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Advanced technology: The rise of the super trusts

Buying shares in a tech investment trust looks like a safer bet for those wanting a piece of the high-growth pie

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Amazon has done very well for trusts that have backed it, but can it be sustained?

Tech stocks are trendy, but notoriously hard to predict. 

Start-ups pop out of the ground every week, with big plans to “disrupt” an industry and dominate a market. 

But for those few that eventually develop into an Apple Inc (NASDAQ:AAPL) or Netflix, there are a host of expensive failures.

That’s why buying shares in a tech investment trust looks like a safer bet for those wanting a piece of the high-growth pie, but not wanting to risk backing the wrong horse.

Listed in London, there are a few main contenders on the market for those wanting to share in tech’s recent success, with Allianz Technology Trust (LON:ATT), Polar Capital Technology Trust (LON:PCT), F&C Investment Trust (LON:FCIT), and Scottish Mortgage Investment Trust (LON:SMT) among the biggest.

These four own net assets worth a combined £15bn. Allianz is the smallest, coming in at £579mln assets owned, followed by FTSE 250-listed Polar Capital with just under £2bn, and blue-chip companies F&C at £4.5 bn and Scottish Mortgage at £7.9bn a piece.

Trusts like these four are seen as treasure chests, stuffed with the world’s biggest companies, the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) and are all tilted towards companies based in US.

Paid off handsomely

So far, backing these trusts, and in effect, these tech companies, has paid off handsomely for investors.

Tech investment companies delivered an average return of 34% over the last year, more than double the performance of the average investment company in the same time period, according to the Association of Investment Companies (AIC).

And this has been reflected with a growing appetite for their shares.

Over the past five years, the Allianz trust’s share price has increased by 184%, with Polar Capital hot on its heels, trading 172% higher, and gaining 38% since the year’s start.

According to Annabel Brodie-Smith, communications director of AIC, it is “not surprising” that tech trusts are thriving:

“Clearly technology has been advancing very swiftly, and it is transforming how people live their lives and how they do business, which I don’t see that changing any time in the future.”

“We’re in the middle of a technology revolution, and as a result of that, they’ve performed very strongly.”

Allianz and Polar both count Microsoft Corp as their single biggest holding, at 9.5% and 7.8% of their respective portfolio, with investments in Apple and Facebook among their ten largest investments.

For the FTSE 100 trusts, Scottish Mortgage has invested 9% of its capital into Amazon and 6.3% into Alibaba, alongside holdings in Tesla, Netflix, and Tencent.

F&C is a more traditional trust, and has lots of smaller stakes across sectors, but nonetheless counts Amazon, Microsoft, Alphabet and Facebook among its top five investments.

Nevertheless, Brodie-Smith cautioned investors that “it’s important to remember that investing should be for the long term and past performance is not an indicator of future returns”.

And not everyone is convinced that the road will be paved with rainbows forever.

Keeping tech at arm's length

Alasdair McKinnon at The Scottish Investment Trust, an avowed contrarian, is keeping tech at arms’ length for now, spying a potential bubble bursting moment on the horizon as valuations go up and up, reminiscent of the dotcom bubble of the 1990s.

“There is a great deal of pressure across the whole [investment] industry to be very short-term, because everyone wants to do as well as they can in the shortest possible time frame.

“That’s very understandable, but I think it misses out on the benefits of a longer-term approach,” said McKinnon.

The main issue with growth investing, according to McKinnon, is that “when things are going well, the whole world will tell you why you should keep buying”.

This leads to “far too much money getting chucked at a sector”, where there are lots of “false stories and a lot of very bad business models in existence”.

McKinnon recalled the notorious financial advisory firm Durlacher, which crashed in 2002 after nearly joining the FTSE 100 index at the height of the technology boom, with a valuation that had swelled to £2bn in just seven years.

Business crashed spectacularly when a large number of technology ventures in which Durlacher had invested lost much of their value.

“In a year, they’d gone from masters of the universe to zero. It was extraordinary to see how the mood changed, because the business model was always bad, but because it was working, people went with it.”

McKinnon currently holds no tech investments, and prefers mining stocks such as Newcrest and Newmont, and supermarket retailers such as Target and Tesco, which make up Scottish Investment Trust’s four largest holdings.

Nevertheless, the trust has owned stakes in Google and Microsoft in the past, but these were only bought “when the companies looked cheap” based on worries they couldn’t keep up with the switch away from desktop computing.

Over the past five years, Scottish Investment Trust has delivered an impressive 53.6% return, with shares shooting up 56.5% in the same time.

So, there’s clearly money to be made on either side of the tech conundrum. At least for now.

Quick facts: The Scottish Investment Trust

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