Tech trust up 40% over past year slips to unusually wide discount

The discount of this trust, which has just under a quarter of its assets in Apple, Microsoft and Facebook, catches the eye.

On the whole, there are slimmer pickings for investment trust bargain hunters. The average trust discount, according to Numis, is 5%. In contrast, a little over a year ago during the worst of the Covid-19 sell-off, the average discount figure reached an all-time high of 18.4% (on 23 March 2020).  

As explained in brief in the video below, one of the main reasons a trust trades on a discount is due to substandard performance. This could be over the short term or persistently across multiple time periods. This can lead to low demand for the trust, resulting in a discount.

But this does not mean that all strongly performing trusts trade on a premium. There are occasions when a discount can be picked up, such as with Polar Capital Technology (LSE: PCT), which is trading on a discount of 6.5%. The current discount is wider than its one-year average discount figure of 2.8%.

The trust’s share price is up 42.7% over the past year, while over three years it has more than doubled investors’ money in returning 119.4%, according to Morningstar.

In addition, its short-term performance numbers are ahead of its benchmark. In December, the trust reported a 28.1% net asset value (NAV) return over a six-month period (to 31 October 2020) versus 23.9% for the Dow Jones World Technology index.

So why is the discount so wide? One explanation would be some profit-taking and rebalancing following the tech sector’s strong run. But this would not explain why its main competitor Allianz Technology (LSE: ATT) continues to trade on a small premium, of 1.1%.

Instead, Numis puts Polar Capital Technology’s discount down to the stronger performance of Allianz Technology. The latter’s share price is up 68.8% over the past year, while over three years it has returned 175.7%.

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“Many technology-focused funds are trading on premiums and therefore we believe the discount on Polar Capital Technology looks like an attractive entry point. We expect this reflects a very strong run of performance from Allianz Technology, its closest peer.

“However, the discount still appears wide given that Polar Capital Technology has outperformed its benchmark and most open-ended peers in the Investment Association’s Technology & Telecommunications sector,” says Numis.

Polar Capital Technology, managed by Ben Rogoff, is more benchmark-aware than Allianz Technology. It is not beholden to it, but its portfolio takes into account how the benchmark is constructed in an attempt to outperform it.

Allianz Technology, managed by Walter Price, is more flexible in being less wedded to its benchmark, which is also the Dow Jones World Technology Index. As well as investing in large tech companies, it has a bias towards mid-cap companies. 

As a result, Polar Capital Technology tends to have bigger stakes in the biggest companies in the index. The trust currently has just under a quarter of its assets in Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB). Its top 10 holdings account for 52% of the portfolio versus 34.3% for Allianz Technology.

Being more index-aware also leads to more holdings, which at the end of last year stood at 111 for Polar Capital Technology versus 77 for Allianz Technology.  

Of the famous five FAANG stocks, Allianz Technology favours Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Apple. 

Both trusts tilt their portfolios towards the biggest technology themes they believe have the best growth prospects in the coming years. One standout theme both trusts are seeking to profit from is cloud computing. Companies that serve this industry are benefiting from the Covid-19 work-from-home phenomenon.  

While the trusts invest in a different manner, both have served shareholders very well over both short and long time periods. There will no doubt be volatility among tech shares along the way, but the long-term drivers for technology remain in place.

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“There is no question in our minds that the Covid-19 crisis will spur the use of technology and change how we live and work in the future,” says Price. 

The same sentiment is echoed by Rogoff. He says: “We do not believe that technology outperformance has to end with the pandemic diminishing. Covid-19 has clearly accelerated a number of key technology trends, but the redistribution of profit pools across myriad industries began long before the pandemic. Companies have been forced to adapt their business models to a digital-first world.”

While Allianz Technology has enjoyed the upper hand, Polar Capital Technology has the cheaper price tag. Its discount offers investors the chance to buy the trust for less than the sum of its parts.