Technology and biotechnology suffered a severe correction in March as investors turned away from growth stocks and into undervalued or defensive names.
Hart, who says that technology is one of the major themes he is playing in his trust of funds, says that the long-term prospects for the sector remain strong but investors need to be selective.
“There were some names within the tech sector which started out as being overvalued, the social networking sites in particular,” he said.
“But the underlying fundamentals of the technology industry are very positive as it goes through significant changes and people are bringing new technology to a changing landscape.”
“There are going to be casualties along the way. There are going to be some incumbent names fall behind as they can’t keep up with the changes.”
Data from FE Analytics shows that the Nasdaq 100 fell over 7 per cent after 5 March and is still over 4 per cent down. IMA Technology funds are around 9 per cent down from their peak, while widening discounts mean that investment trusts have been even harder hit and are down around 14 per cent.
Performance of sectors and indices over 1yr
Source: FE Analytics
The discount on the technology sector widened more than on any other investment trust sector in April, according to research from broker Winterflood.
One of Hart’s favoured trusts is Ben Rogoff’s Polar Capital Technology which is a good example: the discount has widened out to 3.6 per cent having traded on a small premium at the turn of the year.
Price and NAV performance of fund over 1yr
Source: FE Analytics
The RCM Technology trust has seen a similarly sharp move, and is now trading on a 3.3 per cent discount. Board policy is to keep the discount under 7 per cent.
Price and NAV performance of fund over 1yr [RCM]
Source: FE Analytics
Hart’s other favoured fund Herald is something of an exception. It has suffered in NAV and share price terms with the rest of the sector, but the discount remains near to its one-year average.
It is currently trading on a 16.5 per cent discount compared to a one year average of 16.1 per cent.
“Herald is really interesting ,” Hart said. “It holds a lot of really interesting stocks in smaller end of the market and [manager] Katie Potts has proven her ability over time.”
Data from FE Analytics shows that the £70m Herald Investment Trust has now slightly underperformed the FTSE over the past three years following the recent sell-off, despite a strong 2013.
Performance of trust vs index over 3yrs
Source: FE Analytics
Kieran Drake, analyst at Winterflood, says that within the sector some discounts have already come back from their lows during the worst of the correction. For example RCM Technology’s discount widened to around 10 per cent, but is currently around 3 per cent.
He suggests that any decision to invest now should more likely reflect an investor’s assessment of the fundamentals for the sector rather than a view on narrowing discounts.
“Maybe the best opportunities to benefit from a narrowing of discounts has passed,” he said
Drake notes that some value remains in the sector with Polar Capital trading wider than its one-year average discount. Herald, he says went as tight as 11 per cent in February so its current discount of 16 per cent reflects a sharp move outwards, although it is now in-line with its one year average.
“Sector focused funds generally have the potential for higher volatility and higher risk than broadly diversified funds but they also offer potentially higher returns” he said.
“The tech sector has sold off sharply and that has been reflected in widening discounts, but it all hinges on your expectations for the tech sector.”
“There has been a divergence between the higher growth, more volatile stocks which have been most heavily impacted and the mega caps like Microsoft which haven’t seen that much movement because their valuations hadn’t been as high. RCM Technology has rotated some of its assets between the two categories.”
Hart thinks that healthcare is another long-term theme worth investing in, and there is plenty of crossover between these two ideas through biotechnology and the use of new technologies to make healthcare more efficient and effective.
“We particularly like demographic stories,” he said. “Therefore we hold Polar Capital Global Healthcare, which focuses on large cap pharmaceuticals and we own Worldwide Healthcare which gives us more pharmaceutical exposure but with more biotechnology.”
Hart also holds BB Biotech and HBM Healthcare, lesser-known biotech funds. FE Trustnet highlighted BB Biotech earlier this week.
Winterflood’s recommended fund in the sector is RCM Technology.
