Rolls-Royce shares have done really well in my portfolio since I bought them two years ago. Yet while I think the FTSE 100 engine maker is set up for further future gains, especially as defence budgets rise, I envisage a handful of stocks doing even better.
One of them is a newcomer to the UK’s blue-chip index: Polar Capital Technology Trust (LSE: PCT). Shares of this investment trust have surged 132% over the past five years.
However, the stock might just be getting started, making it one for growth investors to consider, in my opinion.
What it does
As the name suggests, this trust invests in the technology sector. It was launched in 1996 and has been managed by Polar Capital since 2001. It has been run by lead manager Ben Rogoff since 2006, which signals a stable investment philosophy.
What I like here is that the trust is invested in a number of high-growth technology themes. These long-term trends include:
- online advertising
- e-commerce
- software as a service
- cloud infrastructure
- cybersecurity
- artificial intelligence (AI)
- connectivity/5G
The portfolio contains 105 stocks, but the top 10 holdings at the end of January accounted for nearly half (49%). I do like to see a concentrated portfolio, as one spread too thinly among many hundreds of shares operates in a (pointlessly) similar way to a global index fund.
The top five positions are Nvidia (7.5%), Meta Platforms (7.3%), Microsoft (6.8%), Apple (6.1%), and Alphabet (5.9%). It also has a large holding in Taiwan Semiconductor Manufacturing (TSMC), which makes the high-end chips for Apple and Nvidia.
Furter down the portfolio, there are interesting stocks like edge computing firm Cloudflare and streaming app Spotify.
Over the 10-year period to the end of January, the trust’s net asset value (NAV) rose 602%. This strong performance has pushed its market value above £4bn and into the FTSE 100 for the first time.
Today, rapid innovation is propelling AI towards superhuman capability. While market fluctuations are inevitable, Polar Capital Technology Trust is well positioned for the AI era which we expect to be one of the most exciting and transformative investment opportunities of our lifetimes.
Ben Rogoff
Volatility is a given
One risk worth noting here is the heavy concentration in semiconductor and related equipment firms, which make up approximately 28% of the portfolio. While I expect this sector to only grow in importance — nearly everything has a chip in it nowadays — it can also be highly cyclical. This means the earnings of semiconductor companies can be volatile.
Also, Nvidia is a large and important holding. If the AI chipmaker’s rate of growth slows faster than expected over the next year, the trust’s position in it could become less valuable.
A final thing worth highlighting is that there was a 10% performance fee if the managers significantly outperformed. Thankfully, that is getting scrapped in May. The ongoing charge on Hargreaves Lansdown is 0.85%, which is competitive within the sector.
Foolish takeaway
As the AI/digital revolution intensifies over the coming decade, I expect Polar Capital Technology Trust to grow alongside it. I see it easily outperforming the wider FTSE 100, including Rolls-Royce.
Finally, the shares are trading at a 7% discount to the trust’s NAV. I think they’re worth considering for inclusion in a diversified portfolio.
