Interactive Investor

Ian Cowie: this out-of-favour investment trust is a bargain

20th May 2021 09:24

Ian Cowie from interactive investor

Our columnist has spotted an opportunity to pick up shares in a high-quality trust on the cheap.   

One of the great advantages of investment trusts over all other forms of pooled fund is the occasional opportunity to pick up a bargain when these shares trade for substantially less than their net asset value (NAV). Now I have found a high-quality example hiding in plain sight.

Financial fashions change almost as often as those for clothes but fluctuations in price may be irrelevant to underlying value. Falling from favour has forced one of the founder constituents of my ‘forever fund’ to be priced at nearly double its usual discount to NAV.

Just a couple of years ago, Polar Capital Technology (LSE:PCT) was trading at a premium - that is, priced above NAV. But ‘jam tomorrow’ stocks or those that pay low or no income are shunned today because of fears that soaring commodity prices may force central banks to raise interest rates sooner than expected.

That has knocked 13% off PCT’s peak price of £24.45 in February, with the shares trading at £21.28 this week. According to investment trust analyst Winterflood, that has stretched the discount to 8.4% compared to its 12-month average discount of 4.3% - as at close of trading on 17 May.

Now take a look beneath the bonnet of this £3.2 billion trust and consider its top 10 holdings. These are led by the titans of technology Apple (NASDAQ:AAPL) - which I also hold directly - and Microsoft (NASDAQ:MSFT), with each accounting for 8.6% of PCT’s assets.

Can anyone seriously imagine a future where either of these businesses ceases to play a major role in the digital economy? Similarly, Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) are PCT’s third and fourth-biggest holdings. Nostalgia for shopping on the high street and a world without anti-social media is unlikely to hurt either of them.

Samsung (LSE:SMSN), the Korean rival to AAPL, and Taiwan Semiconductor Manufacturing (NYSE:TSM), which makes the building blocks of almost everything digital, are next down the list. TSM's chips are hotter than usual at present because of a global shortage of semiconductors.

Less happily, from the point of view of this investor who would rather minimise my exposure to China because of what the US president Joe Biden has called “genocide” of ethnic minorities, the Chinese e-commerce conglomerates Alibaba (NYSE:BABA) and Tencent (SEHK:700) are next down the batting order.

But less than 13% of PCT’s assets are invested in Asia Pacific ex-Japan, with America and Canada accounting for more than 68% of the portfolio. To be candid, I am comfortable with that and only wish Britain’s technology sector could account for more than its negligible 0.3% share of PCT’s assets.

The top 10 list is completed by Holland’s ASML (EURONEXT:ASML) and America’s Applied Materials (NASDAQ:AMAT). Both make machines for producing semiconductor chips, with the former company claiming to be the biggest supplier of photolithography systems for making semiconductors in the world.

Bear in mind that buyers of PCT today are paying 92p for every £1 of value in these businesses of tomorrow. That sounds like a bargain to this long-term investor.

Better still, Ben Rogoff has been fund manager of PCT since 2006 - which is even longer than I have been a shareholder - with Alastair Unwin on the team since 2005. Xuesong Zhao joined in 2012, followed by Fatima Lu in 2018.

That’s what I call long-term commitment and a refreshing change from the Square Mile game of musical chairs, which can render some performance data meaningless.

To be fair, Walter Price has been at the helm of Allianz Technology (LSE:ATT) for almost as long, since 2007. Price and his team can claim full credit for total returns of 34%, 343% and 656% over the last year, five years and 10 years, according to independent statisticians Morningstar. These trounce PCT’s 18%, 273% and 471% over the same periods.

However, I am less enthusiastic about ATT’s underlying holdings - which include Micron Technology (NASDAQ:MU) and Seagate (NASDAQ:STX), two data storage specialists, and CrowdStrike (NASDAQ:CRWD) in cybersecurity - or its 5.9% discount to NAV.

More positively, Mr Market’s current coolness toward non-yielding technology trusts ATT and PCT may offer bargains for the brave. Both provide professionally managed diversified stakes in the future, priced below NAV today.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian owns shares in Apple (AAPL) and Polar Capital Technology (PCT) as part of a globally diversified portfolio of investment trusts and other shares.

Ian will be away for the next two weeks and will return on 10 June.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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