Investment Trusts: how to play the tech resurgence

Here are three investment trusts to play the technology theme.

Technology funds appear to be back in vogue with many investors. Several analysts have been drawing attention to technology companies’ strong earnings growth, cash-rich balance sheets and attractive valuations. Technology specialist open-ended funds have seen inflows, and bellwether Polar Capital Technology’s shares have recently traded at a premium to their net asset from a discount of more than 20% early last year.

We continue to support the optimistic case made for this sector, and think the specialist investment trusts managed by Polar and RCM are sound choices. But the best opportunities now lie among the ignored parts of the market.

Trusts can remain cheap or expensive for surprisingly long periods, but eventually value wins out. Unfairly ignored trusts get rerated very quickly once noticed, with the illiquidity that previously condemned them to large discounts leading them to rally sharply when buyers return. With technology back in vogue, which second-line trusts stand to benefit? We think the most interesting is Private Equity Investor (PEQ).

PEQ was launched at height of the ‘TMT’ boom in February 2000, and invests via US limited liability partnerships (LLPs) in fledgling tech companies. Unlike many tech funds that have seen shareholder value fall dramatically since the TMT bubble burst, PEQ’s net asset value is up over 10% since it was launched.

The same can’t be said of the share price, which is down one-third and stands at a discount to net asset value (NAV) of 45%. While some discount is justified – invested as it is in LLPs of inferior liquidity and valuation characteristics compared with portfolios of direct equities – PEQ’s discount is excessive given its record and prospects.

PEQ is a self-managed fund, with a San Francisco-based adviser, Campton Group. PEQ’s portfolio is diversified, providing access to more than 500 tech companies, most of which are unlisted. Some of these are now maturing just as the prospects of the tech sector have improved. If this improvement is sustained, it should become easier to realise the value of investments via initial public offerings and trade sales.

The pedigree and potential of PEQ’s portfolio is illustrated by some outstanding successes. It was a founder investor in both Skype and Baidu.com, China’s leading domestic internet search engine. These were hugely profitable, and while likely to prove to be the exception rather than the rule, it is not unreasonable to expect more winners from PEQ’s portfolio.

The credit crisis led to a collapse in share prices of many obscure investment trusts. Those whose shares were comparatively illiquid and held disproportionately by hedge funds suffered particularly, as redemptions forced selling into an unreceptive market.

PEQ is one such trust, and its bargain basement rating has more to do with the peculiarities of the market than it has to do with a rational assessment of PEQ’s prospects. Its largest investor is activist investor Laxey Partners.

 With Laxey’s co-founder Colin Kingsnorth having a seat on PEQ’s board, there is a constant voice pressing for a release of shareholder value. In late 2008 the trust tendered an offer for shares at NAV, and a repeat of this is likely once more investments mature.

Meanwhile it is encouraging to see PEQ use some of its cash resources to buy back over 4% of its shares, which is very value-enhancing at such a large discount to NAV.   

Richard Scott is chief investment officer at Hawksmoor Investment Management