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QD view – the next big thing

Discounts sometimes do weird and wonderful things but one odd situation at the moment is a 6%+ discount on Polar Capital Technology Trust (PCT). An investment in this fund 12 months ago would have made you over 40% on your money. When we published our last note on the trust (in December), it was comfortably outperforming its benchmark. So, what is the problem?

The obvious answer is that investors are taking profits on their holdings in the trust, in anticipation of a setback in 2021. There was something of a switch from ‘growth’-style investing to ‘value’-style investing after the announcements on the vaccines last November, but this move has not been decisive (nor do we expect it to be, for now at least).

Fortunately, we had a chance to catch up with Ben Rogoff, manager of PCT, this week. He had some reassuring messages.

There is no second tech bubble

First, the sector’s good performance over 2020 was in many cases deserved and backed by earnings growth. He categorically rules out stories of a second tech bubble, although there are always individual stocks that are over-hyped.

Ben notes that much of the rhetoric over the past year has drawn analogies to WW2. While that is perhaps overdramatic, the systemic shifts that have occurred in the pandemic are significant. Including Ben, many managers have told us that the pandemic has accelerated many trends around the adoption of technology, notably in connection with working from home and online shopping.

De-urbanisation

Ben does not think that we will all go back to working in offices five days a week in the way that we did. This is a shame for the many service industries that support office workers. Ben also thinks there will be a knock-on effect on the long-term demand for mass transit (no Crossrail 2 for foreseeable future, perhaps). Instead, he thinks we will see a trend of de-urbanisation. If you can work from home, why not do so in the country or by the sea, for example? There are also clear long-term implications for business travel and physical conferences.

Some of the statistics that Ben quotes are compelling. Online sales are now 33% of retail sales, up from 16% pre-pandemic, Zoom traffic increased 30x, and the percentage of GP consultations made online rose from 10% to 75%, for example. The latter point is interesting – why go back to a system where if you are not feeling well, you sit in a waiting room with a bunch of people with other illnesses?

PCT’s portfolio is deliberately more risk averse than that of Allianz Technology, sometimes that works in PCT’s favour, sometimes not. Ben is not afraid to make the portfolio look a lot different to the benchmark, however. He will not invest in a stock that he is convinced will fall in price just because it is a large component of the index.

Avoid yesterday’s heroes

A key focus is in looking to capture the excitement generated when a new technology starts to become mainstream. The corollary of that is avoiding the stocks that still have high revenues but their technology is past its prime. PCT owns no Cisco, IBM, Intel, Oracle or Texas Instruments, for example.

Back the next big things

Currently the portfolio is exposed to themes such as the growth in software-as-a-service (Saas), automation/robotics within industry, cloud security (the need for which was demonstrated spectacularly by the SolarWinds debacle in the US late last year), growth in digital entertainment and online gaming, the changes that will be wrought by 5G, data and artificial intelligence (AI), digital payments and ecommerce.

Ben stresses that the technology landscape is constantly evolving. It is a big argument as to why the sector won’t run out of steam – there are always little companies on the verge of becoming new giants. The important thing is to have someone who knows what they are doing, shifting your technology exposure into these next big things and out of yesterday’s heroes.

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