Polar Capital Technology Trust PLC (LSE:PCT) in the first half of the year showed that it "rotated decisively" towards artificial intelligence (AI) as a primary investment theme.
The FTSE 250-listed tech trust exited interest rate-sensitive sectors like fintech and alternative energy, and in markets affected by rising interest rates, such as electric vehicles.
It also lessened holdings in regions experiencing economic slowdown and in companies vulnerable to AI risks. Additionally, geopolitical tensions and consumer behavior shifts led to decreased investment in travel-related sectors.
AI exposure increased
This was seen with new investments in the semiconductor subsector (Micron Technology and Rambus); advanced packaging (Amsterdam-listed BE Semiconductor Industries); testing (Tokyo-listed Advantest (NYSE:ATE) and Nasdaq-listed Camtek); and electronic design automation software (Cadence Design Systems and Synopsys, both Nasdaq-listed).
A series of forays were also made into smaller Asian component and materials companies that managers believe have "a more significant role to play in AI chip and server manufacturing than they did during the cloud era".
Lead manager Ben Rogoff and co-manager Nick Evans also pivoted software exposure towards Adobe and Monday.com as companies that "appear able to monetise AI within their existing offerings", as well as investing several data-related asset companies Datadog and Teradata that they felt "should benefit from the growth in AI-related workloads and the need for better data".
New investments were also made in a number of what they called "idiosyncratic longer-duration assets with an AI angle", being nasdaq-listed Evotec and London-listed Oxford Nanopore Technologies following significant share price weakness.
Notable exits
A significant reduction was made in the trust's exposure to interest rate-sensitive areas such as fintech, with exits from Adyen and GMO Payment Gateway, and from alternative energy with the sales of Enphase Energy and SolarEdge Technologies.
Exposure to electric vehicle (EV) and related assets as higher interest rates began to negatively impact demand via increased financing costs, shown via exits of Chinese EV maker BYD and auto-exposed semiconductor suppliers such as Infineon Technologies and ON Semiconductor.
The general China slowdown was cited as the reason for the exit of Alibaba Group (NYSE:BABA) and from robotics-related companies Cognex and Nabtesco.
Emerging concerns that AI "might pose a meaningful risk to so-called 'point solutions' relative to larger platforms" was mentioned as sparking the exit of software application companies Freshworks, Paycom Software and Smartsheet.
Conflict in the Middle East and concerns around the US consumer led to the reduction of travel-related names, including Airbnb Inc (NASDAQ:ABNB, ETR:6Z1).
Par performance
For the half-year to 31 October, net asset value grew 9.4% to £3.09 billion and NAV per share 12%, which compares to the 12.8% gain of its benchmark, the Dow Jones Global Technology Index.
The statement from PCT noted that the trust is underweight the US tech giants, in large-caps in favour of "growthier small and mid-caps".
Its three largest holdings - Apple, Microsoft and Alphabet - represent circa 28% of its NAV and circa 42% of the benchmark, while PCT's top five holdings (which also include Nvidia and Meta Platforms) represent circa 39% and 53% of NAV and benchmark, respectively.
The half ended with a net cash position of 5.5% but during the past month the trust deployed more of its cash, with circa 4% cash uninvested at the end of November.
"Our overarching focus remains on positioning the portfolio in favour of companies that should prove important AI enablers and beneficiaries. At the time of writing, we believe that more than three-quarters of the portfolio is explained by AI enablers and beneficiaries," the managers said.
Most AI-exposed investment trusts (research from June)
- Allianz Technology Trust (Technology & Technology Innovation sector) 37.56%
- Polar Capital Technology (Technology & Technology Innovation) 36.62%
- Menhaden Resource Efficiency (Environmental) 27.96%
- Alliance Trust (Global) 18.69%
- JPMorgan American (North America) 17.98%
- JPMorgan Global Growth & Income (Global Equity Income) 17.52%
- Martin Currie Global Portfolio (Global) 16.97%
- Scottish Mortgage Investment Trust (Global) 13.52%
- Templeton Emerging Markets (Global Emerging Markets) 12.16%
- abrdn New Dawn Investment Trust (Asia Pacific) 11.44%
Analyst Will Crighton at Stifel said it was "a decent result" given the underweight to the Magnificent Seven mega caps, while the net cash position and a Nasdaq put option cost it a combined further 80 basis points.
"However, stock selection was positive and was helped by significant exposure to AI names."
Crighton noted that the fund's discount mostly fluctuated between 15% and 12% over the past year and is currently at 13%, which is wider than during the last rally in 2020, when it was around 5%, before widening to around 10% over 2021.
"The lack of discount narrowing is fairly surprising to us given this strong rally. This is perhaps due to a lack of outperformance against the benchmark. We think concerns over high valuations may be another reason," the analyst said.
Stifel retained a 'neutral' rating for now.