Technology is transforming the world and changing the way we do things. Until a few years ago developments like robotics, artificial intelligence and virtual reality were rarely to be found outside of science fiction, but many of them are now part of our everyday lives.
Investing in companies at the cutting edge of these new technologies offers a high return/high risk profile that might be suitable for younger investors with an active interest and good working knowledge of these areas.
The main danger is if the hype gets ahead of the reality, as is the case with some of the giant US tech companies and in particular the FANG stocks – Facebook, Amazon, Netflix and Google (now Alphabet) – where valuations have been bid up to ridiculous levels.
Fortunately it is a very different picture on this side of the pond where many small British tech companies have the potential to deliver structural growth in a low-growth world.
British tech companies have the potential to deliver structural growth in a low-growth world
One of the easiest ways to benefit is the Herald Investment Trust (HRI), which delivered 40% growth in NAV over its financial year to the end of May and whose shares are trading on a 19% discount.
Katie Potts, the manager of the £911m fund, is in the enviable position of having the cash available to help finance expanding listed tech companies. She has been meeting two or three a day, but has been exercising caution with a total of 30 deals completed last year and a further 38 YTD.
Herald’s portfolio provides exposure to a number of companies that can continue to grow even during an economic slowdown. These include businesses working on smartphones, security and identity management, fintech, and the internet of things, as well as big data and cloud computing.
One of the largest holdings is Telit Communications, whose technology enables commonplace items to be connected to the internet. Its products can be used to monitor stock levels in retail settings and to enable smart buildings for the better control of lighting, heating and ventilation.
Since it was launched in 1994 the NAV return has been 1235.8%, which is well ahead of the 265.1% achieved by the Russell 2000 Tech Index
Even more ground breaking is Isra Vision, a German company that develops the technology to help robots ‘see’ and whose products are used as control systems for quality assurance. Another is Bango, which provides mobile payments solutions.
One of its better known stocks is the compound semiconductor specialist IQE. This has been diversifying away from mobile technology and has developed exciting new products aimed at the optical sensor market.
Potts has managed the fund since it was set up in 1994 and her remit is to invest in a global portfolio of small technology, communications and multimedia companies. She has a bias towards the UK, which at the end of May accounted for 58% of the assets, with a further 22% in North America and 10% in cash.
The long-term performance has been incredibly impressive. Since it was launched in 1994 the NAV return has been 1235.8%, which is well ahead of the 265.1% achieved by the Russell 2000 Tech Index.
Despite these remarkable returns the shares are trading on a 19% discount to NAV, which can only be due to the fact that it has a relatively low profile amongst private investors. If the underlying tech companies continue to deliver such strong returns there is every chance that the discount would narrow.