The Herald Investment Trust is good value, despite its great track record.
Back in July 2009 I wrote about a new technology boom that seemed to be underway, both in terms of the operating activities of tech companies in what were then still very tough times, and also their share prices.
I added: "I suspect there's more to come as the recovery gathers pace and the economic landscape is reshaped."
Finally, I suggested readers investigate a trust I'd recently bought, the Polar Capital Technology Trust (LSE: PCT), which was trading at 183p and on a 15% discount to its net asset value (NAV). It has since risen 133% to 358p (it hit 384p earlier this month) compared to a mere 40% rise in the FTSE 100.
Along the way the tech boom 2.0 has gathered steam, leading to frothy-looking valuations for Facebook and Twitter as wealthy investors have scrambled for a piece of the new socially-networked and increasingly wireless action.
For its part, the Polar Capital Trust has enjoyed strong rises in investments like Apple and Google, as well as the closing of its discount. It has even traded above NAV at times.
In fact, I got a bit (prematurely) nervous about this sudden enthusiasm for technology, and sold out around the £3 mark.
Heralding a new opportunity
Like any good (i.e. bad!) investor in shares, I soon regretted my decision.
I really do believe a new cycle is playing out, and would rather have money in companies that exploit humanity's ingenuity to raise living standards, rather than implicitly bet against it by buying expensive stakes in that other recent outperforming sector -- commodities.
Unfortunately, Polar Capital has continued to march upwards without me. I've therefore turned my attention to the UK's other major listed tech fund, the Herald Investment Trust (LSE: HRI).
Herald's portfolio is very different from Polar Capital, but you're still getting exposure to technology shares and so tagging along with the tech rally. And whereas Polar Capital has flirted with a premium to NAV, Herald sports a discount of 18%.
That's potentially a decent margin of safety, provided you're happy with the manager's investing style and other elements of the trust.
Mostly ARM-less
So what do you get for the 508p that a Herald share will currently set you back?
Unlike Polar Capital, which is overwhelmingly invested in US giants, Herald has nearly two-thirds of its money in UK tech firms, with an emphasis on smaller companies.
Familiar holdings to Fools may include NCC Group (LSE: NCC), Imagination Technology (LSE: IMG), and Telecom Plus (LSE: TEP). Of the likes of ARM (LSE: ARM), Autonomy (LSE: AU), and Sage (LSE: SGE) there's not a sniff -- at least they're not in the trust's top 20 holdings.
Despite this focus on the flightier end of the technology spectrum, the trust itself is a grizzled veteran -- in tech fund terms. It was launched in 1994, and has had the same manager, Katie Potts, ever since.
High tech helter-skelter
Herald rode the technology bubble and burst pretty well, doing some selling near the top and gearing up a few years latter to snag some bargains.
Indeed, it's one of only three UK tech trusts to survive the dotcom crash -- there were 16 at the peak! It also claims to have outperformed all but one of the surviving technology funds in the US, UK and Europe since 1998, which is quite a boast.
Long-term holders have been richly rewarded. Anyone who contributed to Potts' original £65 million war chest in 1994 has seen their shares increase by over 450%. The underlying assets have done even better with a 520% gain.
Herald's performance compares spectacularly with an investment in the FTSE 100, which has advanced 70% over the period, as well as against a 60% advance in the FTSE Small Cap index and a 110% advance in the Trust's own benchmark -- a blend of the Hoare Govett Smaller Companies Index, the AIM index, and the US Russell Technology index.
The short-term gains have been great, too -- Herald is up 43% over the past 12 months, compared to 7% for the FTSE 100. Over the past two years, Herald is up over 160%.
Buying the boom
Past performance is of course an unreliable guide to future riches, particularly with quoted funds, which tend to rise and fall on the enthusiasm of investors as well as their investments.
So can Herald's recent strength continue?
Well, the 18% discount hardly suggests the market has got ahead of itself in its enthusiasm for Herald, although it might have overpriced its underlying assets. And Katie Potts sounded realistically optimistic in Herald's recent annual report:
"Whilst the structural imbalances in the world economy cast a continuing cloud, the sector should fare relatively well in a background of inflation or deflation. Whilst investee company valuations are not as compelling as two years ago, they are attractive against the valuation of bonds and very modest versus the last time your Company had a NAV per share at this level in 2000."
I wouldn't expect to double your money in a hurry, but for long-term exposure to a still rehabilitating sector and with reasonable annual costs of 1.14%, Herald looks good value.
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