Herald 02 October 2023

The Herald Investment Trust (HRI) offers investors a specialist strategy focussed on identifying innovative and disruptive companies within the telecommunications, media and technology sectors. Katie Potts has managed the trust since she founded it in 1994. Since then, she has utilised her vast technology-sector experience to invest in disruptive smaller companies with market caps ranging from £50m up to, and in exceptional circumstances above, £3bn.

HRI has not paid a Dividend for over a decade due to the focus on generating capital growth. The success of this has been demonstrated by its ability to generate alpha, especially during periods accommodative for growth. This has helped longer-term Performance characteristics relative to an expanded set of global strategies. HRI has had a high allocation to the UK - 40% at present - which has at times created a drag on performance, especially over the first half of 2023. However, this is a market in which the team are seeing a greater number of relative-value opportunities.

As discussed in Portfolio, the strategy is unrestricted in terms of geography and sub-sector allocations, which helps enhance diversification across a portfolio of c. 350 stocks. Herald’s investment management team is split across these markets, covering a universe of over 5,000 quoted and unquoted companies. The investment management team include eight sector specialists, who have a track record of providing unique access and an understanding of the operational mechanics across the value chains and investment opportunities across the sub-sectors.

There is no discount control mechanism. However, the board has taken a more aggressive stance on buybacks, providing liquidity for investors, and helped narrow the discount to 13.1% over the last twelve months to 14/09/2023, which is now narrower than its five-year average and the current peer-group average (see Discount).

Significant cash in the portfolio is available for deployment when opportunities arise. Currently, the portfolio is not geared.

HRI offers investors a specialist technology-focussed strategy looking to benefit from a range of key secular growth themes. We believe the portfolio may provide interesting diversification given the range of niche sub-sectors it is exposed to, especially when compared to the typically larger-cap-focussed tech strategies. It also has a much more UK-focussed portfolio than global tech products, as well as greater allocations to other ex-US regions, which means it could complement the typical technology fund.

Inflationary pressures have started to subside; however, they remain higher than expected, particularly regarding wage-price inflation in the UK and US, where HRI’s manager concentrates. However, interest rates may have peaked, or at least be very near a peak, and we believe this may relieve pressure on growth equities’ valuations. Furthermore, we believe, HRI’s small cap, technology focused strategy may be capable of offering significant upside in a recovery – particularly given the severity of the re-ratings in UK smaller companies and the reduction in loss making companies in the portfolio. In our view, the higher level of dry powder available to invest in a more attractively priced environment, may also mean HRI is better placed than it was in the past.