Technology is everywhere. The race to build artificial intelligence (AI) has been one of the defining drivers of markets in the last twelve months, and there’s barely an industry left untouched.
The so-called SaaS-mageddon torched the valuations of software businesses when investors started to worry that AI’s ability to code would leave legacy software businesses facing insurgent competition from all angles.
The utilities sector has been transformed into a growth industry thanks to the massive power demands of datacentres springing up across the world. Miners, manufacturers and media – the list goes on.
No fund manager can afford to ignore an innovation revolution, but for some this is nothing new.
Dedicated technology investors have spent decades identifying disruptive technologies, often long before they reach the mainstream. This sort of single-sector investment can be higher risk, lacking the diversity of broader funds, but the UK has an embarrassment of riches when it comes to technology managers – particularly when it comes to investment trusts.
Each manager offers something a little different, whether it’s investment in higher risk private companies or zeroing in on particular technological themes.
What to consider before investing in technology trusts
We’re looking at four leading UK technology investment trusts and what makes each unique.
But remember, investing in these trusts isn’t right for everyone – especially as all four are potentially higher risk because of their ability to use gearing and invest in smaller companies and in emerging markets. Investors should invest only if the trust’s objectives are aligned with their own. Investors should note that the investment trusts can trade at a premium or discount of net asset value, potentially increasing volatility.
Investing is for the long term, typically 5 years or more, and can help your money grow, but the value of investments can rise and fall, so you could get back less than you put in.
You should understand the specific risks of a trust before investing and make sure that any new investment forms part of a diversified portfolio.
Scottish Mortgage Investment Trust – SpaceX and other stars
Scottish Mortgage and its manager, Baillie Gifford, are probably the highest profile UK investors in global tech companies. The team was an early backer of both Tesla and SpaceX and holds stakes in TikTok owner ByteDance and AI giant Anthropic, as well as large investments in publicly traded tech giants like NVIDIA and Taiwan Semi-Conductor Manufacturing Company (TSMC).
Managers Tom Slater and Lawrence Burns believe that total stock market returns are driven by a very small number of companies. They set out to track down those companies and back them heavily.
The result is a high-risk portfolio.
When it pays off, it pays off big – the trust made 132 times its money on NVIDIA for example – but the other side of that coin is that Scottish Mortgage has occasionally lost its entire investment, a particular risk in the trust’s private investments where it will struggle to exit if things are going wrong.
The team thinks that this asymmetric return – with a potential upside of many multiples of the trust’s original investment but a downside that’s capped at 100% – is the key to making “excellent returns” for investors.
The trust does have a softer side, though.
Although most of its holdings are in the stellar growth category, with a bias to tech, the team can invest across sectors and invests in a small number of quality growth names – companies like Ferrari (currently 1.9% of the trust). The managers believe that these companies have the potential to compound returns over the very long term – delivering outsized returns.
Although it does not currently, the trust can also make use of derivatives, which adds risk.
RIT Capital Partners – a bucket load of cherries
Like Scottish Mortgage, RIT Capital Partners has large investments in private tech companies. However, the former Rothschild family investment vehicle aims for a much more balanced portfolio.
It has three core investment buckets – listed shares, private investments and “uncorrelated strategies” – turbo-charged by high conviction holdings cherry picked by the manager.
The uncorrelated bucket includes a mix of hedge funds, bonds and real assets, designed to be less exposed to downturns in the stock market while delivering a better return than cash. The bucket currently accounts for about 20% of the trust – and the hope is that it allows the trust to take more risk elsewhere, though it can also include higher risk bonds.
Listed companies account for about half the trust’s assets – including investments in individual companies and in funds overseen by external third parties. The trust also makes use of stock market derivatives, such as S&P 500 options, which provide exposure to strong stock market performance – albeit derivatives can also increase risk. That combination gives the trust broad exposure to global stock markets and enhanced exposure to the companies that it believes will be long-term winners.
However, it’s the trust’s approach to private investments that really sets it apart.
Accounting for a third of the portfolio is a mix of private equity funds and individual private companies. Funds give the trust broad exposure to private companies but, thanks to co-investment rights, also create opportunities to cherry pick individual deals to back directly. As with Scottish Mortgage, those private investments are a comparatively higher risk.
That has helped it build larger positions in companies like AI group Anthropic, payments giant Stripe, and trucking software platform Motive.
Crucially, it has also seen the group back ‘off the beaten track’ private tech companies like Coupang. Commonly referred to as the “Amazon of South Korea”, RIT invested in 2018 – prior to the company listing in 2021 – and made about 7 times its original investment. Investors should remember that returns are never guaranteed.
Allianz Technology Trust – a San Francisco story
If technology has a geographical home, it’s California. Silicon Valley spawned five of the Magnificent 7 giant US tech companies. Based in San Francisco, the Allianz Technology Trust team is at the heart of the techno-swirl.
The managers take advantage of local networks of entrepreneurs, engineers and venture capital investors to identify the companies that they believe are best placed to capitalise on themes like AI, cloud computing, electric vehicles and cybersecurity.
A focus on quality indicators like sustained earnings growth, market leadership and barriers to entry leads the manager to tech giants like Nvidia and Alphabet but also some ‘off the beaten track’ names like semiconductor equipment manufacturer Lam Research Corporation and electronic sensor supplier Amphenol.
The trust invests less than its benchmark in the very largest US companies (those valued at $250bn or more), reflecting the manager’s belief that high-growth companies tend to be smaller. It’s also what you’d expect from a manager whose edge comes from feet on the ground, where the team can pick up on what they believe are underappreciated and undervalued opportunities.
The trust is concentrated in a smaller number of companies, meaning that each company can have a big impact on performance, and this adds risk.
Polar Capital Technology Trust – AI Maximalism
The Polar Capital Technology Trust team are self-described “AI Maximalists” – believing that the AI revolution is only just beginning and will be the dominant driver of markets for years. The trust is positioned to take advantage of that belief.
Although the market focuses on mega-caps like Nvidia, Microsoft and Alphabet, the Polar Capital team has been reducing exposure to those names. That’s partly down to a belief that the transformative potential of AI will significantly increase volatility.
The team believes that greater diversity helps mitigate that and increasingly also uses options to help manage the big swings in valuations – though these derivatives can themselves add risk. The reduction in large cap exposure is also because of concerns over the returns available to hyperscalers and because they simply see more opportunities in the companies that provide the hardware, infrastructure and power necessary for AI to function.
Manager Ben Rogoff thinks that the AI opportunity is broad, encompassing companies that enable AI technology (like those making semiconductor chips or providing cloud computing services), AI beneficiaries (mainly technology companies) and AI adopters.
That has led to investments in some non-traditional technology companies.
Examples include turbine manufacturer Caterpillar and wafer manufacturer Shin-etsu Chemical – suppliers to the AI revolution where the team sees scope for supply chain bottlenecks that could drive prices and profit margins in the near term.
The trust’s big bet on AI has delivered some very strong returns in the short term, with net asset value more than doubling last financial year – the trust’s best year of performance vs the benchmark in two decades.
The team believes that the AI revolution has much further to run and are investing accordingly. Investors should bear in mind that a trust focused on a very specific area means that any setbacks could have a big impact on performance. As well, past performance is not a guide to future returns.
This article is for information only and not personal financial advice. If you’re not sure what’s right for you, a financial adviser can help.