Fund Battle: Polar Capital Technology vs Allianz Technology

The two technology trusts are flying this year as the AI boom takes off, but which should you buy?

Launched just a year apart, in 1995 (Allianz Technology Trust) and 1996 (Polar Capital Technology Trust), these two tech investing heavyweights have survived the dotcom bust, 2008 financial crisis and Covid-19 pandemic.

Returns over that nearly 30-year period are close. Figures from FE Fundinfo show, ATT up 2,575% and PCT up 2,231%, compared with 1,620% for the Nasdaq 100 index, a widely used proxy for tech stocks. This year they are neck and neck, both rising 30%. But which is best to buy now?

In the first part of our new monthly fund battle series, we take a look at how the funds are managed and assess which could be a better fit for your portfolio.

How do they invest?

Both are dedicated technology investors, but they approach the market in subtly different ways. Polar Capital is more “benchmark” aware, meaning that it tends not to stray too far from what its technology stocks benchmark looks like and makes small overweight and underweight positions in an attempt to outperform it.

Its top stocks three stocks are therefore the biggest tech names: Apple, Microsoft, and Google-owner Alphabet. However, given how large these tech stocks have become, it is still technically underweight them.

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For example, PCT has 10% in Microsoft, 9% in Apple and 7% in Google, but the index weightings have nearly double that in Apple and Microsoft, and about 10% in Google. Active managers try not to become too overweight in any stock and 10% is generally the most an investment trust will own in any individual share, even though they are allowed to hold more than that. Open-ended funds are capped at 10% in a single share as per European “Ucits” rules.

Polar manager Ben Rogoff, who has been running the trust since 2006, takes a conservative approach to technology investing, preferring companies that are in a strong financial position, with its biggest positions generally the most well established and financially secure companies.

He likes big companies with a scale advantage over peers, but also looks for disrupter companies that can change the world. The trust tends to avoid large contrarian bets on smaller firms that have a high risk of failure. Because of this approach, more than 90% of the portfolio is in large companies with market caps over $10 billion (£7.8 billion). The trust owns 88 positions, with riskier companies taking up only very small parts of the portfolio.

Allianz Technology has been generally happier to build larger stakes in smaller companies than Polar Capital Technology, but new manager Mark Seidenberg, who took over a year ago, moved to make the portfolio look more like the benchmark and focus on more financially secure companies as interest rates rose.

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Its biggest positions are in Apple (9.3%), Microsoft (8.4%) and Facebook-owner Meta (6.2%). Around 95% of the portfolio has a market cap above $10 billion and there are 48 positions, which is just over half the amount of rival PCT. As a result, ATT is a more concentrated portfolio.

The goal of ATT is, according to the fund manager, “invest in a diversified portfolio of companies that use technology in an innovative way to gain competitive advantage.”

Particular emphasis is placed on companies that are addressing major growth trends with innovation that replaces existing technology or radically changes products and services or the way in which they are supplied to customers.

Allianz Technolgy is run out of California, close to the largest technology companies. Whereas, Polar Technology has an eight-person technology investment team based in London, which is one of the largest tech teams in Europe. Both trusts are therefore well placed to invest in technology.

What are their big bets today?

Polar Capital is explicitly bullish on artificial intelligence (AI) and therefore computer chips companies, which are the brains behind the AI models. It has 25% of the portfolio in semiconductor stocks, with Nvidia, ASML, TSMC and AMD and Samsung in the top 10 positions. America’s giant tech stocks, which Rogoff also owns, are also key players in AI and have seen their shares soar this year.

Rogoff said: “The market has been led by mega-cap technology stocks, which appear well exposed to the AI theme given their scale, AI talent and mass of data. They have also showed cost discipline and  earnings upside from lower valuation starting points at the start of the year.”

AI has long been one of the trust’s core themes, but Rogoff believes an inflection point for its widespread adoption may have been reached.

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“This inflection point is in part due to the performance of the technology improving. For example, ChatGPT4 can handle 8x the number of words as GPT 3.5 as well as images, despite being released less than four months later, but also due to the natural language interface – the underlying transformer model technology has been around since 2017 but is now widely available to non-specialist users.

“ChatGPT, in particular, represents an ‘iPhone moment’ for AI, according to Nvidia CEO Jensen Huang, as it is the latest iteration of a new user interface giving rise to mass adoption of new technology and functionality,” Rogoff said.

Allianz Technology Trust is also exposed to AI, with large positions in Nvidia and Microsoft, but software, and in particular cyber security, appears to be more important for Seidenberg.

He said: “As companies need to reduce costs and improve productivity, particularly in light of a potentially uncertain macroeconomic outlook, we expect to see accelerating demand for innovative and more productive solutions such as cloud, software-as-a-service, artificial intelligence, cyber security.

“We are in a period of rapid change, where the importance of technology is key to the prosperity of most industries. We believe that this environment is likely to provide attractive growth opportunities in many technology stocks over the next several years.”

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Compared with PCT, ATT has twice the amount invested in Meta, at 6%, which has proved to be a good call this year as shares have more than doubled in value.

Seidenberg says that its Reels feature, which competes with TikTok, is performing well. He said: “Reels has not only driven an increase in overall app engagement, but has aided the company in gaining share in the shortform video segment. While Reels remains a revenue challenge at present,  Reels is still expected to be neutral to overall revenue either by the end of 2023 or early into 2024.”

Seidenberg also likes the fact that Meta is an AI leader.

“The company indicated it is no longer behind in building out its AI infrastructure and now has the ability to build out further new initiatives at scale. Going forward, Meta remains focused on increasing its investment in both AI and the broader metaverse development, indicating that the two initiatives are very much related,” he said.

Which should you buy?

The key question investors should ask is if they want broad technology exposure, where a fund manager owns a lot of shares and does not deviate too far from the benchmark, or whether they want a more specialist manager who is ready to take contrarian bets.

Polar Capital Technology would suit more defensive investors better, while Allianz Technology would suit more adventurous investors who are ready to take more volatility in the hunt for greater returns.

Both trade at similar discounts: 12% for PCT and 11% for ATT, so both could prove a bargain if the tech booms continues and the discount narrows. Neither have unlisted investments. 

Fees are 0.84% for PCT and 0.7% for ATT. Both have performance fees that kick in if returns are 10% above the Dow Jones Global Technology Index.

Alternatives?

Allianz Technology and Polar Capital Technology are two of the main and most-popular active choices. There are a small number of open-ended funds that specalise in technology – such as Fidelity Global Technology – but the current attraction of the two tech trusts is that investors have the opportunity to pay less, due to their discounts.

For passive exposure options include L&G Global Technology Index and Han-GINS Tech Megatrend Equal Weight ETF. The latter tracks an equal weighted index of global tech stocks.

Alternatively, exposure to an index fund or ETF tracking the Nasdaq index will also provide plenty of exposure to tech. One example is the Invesco EQQQ NASDAQ-100 ETF . 

Key facts

Source: FE FundInfo, data as of 16 June 2023