Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Allianz Technology Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Investment trust discounts can represent a great opportunity for investors, but identifying a trust which is on a discount which is likely to close can also be very challenging.
The opportunity for a share price uplift is evidently an attraction of the investment trust structure. So true is the very definition of a discount: owning assets at a price that is below their intrinsic value. Yet, there is a very evident risk in the possibility of a discount not coming in at all.
This is where considering the context of a trust’s discount is crucial. Two of our recent research pieces into discounts and subsequent share price and NAV behaviour suggest that, by and large, buying trusts on anomalous discounts can be a source of positive returns, although this is by no means guaranteed.
At the same time, it is worth considering the underlying portfolio the discount pertains to. As always, an investment thesis has been used to build that portfolio and a discount does not necessarily reflect a diminished investment case. Rather, the machinations of market sentiment can overly punish long-term thematic stories that are still supported by demographics, changing habits and other macroeconomic trends.
Technology in trouble
One trust sitting on an unusually wide discount is Allianz Technology Trust (ATT). Its current c. 7.2% discount (as at 17/09/2021) is significantly wider than its one and five-year average of -2.8% and -1.8% respectively.
The trust has been caught up in a general rotation away from strong ‘growth’ names, which has seen the technology sector in particular punished by markets. In particular, investors have been moving capital towards the kinds of sectors that are benefitting from the reopening of economies globally: such as leisure and hospitality, travel and even banks. To fund this, they have been taking capital from the growth trades that have boomed over the last five years.
However, the tailwinds behind technology remain strong, as demonstrated most palpably by the Covid-19 pandemic itself. With much of our lives moving online, the Dow Jones Global Technology Index significantly outperformed the MSCI ACWI from March 2020 to July 2021.
This has proven even truer for ATT, which has outperformed its peer group over the last year posting an NAV return of 39.4% to 17 September 2021 vs the Dow Jones Global Technology Index return of 32.0%.
A skilled hand
This outperformance is reflective of ATT’s longer-term track record of achieving outstanding returns through a mix of solid stock selection and skilled identification of the future themes in technology.
The portfolio is overweight mid-caps relative to its benchmark, demonstrating the management team’s focus on finding future growth – indeed, many of these mid-cap names have a projected annual growth rate of up to 40%, against the 20% seen for many large-cap names, although the trust still has exposure to the large caps that the team considers outstanding. These companies have seen their growth accelerated through the pandemic. For instance, growing uptake of cloud computing has driven demand for the services of companies like Snowflake, a mid-cap data analytics software provider.
However, while the team does typically focus on growth, they have the flexibility to look across the technology sector. Within the context of the current market rotation, they have added some cheaper, more cyclical names, such as semiconductor manufacturers and travel services to their portfolio.
While the worldwide shortage of semiconductors has been much discussed, the team is clear that this trend cannot continue forever and believe that we are reaching ‘peak imbalance’, where production will begin to surge to match demand. With that in mind, they have been buying into this theme at the cheaper end of the market such as through Applied Materials, reducing valuation risk in their view.
This means the team has benefitted from the buoyant demand for semiconductors as the global economy emerges from the pandemic and will continue to do so into the future as longer-term trends like vehicle electrification support demand for some time to come.
With a once-in-a-lifetime recovery driving certain segments of the market, the team believed it was crucial to gain exposure to these more cyclical names, which they argue have a minimum 12-month time horizon.
The benefits of a flexible investment approach are reflected in the trust’s outperformance since the start of the pandemic. In that time, technology stocks have fallen in and out of favour, as the outlook for the global economies has waxed and waned. By identifying opportunities based on the broader economic context, the management team have remained ahead of the pack, a track record that has arguably not been recognised by the market given the trust’s anomalous discount.
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