Polar Capital: will AI continue to power this tech trust higher?

It has been a great couple of years for funds with money in artificial intelligence (AI), yet the managers of the Polar Capital Technology Trust think that the AI story is only just beginning. The recent best-seller has had a fantastic year thanks to the decision to increase the allocation to this area and it now has around two-thirds of the portfolio invested in AI-related businesses.

Managers Ben Rogoff and Alastair Unwin are particularly excited about the prospects for the companies that are helping to build the underlying architecture, such as the chips, systems, storage and networking facilities. They believe that these are the most direct beneficiaries of an infrastructure build-out that is only a few quarters old.

Risk-tolerant investors who share their view might see the share price weakness over the last few weeks as a long-term buying opportunity, although they would need to be comfortable with the high level of volatility.

Objective and approach

The trust aims to maximise long-term capital growth by investing in a diversified portfolio of technology companies around the world. It has one of the largest dedicated tech teams in Europe and an established track record that dates back to 1996.¹

Polar Capital Technology follows a theme-based approach to stock selection. The people behind it believe in rigorous fundamental analysis and concentrate on factors such as: the quality of the management, the identification of new growth markets and the major technological trends.

What are the managers’ latest views?

Writing in the latest annual accounts, the managers said that Artificial Intelligence has already become a corporate imperative, with around 45% of CIOs intending adoption within 12-24 months.²

“Accenture estimates that as much as 40% of all working hours will be supported or augmented by language-based AI while McKinsey believe that generative AI could automate 30-50% of tasks in about 60% of occupations, adding the equivalent of between $2.6-4.4trn in economic output annually by 2030.”³

Rogoff and Unwin say that AI monetisation is still nascent, but think that it will profoundly change the world, as it will transform the speed of knowledge creation, accelerate scientific progress and unlock new ideas.

The underlying portfolio

At the end of June the £4.4bn trust held a total of 97 stocks with the ten largest positions accounting for 53.3% of the assets. Most of them are well-known, large cap companies, the majority of which are listed in the US.

Polar Capital Technology Trust - top 10 holdings

1. Nvidia
2. Microsoft
3. Alphabet
4. Apple
5. Meta Platforms (Facebook)
6. Taiwan Semiconductors
7. Broadcom Inc
8. Micron Technology
9. Advanced Micro Devices
10. Crowdstrike Holdings

Source: Polar Capital Technology Trust factsheet, 28.6.24

The managers think that the magnificent 7 − Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla − will continue to dominate the markets because of their advantages of scale. They also believe that these businesses will invest heavily in new opportunities and anticipate retaining sizeable positions in them over the coming year.

One of the problems with this approach is the concentration risk, as the trust’s 3 largest holdings (Nvidia Microsoft, Alphabet) account for 35% of the benchmark. Rogoff and Unwin say that the large weighting is justified by the unique nature of the companies and the fact that they are well-positioned for AI because of their size.⁴

Strong performance

The latest annual accounts to the end of April show an impressive NAV total return of 40.8%, which was ahead of the 38.9% achieved by the Dow Jones Global Technology benchmark, with the share price up 50.5%. Please remember past performance is not a reliable indicator of future returns. This outperformance was driven by a number of AI-related companies, including various chipmakers, as well as data centre spending beneficiaries and semiconductor equipment makers.

Its longer-term record is also very good. Over the 5 years to 9 August the trust generated an annualised return of 15.77%, compared to 8.51% from its peer group and 19.55% from the benchmark.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in the trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.