It has been a painful period for tech fans, and with interest rates expected to remain high, this top tech trust has responded by taking some risk off the table.
The board of Allianz Technology Trust (LSE:ATT) said it was “disappointed” by ”the “significant de-rating” of its share price in 2022, which slumped 40.4% over the period.
In its annual results, released yesterday, the trust reported a less severe, but still painful, drop of 33.6% for the performance of its underlying investments – the net asset value (NAV). The trust underperformed its benchmark, the Dow Jones World Technology index, which in sterling terms fell by 26.4%.
As well as expressing its disappointment the board noted the losses are “in line with rating movements implicit in the share prices of other larger investment companies focusing on high growth opportunities.”
It also pointed out it “has full confidence in the investment manager's differentiated strategy and in the technology sector as a source of longer-term superior returns.”
The trust, which since last July has been overseen by Mike Seidenberg following the retirement of longstanding fund manager Walter Price, underperformed the index due to having greater exposure to stocks with high growth potential. Such companies have been negatively impacted by rising interest rates, due to investors placing less value on promised profits in future years. Instead, investors have turned to value stocks that make most of their profits today, as well as dividend-paying shares that offer ‘jam today’.
Seidenberg explained: “High valuations had been sustained by a very low risk-free interest rate, which had seen the long term cashflows they offered highly prized by investors. In a climate of rising interest rates, these cashflows were worth less.
“The fastest growing companies - where more of their valuation was tied up in future revenues - proved particularly vulnerable. Even though many companies continued to deliver high growth and outpace earnings expectations, it held back their share price progress.”
In response to the prevailing economic backdrop – with interest rates expected to remain high until inflation is brought under control – Seidenberg has moved to reduce risk. He has moved away from some of the higher growth, high risk areas, and increased exposure to defensive positions, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Microsoft (NASDAQ:MSFT).
Seidenberg said: “We continue to believe in the long-term prospects for many high growth companies in areas such as cloud computing, data analytics or cyber security, and retain a weighting in the portfolio. Nevertheless, we recognise that sentiment is likely to be against them while the economic climate remains weak.”
Looking ahead, Seidenberg acknowledged it “has been a tough period”, but pointed out “many of the structural growth opportunities for technology are intact.”
He added: “Digital transformation, cyber security and cloud computing are multi-year growth themes and the recent uncertainty has not changed their outlook. Technology remains an exciting sector in spite of its difficulties in 2022.”
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The difference in the trust’s NAV and share price returns is due to its discount widening. At the start of 2022 the company has trading on a small premium, but ended the year on a discount of 9.1%.
One of the ways an investment trust board can attempt to limit discount volatility is through buying back its own shares. The board said it considers doing this during periods when its discount is consistently over 7%. Its current discount is 14.1%.
Over five years, figures from Morningstar show that Allianz Technology has returned 63.4% in share price terms. Its biggest rival – Polar Capital Technology (LSE:PCT) – is up 60.7% over the same time period.
In terms of 10 year returns Allianz Technology has notably ahead, up 473.5% compared to 356.8% for Polar Capital Technology.
Polar Capital Technology, managed by Ben Rogoff, is more benchmark-aware than Allianz Technology. It is not beholden to it, but its portfolio takes into account how the benchmark is constructed in an attempt to outperform it.
Allianz Technology is more flexible in being less wedded to its benchmark, which is also the Dow Jones World Technology Index. As well as investing in large tech companies, it has a bias towards mid-cap companies.
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