Ian Cowie: tariff truce boosts technology investment trust duo

Technology shares are among the big winners from an unexpected 90-day truce in the trade war between America and China. Better still, investment trusts focussed on this sector continue to trade around double-digit discounts to their net asset value (NAV), so short-term traders who were shaken out in brutal write-downs that followed US president Donald Trump’s tariff tantrums can still log in for long-term capital growth.

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As part of the deal agreed in Switzerland last weekend, America will lower tariffs on Chinese imports from a prohibitive 145% to a merely punitive 30%. Similarly, China will slash duties on US goods from 125% to 10% and also said it would “suspend or cancel” non-tariff measures taken against America.

Peace breaking out between both the world’s biggest economies has prompted hopes that the so-called ‘Magnificent Seven’ technology shares can ride again. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT)Amazon (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA), Meta Platforms (NASDAQ:META), Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOGL) enjoyed substantial gains this week.

For example, Meta jumped 8% higher, Apple followed with 6% and Alphabet delivered 4%. With such wide variations between individual businesses, investment trusts demonstrated the value of diversified exposure with Allianz Technology (LSE:ATT) and Polar Capital Technology (LSE:PCT) both advancing by more than 5% on news of the tariffs truce.

While computers and smartphones had been exempted from the original taxes imposed by Trump on ‘Liberation Day’, as he hoped to avoid inflationary price spikes, a trade war between the world’s biggest economies was widely seen as bad for business. As a result, the investment trust technology duo had suffered short-term setbacks after exemplary long-term returns.

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To be specific, ATT leads its sector over the last decade, five years and one-year periods with total returns of 556%, 101% and 12%. That’s an impressive hat-trick of outperformance in the fast-moving technology market. PCT ranks second with 461%, 77% and 9.9%.

Neither pays any income but ongoing charges are reasonable at 0.64% and 0.8% respectively. Even so, both produce massive annual revenues for fund managers because ATT has total assets of more than £1.6 billion and PCT holds nearly £4.4 billion.

As referred to earlier, ATT shares remain priced nearly -9% below their NAV while the persistent runner-up PCT trades at a bigger discount of -10.7%, according to independent statisticians Morningstar. Both underlying portfolios are dominated by the ‘Magnificent Seven’ shares, albeit in different weightings.

While ATT leads with Apple, Nvidia, Meta Platforms and Microsoft in descending order by size, PCT’s top four stocks are Nvidia, Meta Platforms, Microsoft and Apple.

After the extreme price volatility seen in the last year, more fundamental questions remain about how technology shares can justify price/earnings ratios - or other valuation metrics - that remain in nose-bleed territory. One answer came in advertising data this month that might have received more coverage in less extraordinary times.

Alphabet and Meta Platforms grabbed more than half of all the advertising expenditure in Britain last year, according to a trade body, the Advertising Association. Out of a total £43 billion spent on adverts, some £20 billion went to Alphabet and £6 billion went to Meta Platforms.

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Nor is there any sign of the tech giants’ dominance diminishing. Social media advertising - such as YouTube, which is owned by Alphabet - was the fastest-growing segment of advertising, growing by nearly 23%. By contrast, annual revenues for national newspapers retreated by 4.3% and magazines slipped 7.2% lower. Advertising  revenues for the two firms are now ten times greater than the total for newspapers, magazines and radio combined.

It’s enough to make this old hack weep but digital media, including this website, provide hope for the future. Here and now, if we can’t beat them, we might as well own shares in new technology.

Whether the ‘Magnificent Seven’ continue to lead the way in future, or they are replaced by innovators whose names we have yet to hear, investment trusts professional stock selection is likely to prove valuable. Whether the tariff truce is followed by peace or renewed rivalry between America and China, this small investor aims to avoid short-term panics and persist with a long-term strategy of following the money.

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

Ian Cowie is a shareholder in Apple (AAPL), Microsoft (MSFT) and Polar Capital Technology (PCT) as part of a globally-diversified portfolio of investment trusts and other shares.