Ian Cowie: tipped trust soars and remains cheap

Our columnist identified this trust as an out-of-favour investment trust bargain just over a month ago.

A surprise $1 trillion ruling by a US court shows why it is wrong for investors to write-off big technology businesses. It also makes widespread fears of government clampdowns against so-called digital monopolies look like wishful thinking.

Coming down from the clouds, it seems this small shareholder was right to describe Polar Capital Technology (LSE:PCT) as an “out of favour investment trust bargain” in this space just over a month ago. Since then, PCT’s price has surged 12% and I believe it has further to go - not least because the shares continue to be priced at a near double-digit discount to its net asset value (NAV).

Returning to the big picture, Facebook (NASDAQ:FB) saw its value rise briefly to a record high of $1.01 trillion this week, before falling back to $958 billion on Thursday, after the District of Columbia court threw out claims of monopolistic behaviour. It also rejected calls to break up the social media giant by the Federal Trade Commission (FTC) and several US states. FAANG stocks - that is, Facebook, Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL) - are widely resented for a variety of perceived wrongs, ranging from tax avoidance to misuse of personal data.

Similar regulatory probes in Britain and the European Union have helped bite into these mega-caps’ share price performance in recent months. That has led some high-profile investment trusts, including Monks (LSE:MNKS) and Scottish Mortgage (LSE:SMT) to reduce holdings in household name technology stocks and, instead, increase their exposure to “a new wave of digital companies”.

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But fears the FAANG stocks might be muzzled by governments and regulators look premature after this week’s ruling. Judge James Boasberg of the District Court of Columbia was scathing in his assessment of the plaintiffs’ case. He said: “The FTC’s complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined anti-trust product market.

“It is almost as if the agency expects the court to simply nod to the conventional wisdom that Facebook is a monopolist. Although the court does not agree with all of Facebook’s contentions here, it ultimately concurs that the agency’s complaint is legally insufficient and must therefore be dismissed.”

The FTC has 30 days to appeal. But anti-trust or monopoly-busting litigation against the FAANGs is confronted by fundamental legal problems.

These include the fact that many of the FAANGs’ services are free at the point of delivery to consumers, thus demolishing any price-gouging claims, and a wide variety of competitors exists. Even so, the FTC pointed out that Facebook and its subsidiaries Instagram, which it bought for $1 billion in 2012, and WhatsApp, which it bought for $19 billion in 2014, control 60% of the social media market.

But rival services include TikTok (known in China as Douyin), Snapchat (Snap Inc (NYSE:SNAP)), Pinterest (NYSE:PINS) WeChat and others. Their relative lack of popularity is scarcely Facebook’s fault. Similar arguments can be made to defend Apple, Amazon and Google.

So PCT’s top 10 holdings - which include AAPL, FB and GOOGL - look relatively safe from regulatory intervention for now. That’s much appreciated by this investor who first invested in AAPL at $95 in February 2016. Its four-for-one share split last August gives a book price of $23.75 for stock that traded at $137 this week, making AAPL my most valuable shareholding.

I first invested in PCT more than a decade ago with a paper-based broker and transferred the shares into my online ‘forever fund’ at £4.33 in September 2013. Last month, I pointed out how PCT had recently fallen from favour and listed its underlying holdings - which also include Microsoft (NASDAQ:MSFT), Samsung Electronics (LSE:SMSN) and Taiwan Semiconductor Manufacturing (NYSE:TSM).

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I asked readers: “Can anyone seriously imagine a future where these businesses cease to play a major role in the digital economy? Nostalgia for shopping on the high street and a world without anti-social media is unlikely to hurt them.”

Since then, Mr Market seems to have come round to my point of view and PCT’s price has risen from £21.28 to £23.92 on Thursday. Despite data from Morningstar showing PCT has delivered total returns of 16%, 279% and 562% over the last one year, five-year and 10-year periods, its shares continue to be priced 9.7% below their NAV.

But fears the FAANGs have flown too high and will shortly be hauled back to earth are not the only drag on PCT’s price. Its sole long-term rival in the Association of Investment Companies (AIC) Technology and Media sector, Allianz Technology (LSE:ATT) did even better over all three periods - with total returns of 31%, 375% and 761% - with its shares priced at a more modest discount of 5.6% to NAV.

Like MNKS and SMT, ATT favours more exposure to less well-known digital disruptors. All three have demonstrated the ability to identify the technology winners of tomorrow today. To be candid, if I were just starting to invest in technology - and knew then what I know now - I would probably select one of the above investment trusts.

Against all that, PCT’s performance has long earned it a place in my top 10 holdings by investing in businesses I recognise and it rarely pays to be greedy. Put another way, it feels too late in this bull run to chase returns by taking on more risk with less well-known names.

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.