Herald 20 October 2022
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
The Herald Investment Trust (LON:HRI) is managed by Katie Potts, who, as a long-standing expert in the technology sector, aims to identify the most innovative global smaller companies within the telecommunications, multimedia and technology fields.
As discussed in the Portfolio section, Katie has the freedom to invest in anything from listed stocks with market capitalisations of below £50m, all the way up to companies with a £3bn market cap. She is particularly alert to opportunities to invest at the IPO stage.
Over the long term, Performance has been strong, with a good track record of alpha generation and risk-adjusted returns. However, since the end of Q4 2021, HRI has not escaped the sell-off which has been pronounced in smaller companies and in technology. This has led the trust to trade at a Discount of 20.1% at the time of writing wider than its five-year average and the peer group average. There is no discount control mechanism in place.
Herald Investment Management has a small team with 10 investment professionals, including four regionally focused portfolio managers who specialise in different fields within the TMT sectors, all contributing to the analysis of companies within the HIT portfolio. HRI’s portfolio is diversified across sub-sectors and includes over c. 350 equity investments which increases stock-level diversification.
Katie currently has significant levels of cash in hand in the portfolio ready for deployment when opportunities arise. Currently, the portfolio is not geared.
HRI offers an opportunity for investors to focus on the telecommunications, multimedia, and technology sector through a diversified portfolio of innovative growth companies at the smaller end of the market cap spectrum. The longstanding specialist nature of the strategy is reflected in the exposure to niche sub-sectors that are not commonly found in the more traditional large cap-dominated tech funds, such as Polar Capital Technology Trust and Allianz Technology Trust. We think such opportunities have the potential to significantly outperform the benchmark over the long term, while the willingness and ability to invest in IPOs is another potential source of alpha.
However, the persistent rise in global interest rates this year and heightened geopolitical pressures have increased market uncertainties and reduced investor confidence. As a result, HRI’s absolute performance has been doubly impacted year-to-date. Firstly, it has been caught up in the broad-based risk sell-off which has hit small caps harder than large cap peers. Secondly, it has been affected by its growth exposure. We believe it is likely that HRI will continue to face such headwinds in the short term. However, as economic conditions ease the inherent sensitivity of small caps may induce a sharp recovery, with high-growth sectors likely to be beneficiaries. HRI’s discount has widened significantly year-to-date which may offer an opportune entry point, although we would caution it may take some time for sentiment to shift.
- Management team has significant sector expertise
- Consistent long-term performance record
- Zero gearing and high cash availability reduces risk and offers the opportunity to deploy capital at cheaper valuations
- The limited telecommunications, multimedia and technology sector focus limits diversification benefits
- May underperform significantly in a value-driven environment
- No discount control policy, which can enhance shareholder volatility and liquidity