Tech trusts: should the betamax moments turn you off?

With all the buzz surrounding Facebook's imminent floatation, it's easy to assume that 11 years after the tech bust the scepticism surrounding the sector has finally been put to bed.

But as Groupon and LinkedIn recently found out, a blockbuster IPO doesn't always do the trick.  The two internet companies - darlings of the ever-expanding social network and internet discount craze - in November came under the attack of speculators whose thirst for tech shorts grew so great that it pushed interest in the stocks to a record high.

Closed-end funds have also seen their discounts widen amidst this wave of high profile IPOs.  

Despite absolute and relative performance of technology-focused investment companies over the last three years, discounts to net asset value (NAV) stretch as wide as 17% and valuations have been dubbed  pretty 'undemanding' given the prospects for earnings.

What's holding investors back?

The characteristics that drive the sector's earnings are also among its biggest drawbacks. The sheer turnover of gadgets makes the industry immensely competitive and sales can dry up when geeks get wind of a new device due to come out months down the line.

But Tom Tuite Dalton, investment companies analyst at Oriel Securities, argues that the volume of merger and acquisitions (M&A) in the sector is a telling value indicator.

'Last year's acceleration in tech sector takeovers, where bid premia were at record highs, suggests to us that a number of tech companies have strategic value that is not reflected in their market price.  Given cash-rich balance sheets among tech majors like Apple, we expect M&A activity to remain a key performance driver this year and next,' Tuite Dalton said.

Key to playing the sector profitably is knowing when to pounce, the analyst added, pointing to the chart below that highlights just how quick technology fads come and go.

''Knowing when to exit is also a key challenge for the tech fund manager and arguably a key risk,' Tuite Dalton said.  'Look what happened to Nokia, and more recently, RIM's share price in the smart phone market.'

Which manager?

Of all the tech trusts Ben Rogoff's Polar Capital Technology trades on the tightest discount to NAV, at around -4.5% at Thursday's close.  The vehicle is typically more benchmark aware than its open-end equivalent, but Charles Stanley's investment trust and investment companies analyst Stephen Peters said that Rogoff's £496 million vehicle is clearly the sector's top performer.