Ian Cowie: tech trust duo on big discounts

Our columnist views Elon Musk’s investment in Twitter as a sign that it is unwise to write off technology shares.

Like so much anti-social media, Twitter (NYSE:TWTR) sometimes seems like a digital Tower of Babel, where everyone is talking but nobody is listening. Now Elon Musk’s $2.9 billion bet on ‘the pub with no beer’ should remind cynics that, despite a recent backlash against shares that pay low or no dividends, new technology might still be the future.

If the billionaire is right, smaller investors who want less intoxicating and more diversified exposure to this currently out-of-favour sector should consider shares priced at double-digit discounts to their net asset value (NAV). Two investment trusts in the Association of Investment Companies (AIC) ‘Technology & Media’ sector are trading at discounts of 13% and 12% below their NAVs this week, despite having more than doubled shareholders’ money during the last five years.

Both received a boost when Musk disclosed his 9.2% stake in Twitter by telling his 80.4 million followers - that’s more than the entire population of Britain - causing the online platform’s share price to spike 27% higher on Monday. Before the eccentric chief executive of the electric carmaker, Tesla (NASDAQ:TSLA), announced he had become the biggest investor in Twitter, the platform’s shares had nearly halved from their 52-week high.

Rising inflation and interest rates have soured Mr Market’s taste for ‘jam tomorrow’ stocks, prompting formerly high-flying tech investment trusts to fall to earth. For example, Polar Capital Technology (LSE:PCT), a fund with total assets above £3.5 billion, has delivered total returns of 477% during the last decade and 144% over the last five years but - even after Monday’s 2.3% bounce - remains barely positive over the last year, when it advanced by a modest 2.5%. PCT remains priced nearly 13% below its NAV (at the time of writing on 5 April), according to Morningstar.

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Even more eye-stretching medium to long-term performance was posted online by Allianz Technology Trust (LSE:ATT), a £1.34 billion investment trust, which delivered total returns of 774% over the last decade and 204% over the last five years, before it slumped to a meagre 1.27% over the last year, with over one percentage point of that occurring on Monday. It is priced 12% below NAV. Neither ATT nor PCT pay any dividends.

Similarly, Britain’s biggest investment trust, Scottish Mortgage (LSE:SMT) has suffered recently for its high exposure to technology and its low yield - a negligible 0.33% - with total returns going negative over the last year, when its share price fell by 10%. Even so, SMT shareholders remain 724% ahead over the last decade and 190% up over five years.

This would be a good point to declare an interest. I have been a shareholder in PCT for more than a decade and, despite technology falling from favour recently, this investment trust - managed by Ben Rogoff and his team - remains the 10th-most valuable shareholding in my ‘forever fund’.

So there might be some wishful thinking in my belief that the underlying digital businesses in which Allianz Technology, Polar Capital Technology and Scottish Mortgage invest may have gone out of financial fashion but are likely to remain in rising demand. For example, PCT’s top holdings are Apple (NASDAQ:AAPL) - who made the MacBook on which I am writing this; Microsoft (NASDAQ:MSFT), the software giant; and Alphabet (NASDAQ:GOOGL), the search engine.

All of the above provide services that seem fundamental to the digital world in which most of us are spending more time and money. Polar Capital Technology also offers wider exposure to this theme via non-household names including the graphics software group, NVIDIA (NASDAQ:NVDA); the self-descriptive Taiwan Semiconductor Manufacturing (NYSE:TSM) and another chip giant Advanced Micro Devices (NASDAQ:AMD).

Meanwhile, Allianz Technology’s biggest underlying holdings are Apple, Microsoft, Tesla, Micron Technology (NASDAQ:MU), a chipmaker, and Alphabet. Long-term outperformance has been generated by bigger exposure to smaller companies, such as ON Semiconductor (NASDAQ:ON), Seagate Technology (NASDAQ:STX) and Datadog (NASDAQ:DDOG).

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Sceptics argue that most - if not all - of the above are over-priced and about to underperform in much the same way as the technology sector did after the dot.com boom went bust 22 years ago. I remember it well.

More recently, and more positively, I would just point out there were plenty of naysayers when I reported investing in Apple six years ago at $95 per share. Since then, allowing for a four-for-one stock split that reduced my starting price to $23.75, this tech giant has become my most valuable holding after soaring more than sevenfold to trade at $178 this week.

So, as I may have pointed out before, perennial pessimism is the easiest way to simulate wisdom about stock markets but it ain’t the way to make money. Mr Musk may know more about technology than his critics. 'Tomorrow' shares are not as 'yesterday' as they seemed last week, and some online giants might be priced to grow again.

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

Ian Cowie is an investor in Apple (AAPL) and Polar Capital Technology (PCT) as part of a globally diversified portfolio of investment trusts and other shares.