Ben Rogoff, manager of the Polar Capital Technology (LSE:PCT) Trust, has been investing in technology for more than two decades. He sits down with interactive investor’s Sam Benstead to discuss how he invests in the sector, including which shares and industries he likes at the moment.
He also goes into depth on artificial intelligence, why there is a discount on the trust, and the reasons why he avoids large positions in unproven companies.
Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Ben Rogoff, manager of the Polar Capital Technology Trust. Ben, thank you very much for coming into the studio.
Ben Rogoff, manager of the Polar Capital Technology Trust: Thanks for having me.
Sam Benstead: So, you're a technology investor. Where are you investing in the tech sector? What are you looking for in this very exciting space?
Ben Rogoff: Well, broadly, we're trying to build a diversified portfolio of around six to eight core themes and then drilling down into where we think the best opportunities are to invest against those themes. And the principle behind that is this idea that as a tech manager, you really can't afford to miss out on the most important themes as they emerge. The way we've structured the trust for more than 15 years has been this idea of a diversified portfolio of themes, and somewhere around 90 to 100 stocks [are] the best play.
Sam Benstead: And what are the most exciting themes that you're investing in at the moment?
Ben Rogoff: Core themes for us have been the likes of cloud computing, where more than 10 years ago we talked [about] how a new architecture for compute really was going to really account for the vast majority if not all of new incremental workloads or units of compute were going to gravitate to the cloud. We've been excited about the cloud for quite a while. We've been excited about the delivery of software as a service, otherwise known as SaaS, and that’s been a longstanding theme of ours.
We’ve been excited for a very long time about artificial intelligence (AI), we call it the data economy and AI. We could talk more about that as we go through this conversation. We've been excited about electric vehicles that have gone from sort of nothing of the market to really dominating incremental sales of automotives today and so on. So, it's really a collection of those type of themes that we're most excited about. But, of course, right now and post the introduction of ChatGPT, which I'm sure many of the viewers will be aware of and familiar with, we've been leaning in very heavily to the artificial intelligence theme.
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Sam Benstead: And technology is a huge investment area ranging from the biggest companies in the world to some of the smallest, how do you pick a technology stock? What characteristics are you looking for?
Ben Rogoff: First, it's fair to say that I'm not doing this on my own. We're currently a team of eight. We're one of the largest teams in Europe dedicated to technology. We're in the process of hiring two new people that should arrive by the end of the summer, so we'll be back to a full strength of 10. And with that large team that allows us to delve beyond the obvious names that actually do dominate the portfolio.
If you look at our top 15 stocks, they're names that many of the viewers will know today. But to make sure that we don't miss out on the most important themes and, of course, the most important stocks, you do need a big team, otherwise you end up with a portfolio potentially of each-way bets. We don't want to do that as technology managers. How do we then go and find stories? Ultimately, it's about the identification of themes and where penetration points are, by which I mean how far through a technology adoption curve we are.
For example, if we went back to electric vehicles, we might say that we may be around 15-20% of cars that have been sold or being sold are electric vehicles. That would put us at around 15-20% penetration, depending on the market. So, we try to identify the important themes, the big ones that are going to change the world, the ones that you can't afford as a manager to miss out on, and then [we] try to identify where we are in those adoption curves.
We try not to be too early. I think there's a temptation as a tech manager particularly. Retail investors, like my late father was the perfect example of this. You're always looking for those big, outside bets, the ones that no one's heard of. The ones that, maybe, are good boasting material down the pub. That's not what we're trying to do. Our view is that the tech sector typically, or at least I should say, technology change, occurs often later than people anticipate.
The current excitement around AI isn't the first time that people have been excited about it. Back in 2014-15, we were excited about something called Big Data. It's really a kind of precursor of AI and that sort of fizzled out. So, for us, it's really trying not to be too early where we feel massive value destruction can take place. Equally, not [outstaying] our welcome. So, we're not interested in so-called value stocks within technology because typically once a sector goes ex-growth or a theme goes ex-growth, you typically see margins erode, competition increase, and stocks that look cheap often turn out not to be as their end profiles struggle. It's in the middle. The sweet spot of adoption for us is 5-10% penetration. Often stocks look expensive, but we're hopeful that the earnings estimates will prove very conservative.
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Sam Benstead: You mentioned big technology stocks continuing to perform well. Your biggest positions are Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), Alphabet Inc Class A (NASDAQ:GOOGL) [and] Meta Platforms (NASDAQ:META). Why do you like those companies so much? And even though you like them a lot, you're underweight them relative to your benchmark. Is that a problem for investors in the trust?
Ben Rogoff: There's quite a lot of questions there, and I'll try my best to unpack them. I took over running the trust in 2006 and when I inherited the company, it was very much a multi-cap portfolio, and I, reasonably quickly, moved that towards being benchmark driven, and the idea was to make sure the trust wasn't making lazy negative bets against businesses that we liked. And that's really underpinned the way I've invested as lead manager since 2006 on the trust.
What that meant is that some of the very best companies in tech, the Apples, the Googles, and Microsofts, as you say, are very well represented in this trust, probably more so than most other companies or technology funds in the world. Now, that's worked, relative to peer group, [and] we're pretty pleased with our performance in Lipper peer group stuff and how we're doing against alternative companies and funds, not just this year but over a longer-term time frames.
That's worked because the nature of technology has changed. Many years ago, again, falling back to this idea of being a small-cap investor and finding things that no one had found before, information flows very differently post the internet than it might have done in earlier periods. The internet has also had a very big impact in terms of this kind of idea of creating natural monopolies. So, if you think about the smartphone market today being dominated by a handful of vendors, [and] internet search, a $100-200 billion market, that sort of size, [being] dominated by Google. And think about office software productivity suites dominated by Microsoft. And so, something may come to change that, but as things stand the internet, smartphones, the most important developments within technology over the last 10 years have really benefited the very largest companies and networks. They've become platforms. And my gut feeling says that that will be even more true during the age of AI.
So, getting back to the other question of, why us and not others? Look, we would love to have to flatten the portfolio. We'd love to be able to reduce some of our exposure to companies that are well owned by our shareholders elsewhere, well-known companies. Right now, those companies are doing very well. They're non-fungible assets, by which I mean, if you sell a share of Apple, it's very hard to find a replacement that looks like Apple. If you're an investor in, I don't know, gold or steel, you might be able to find another company that gives you similar exposure. That's not true as it relates to the very largest companies. So, we're hopeful that what we've seen this year, which has been a very mega-cap driven rally, might broaden, but if you look at the longer-term performance of large-caps to small-cappers, there hasn't been much respite for smaller companies. If that changes, I'd like to think we can flatten the portfolio, at which point we would look more different to the index. And I'd like to think that that would help us in our pursuit of alpha and positive returns relative to the benchmark.
Sam Benstead: The trust is performing very well this year, up around 25%, but there's still a large discount on it, between 12-13% over the past few weeks. Is technology expensive given the rally?
Ben Rogoff: Well, I think a few things. It has been a lovely start to the year. Surprising, actually, given that we came into the year, perhaps we had overshot in terms of valuations and sentiment. I think tech had been the centre of everything during Covid and the reopening period has been more difficult for the sector. People returning to pubs and aircrafts and doing stuff in the real world, less in the online world. And so that's certainly not been helpful.
The very sharp recovery in risk-free rates, the interest rates that are set by central banks, that hasn't been helpful to technology valuations. So that kind of process may have overshot, and we've started this calendar year in the doldrums a bit. Investor sentiment and positioning and tech hadn't been that negative for quite a while. So, some of what we've enjoyed year-to-date has been probably best understood as a kind of antidote to that, but also, we've seen ChatGPT, we've seen the explosion of interest in generative AI. And so, again, we're hugely excited about that.
In terms of the discount, I think the overall trust sector is still suffering from wider-than-average discounts. We're not immune to that. It's a bit of a head-scratcher given how well tech has done and we're pretty pleased with the absolute returns that we've generated in the trust year-to-date. But in the end, the market's always right. And so, during periods like this, investors should expect the company to continue to buy back stock. During the last fiscal year, we bought back something [like] around six million shares, which again is an accretive thing to do, but also, it's just a good reminder that over the time Polar Capital has run this company, we've withdrawn about a third of the outstanding equity associated with the trust.
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Sam Benstead: Technology has had a great decade. Things slowed down a bit last year but, like you said, perhaps [are] looking up again, at least in terms of share price performance. But we're in this new, more difficult economic environment. Interest rates are at 5% in the UK now. That affects how companies are valued. It might affect economic growth. So why can tech continue to have a fantastic decade? Why should we still invest in technology?
Ben Rogoff: Well, I can't obviously give investment advice and your viewers should know that past performance is no guide to future performance. Since I took over managing the trust, I think that our net asset value (NAV) has compounded around 15% per annum. Again, no guide to what we might deliver in the future but, the reason behind that has primarily been driven by the revenues, cash flow and earnings of the companies that we invest in.
The tech sector has become, again, perhaps the pandemic as a forcing function might have ended up benefiting the sector too much too quickly. We're sort of in the process of unwinding some of that. If you look at what's happening in the cloud space, for example, where companies like Amazon, Microsoft and Google dominate this new form of compute. There was a rush to deliver everything in the cloud during the pandemic, and some of that now is being replaced by a more thoughtful way to deliver cloud. Customers, I should say, are optimising their cloud spend. So, we're sort of living in the post-pandemic world, that's definitely had an impact near-term.
But, again, the last bull market belonged to tech. It was the decade where the internet finally delivered on the promise we were excited about in the late 1990s. It was a smartphone-dominated period where everything changed. Coming to your offices today, I used my smartphone to hail a cab in a way that was impossible to imagine in the late 1990s.
So, what happens in the future? It's hard to think of a world or scenario where technology doesn't remain at the centre of everything. Demographics are in our favour. Young people are so-called digital natives. My children are way ahead of where I am in terms of the latest apps and, again, I like to think of myself as being a digital native, so we know the demographics are on our side.
We know that the pandemic will have advanced things like the work-from-home mentality, which again is all about tech. How can I work remotely from where the means of production are? It's the first time in human history, again, enabled by technology. And then on top of that, there's AI. This idea that we can think about knowledge and understanding in a profoundly different way. Again, all roads lead to tech.
Sam Benstead: Ben, thank you very much for coming into the studio.
Ben Rogoff: Thank you for having me.
Sam Benstead: And that's all we've got time for. You can check out more Insider Interviews on our YouTube channel where you can like, comment and subscribe. See you next time.
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