Tough period for tech trust, but broad AI exposure on offer

In the year to end of April 2025, Polar Capital Technology Ord (LSE:PCT) generated a 3.1% net asset value (NAV) return, lagging the DJ World Technology benchmark return of 5.1%. The share price return was a small loss of -1.2% as the discount moved wider throughout the year.

The modest overweight to mid-cap (10.1% of portfolio versus 3.8% for the index) dragged on relative returns, as well as the small underweight to the US (71.9% of the portfolio vs 81.6% for the index). 

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Muted performance broadly reflects the tumult that befell the wider equity market and tech sector in the final quarter of the reporting period. Sell-offs arose throughout February and March 2025 as investors reassessed incumbent AI leaders in the face of the emergence around six months ago of Chinese AI company DeepSeek releasing a new product which has a fraction of the development costs seen in the US.In addition,technology shares were shaken, alongside the entire US market, by uncertainty over US tariffs.

US technology returns were also hampered by a weakening dollar (-6.3% vs GBP over the trust’s financial year).

The numbers in detail (for financial year to 30 April 2025)

Share Price Return: -1.2%
Net Asset Value (NAV Return): +3.1%
Benchmark (DJ World Technology Index) Return: +5.1%
Premium/Discount: -11.3% (vs -7.4% in prior year)
Full-Year Dividend: nil (vs nil in 2024)
Gearing: nil during period

Outlook

BenRogoff, the investment trust’s longstanding manager since 2006, views that policy action will continue to drive market returns in the near term. Spending on technology (much thanks to AI) is accelerating, while earnings growth in the US tech sector of 18% is forecast to be well ahead of the S&P 500. Rogoff thinks the trajectory of technology in 2025 will once again be dictated by progress within AI.

Discount

A widening of the discount from just over -7% to over -11% throughout the period lessened returns to investors, but was commensurate with the wider investment trust sector and in near lockstep with close peer, Allianz Technology Trust Ord (LSE:ATT). The discount has closed to nearer -8% at the time of writing.

Portfolio

At the epicentre of the listed-Technology sector are the Magnificent Seven, which make up 33% of PCT’s portfolio (although not all are included in benchmark). Top positions NVIDIA Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL) and Microsoft Corp (NASDAQ:MSFT) alone represent 23% of the portfolio (an even greater 31% of the benchmark). These companies have not just dominated equity index composition, comprising over one-third of the broader US equity index (S&P 500), but have also accounted for around one-quarter of the S&P 500’s earnings.

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The dominant theme around which the portfolio centres remains artificial intelligence. Statistics shared regarding active user bases of AI products astound, as well as news of the frantic spending by hyperscalers – large-scale data centres – xAI, Meta, OpenAI, Anthropic, Google.

Rogoff’s enthusiasm is reflected in the trust’s sub-sector exposure, favouring semiconductors at 32% of the portfolio, including AI supply chain companies such as Nvidia, Broadcom Inc (NASDAQ:AVGO) and Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM). He also backs the less familiar KLA Corp (NASDAQ:KLAC), a chip-making tool producer investing heavily in AI, or Astera Labs Inc (NASDAQ:ALAB), producer of infrastructure for data centres and a collaborator with Nvidia.

Software, the next largest sub-sector, houses PCT’s near 7% Microsoft position, as well as smaller, pre-profit Klaviyo Inc Class A common stock (NYSE:KVYO), a CRM solution provider, up to large-cap names such as CrowdStrike Holdings Inc Class A (NASDAQ:CRWD) and Palantir Technologies Inc Ordinary Shares - Class A (NASDAQ:PLTR).

Dividend

It has a long-term focus on capital growth and, as such does not think it worthwhile to pay a dividend.

Fee

A review of fee arrangements has resulted in an updated fee structure, with 0.75% a year charged on the first £2 billion assets, and 0.6% on all other assets – a tangible change given the trust’s substantial size (over £4.3 billion). The performance fee has also been removed, with changes in effect since May.

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Its financial year started out bright, but a collision of events throughout the first quarter and in early April negatively impacted the technology sector. The decline in the US dollar has also knocked the wind from the US-centric tech sector’s returns, for UK investors especially.

Following its previous financial return (from end of April 2023 to end of April 2024) of over 40% and 50% in NAV and share price terms (both figures ahead of benchmark), PCT modestly lagged its benchmark. It lagged due to its greater diversification into mid-caps, but more so due to its increased discount. However, while factors threatening markets in the reported year have not disappeared, cyclical sectors and tech especially have excelled in May/June and PCT has outperformed, returning near 30%, while its discount fell to high single digits.

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While mid-cap tech generally lagged the incumbent giants, there have been spots of fantastic performance for some of PCT’s differentiated smaller positions over the last 12 months such as investment broker Robinhood Markets Inc Class A (NASDAQ:HOOD), supply-chain service provider Celestica Inc Ordinary Shares (Subordinate Voting) (NYSE:CLS), or taser manufacturer Axon Enterprise Inc (NASDAQ:AXON).

Reflective of the trend in the benchmark, over the past decade PCT’s portfolio has become increasingly concentrated, with top 10 holdings reaching over 50% in mid-2024 and, now around 48% of the portfolio (compared with over 65% of the benchmark). The benchmark is heavily exposed to Nvidia, Microsoft, Apple, Meta Platforms Inc Class A (NASDAQ:META) and Alphabet Inc Class A (NASDAQ:GOOGL). PCT allocates across all the MAG-7, which have been some of the early AI leaders and have made impressive earnings progress. However, the MAG-7 position for PCT still represents a relative underweight. This is exacerbated as Rogoff and team have selectively taken stock-by-stock decisions to further underweight Alphabet, Apple and Microsoft, while the overweight Meta position reflects conviction from Rogoff given their monetisation of existing business via AI.

As many active managers found, being underweight mega-cap (Nvidia in particular) in 2023 and most of 2024 dragged on relative returns. Should these mega-cap companies as a whole continue to drive indices, it will be increasingly difficult to add value above index fund and exchange-traded funds (ETFs), which own the index rather than attempting to beat it.

However, performance of the group has diverged. In the past financial year, returns ranged from -8% for Alphabet to +44% Tesla Inc (NASDAQ:TSLA) (in GBP terms) and have not been uniform in the first six months of 2025. Should we see a continuation of this trend, it could be that PCT’s willingness to selectively weight across the group adds to relative performance. Further, as we enter a more mature phase of AI rollout, we may see early adopters of AI struggle at the hands of challengers, whether large or small.

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Despite the hurdle of still high valuations across the tech sector, we still see signs of impressive earnings and revenue growth and AI remains a transformational theme driving immense CAPEX and demand for the sector. PCT is a large and benchmark-conscious trust that, while undoubtedly top-heavy and US-centric, offers more diversification than its concentrated benchmark index or cap-weighted tech ETFs. Relative returns above the index over the past five years have struggled, but the past few months have once more shown PCT’s potential to outperform a cap-weighted index as the status quo of the market is challenged.

The discount of -8% is perhaps still a surprising level for what is a very sizeable trust with a positive net cash ratio and invested entirely in listed equities, and the update to the tiered fee is a welcome change that passes on the benefits of the trust’s scale to shareholders meaningfully.