Using investment trusts to invest in Big Tech
Big tech has come off the boil in recent weeks. Tesla is down 32% from its January peak, and though the more profitable FAANG stocks have fared better, their share prices are still some way off their January or February highs. Amazon, for example, is down 11%.
Those who may have been put off by big tech’s soaring valuations may be tempted into the market by these share price falls.
Several investment trusts offer substantial exposure in the form of a diversified fund, where you can let the fund managers worry about the right time to buy or sell. After big tech’s recent battering, many of these trusts now trade at discounts, which might be an added incentive to the bargain hunter.
As a rough guide to ‘big tech’ exposure, the AIC’s stats team has scoured the universe of investment companies for holdings in nine companies.
These are the “FAANG” stocks (Facebook, Apple, Amazon, Netflix and Google – now called Alphabet) plus Microsoft and Tesla, and we’ve thrown in China’s Alibaba and Tencent for good measure as they are easily large enough to merit the description. You could call them the FANATAMAT stocks, if you like.
The UK’s investment trusts in aggregate have £10.4bn of exposure to these companies, about 4% of all their assets. But of course, some have much more exposure than others.
Starting off with technology-focused trusts, there are Allianz Technology Trust PLC (LON:ATT) and Polar Capital Technology Trust PLC (LON:PCT), which have an estimated 21% and 38% exposure to FANATAMAT respectively (all percentage exposure figures are from the most recent company reports or factsheets).
Allianz Technology is run by tech veteran Walter Price, who is based out in San Francisco where much of the action is. He’s been following the tech sector since the 1970s which means he really has seen it all, and he has worked with fellow senior portfolio manager Huachen Chen for more than 30 years. Top holdings are Alphabet (5.6%), Amazon (4.1%) and Micron Technology (3.5%), which makes computer memory and storage products. Over the past ten years (to the end of February) it has returned 697%, and now trades at a discount of 9% – the widest seen for almost a year.
Polar Capital Technology is run by Ben Rogoff, who has been a tech specialist for 24 years and has a passion for the sector that is obvious to anyone who meets him. With a market cap of over £3bn PCT is one of the largest investment trusts and it trades at a discount of 11%. In contrast to Allianz Technology it has a greater number of holdings (113 versus 74) but actually has bigger positions in the big names: top holdings are Apple (9.6%), Microsoft (8.1%) and Alphabet (5.9%). The past ten years have seen Polar Capital Technology deliver a total return of 502%.
For many retail investors, mention investment trusts and one name that immediately springs to mind is Scottish Mortgage Investment Trust PLC (LON:SMT). One of the three investment trusts to have earned a place in the FTSE 100, Scottish Mortgage is a giant among closed-ended funds with a market cap of more than £14bn.
Its exposure to our selected nine “big tech” stocks is just under a quarter of the portfolio, at 24%, but unusually it supplements this with exposure to unquoted tech companies (16% of assets) – which the managers James Anderson and Tom Slater believe offer some of the most exciting opportunities. This unquoted exposure works well inside the closed-ended structure of an investment trust, because the fund managers will never be forced to try and sell assets when investors sell their shares (as unfortunately happened to Neil Woodford’s open-ended fund). Scottish Mortgage’s top holding is Chinese tech giant Tencent (6.5% of the portfolio), followed by US biotech company Illumina (6.1%) and Amazon (5.9%). Its ten-year return is 781% and its current discount is 11%.
The investment trust that has the highest exposure to our ‘FANATAMAT’ stocks (that’s never going to catch on, is it?) is Manchester & London Investment Trust plc (LON:MNL). The nine stocks make up a whopping 71% of this trust’s portfolio, with enormous holdings in Microsoft and Amazon (each 16% of the portfolio) and substantial exposure too to the Chinese tech titans, Alibaba (12%) and Tencent (11%).
It should be noted that unlike open-ended funds, investment trusts are not subject to any maximum amount they can hold in an individual stock, as long as they have a diversified portfolio. This can add “concentration risk” but allows for high-conviction strategies. Manchester & London sits in the Global sector and has delivered a ten-year return of 97%. It trades at a 10% discount.
The next investment trust on our list is Menhaden PLC (LON:MHN), which sits in the AIC’s environmental sector. Menhaden does not set out to invest in ‘big tech’, but its mandate is to invest in businesses or opportunities that deliver, or benefit from, more efficient use of energy and resources. It makes our list because it has 21% of its assets in Alphabet, and a further 4% in Microsoft.
Menhaden’s managers state that Alphabet “continues to lead the way on sustainability in the technology industry and remains the largest buyer of renewable power worldwide”. Menhaden was founded in 2015 and has assets of just over £100m. It trades at a discount of 24% and over the last five years has delivered a return of 52%.
The remaining investment trust with exposure of more than 20% to our selected stocks is Baillie Gifford US Growth Trust PLC (LON:USA), which like its big brother Scottish Mortgage is managed by Edinburgh-based fund managers Baillie Gifford. This investment trust’s holdings in Alphabet, Amazon, Netflix and Tesla make up 21% of its portfolio.
It was launched in March 2018 and is managed by Gary Robinson and Kirsty Gibson. In common with Scottish Mortgage, Baillie Gifford US Growth is managed according to the principle that a tiny proportion of all companies will, over the long term, account for a huge proportion of stock market returns, and devotes its attention to finding those companies.
Finally, it’s always worth remembering there’s more to tech than big tech – small tech can be rewarding too.
Herald Investment Trust PLC (LON:HRI) is an investment trust that focuses on exciting opportunities in smaller quoted companies in the technology, telecoms and multimedia sectors, and while it is global in scope, it is unusual in having a large weighting to the UK (almost half its assets).
It has been managed since its launch in 1994 by Katie Potts, who has decades of experience in tech investing. Herald’s return over the past ten years is 321%.
This article was written by Nick Britton, head of intermediary communications at the AIC.