Allianz Technology Trust up over 40% in 2023, but sits on ‘rare’ discount

For investors looking for dedicated exposure to technology companies two of the main options are investment trusts Allianz Technology Trust Ord (LSE:ATT) and Polar Capital Technology Ord (LSE:PCT). The duo are popular with ii customers, regularly appearing in our monthly top 10 most-bought investment trust table.

• Learn with ii: How to become an ISA millionaire | ISA Investment Ideas | Top ISA Funds

Below, on the back of Allianz Technology Trust releasing its annual results this morning, is a review of how performance fared over the 12-month period (to 31 December 2023), as well as highlighting the ii analyst view on prospects for the trust.

Performance

Following a tough 2022 for Allianz Technology Trust, 2023 saw a strong reversion for the trust, and the wider technology sector. ATT returned 44.5% on a share price basis, and 46.4% on a NAV basis, versus an even stronger index return of 48.2% for the Dow Jones Global Technology index.

The economic backdrop was far from placid, but while the equity market was volatile, tech emerged as the best-performing sector, owing much to the mega-cap names that were immediate beneficiaries of artificial intelligence (AI) excitement and posted strong earnings.

ATT benefited in absolute terms from exposure to the “Magnificent Seven” companies. However, given their mostly underweight positions (less than the index), they were a minor drag on relative performance.

The exception came in the form of re-entering an overweight position in Meta Platforms Inc Class A (NASDAQ:META) in late 2022, which proved well-timed as earnings strengthened in early 2023. Further contributors to performance came from NVIDIA Corp (NASDAQ:NVDA), as well as avoidance of worse-performing parts of the semiconductor sector and the virtually nil allocation to lagging Chinese names.

The numbers in detail (for the year ended 31 December 2023)

Net Asset Value (NAV) Return: 46.4% (-1.8% versus index)
Share Price Return: 44.5% (-3.7% versus index)
Index Return: 48.2%
Discount: -10.3% (as at 31/12/23)
Gearing: Nil
Dividend: Nil

Manager outlook

A likely change that is perceived largely positively is the pivoting of the Federal Reserve to focus on cutting rates, which will remove the headwind posed by high discount rates for growth stocks and may provide support to the technology sector.

Nonetheless, geopolitics and in particular the coming of many global elections is highlighted as a key source of uncertainty going forwards.

Portfolio

While ATT’s portfolio does back many large companies, there is still a consistent underweight to mega-caps versus its benchmark DJ Global Technology index. This partly stems from avoidance of excessive concentration and a 10% position limit. But is also a product of management’s belief that investors can benefit from the strong earnings growth opportunities further down the market-cap spectrum.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• Nvidia and Scottish Mortgage made me an ISA millionaire, but now I back these funds too

Management can also hold “off-benchmark” positions, such as Amazon.com Inc (NASDAQ:AMZN) and Tesla Inc (NASDAQ:TSLA) (which the index doesn’t class as being tech companies) or build positions in less familiar firms poised to play a part in structural growth transitions.

The trust holds roughly 90% of the 43-name portfolio in US companies, believing the country to be the deepest pool of technological innovation, and 2023 saw the last of the China allocation cut, with the manager no longer investing given the possibility of state intervention.

Discount

Through 2023, ATT traded at an average discount of 12%, with shares being bought back. The discount had a small negative effect on the overall return to investors, as the trust began 2023 at a discount of 9% and ended the year marginally deeper. ATT spent a good deal of the three years prior to 2022 trading at a premium. Still, ATT is the least discounted of its small sector and has recently moved in a lockstep with its closest peer, which is Polar Capital Technology Trust.

People

A notable announcement for ATT is the ascension of Erik Swords (managing director of global technology) to portfolio manager as of March 2024, with Seidenberg remaining as lead portfolio manager. This is clearly mapped as a mitigation of key-person risk and a positive step in focusing on the longevity of the trust.

ii View

The concentrated tech sector in 2023 proved difficult to beat for strategies much diversified outside the Magnificent Seven. It is encouraging that, as the equity rally broadened out in late 2023, ATT’s wider exposures, especially mid-cap companies, began to benefit and ATT outperformed its index in each of the final two months of 2023 and through the first two months of 2024.

• Ian Cowie: ignore the doom-mongers, 32 trusts are in ISA millionaires’ club
• What I’ve learnt in 30 years as a fund manager

If the dominance of those very largest tech names continues to bifurcate and broaden out across the market, the environment looks more favourable for stock pickers and ATT’s more diversified portfolio may be placed well to benefit.

Long-term returns for the trust are testament to the capability to outperform, returning 1,843% over 15 years (vs 1,544% for the index) over 15 years, and place the trust as one of the top five performing trusts available to UK investors over 15 years.

Further, the discount (now near 11%) that has emerged in the past two years is slightly confounding given the recent strong performance of the trust and sector, and likely is reflective of sentiment regarding the wider investment trust sector. It marks a rare depth versus the trust’s five-year discount average.