech in the early stages of the pandemic, led to significant increases in company valuations and share prices. Spiralling inflation levels, coupled with rising interest rates, made quick work of reversing this growth story, by putting pressure on supply and labour costs, as well as borrowing costs. This has put strain on the sector as whole and naturally hindered the trust’s performance.

It’s not all bad news though. So far this year, technology companies have performed very well, owing largely to a return of growth investing, as well as the boom in sectors linked to Artificial Intelligence and semiconductors. Companies like Lattice Semiconductor, Arista Networks, a cloud networking solutions company and Axon Enterprise, a developer of conducted energy devices, were among the trust’s top performers.

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2022

FIND OUT MORE ABOUT The Polar Capital Technology Trust PLC INCLUDING CHARGES

VIEW Polar Capital Technology Trust PLC KEY INFORMATION DOCUMENT

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