Technology funds have built up a strong track record, says Nick Sudbury, and the economic recovery could help them to make further gains.

Leading the Way


MFM Techinvest Technology Fund

It is rare for a techno fund to leave the rest of its peer group for dead, but that is certainly the case with MFM Techinvest Technology. This small £47.3m OEIC has returned more than 320% in the last 5 years, which is well over 100% more than its nearest competitor. The impressive performance has earned it a top quartile ranking over 1, 3 and 5 years, as well as for the period since launch in May 2003.


It is managed by Techinvest Ltd although operated by Marlborough Fund Managers, hence the MFM in the name. The lead manager is Conor McCarthy, who spent 30 years working in the telecom industry before coming up with the idea for the fund.

MFM Techinvest Technology aims to provide capital growth by investing in a global portfolio of equities and bonds. Its main emphasis is on small cap technology businesses both here and in the US with just over 90% of its assets currently invested in these types of companies. McCarthy says that this is normally where the best value is to be found as there is very little analyst coverage.

His top 10 holdings make up 22.6% of the portfolio and other than Facebook they are not exactly household names. Examples include: Sandvine, Calamp, Radware and IndigoVision. The latter develops digital video surveillance systems for large networked installations and has just emerged from a period of transition, hence the recent purchase.


At the end of February North American stocks accounted for 66% of the fund, with the balance invested in the UK. The manager believes that the main factors fuelling the tech boom are mobile internet and the resulting rapid growth in data and video traffic. His other key investment themes include: software as a service, cloud computing and 3-D printing.

Despite the strong performance, McCarthy sees no reason why his universe of tech stocks shouldn’t continue to do well as many are protected by cash-rich balance sheets. He is conscious that the bull market is well over 4 years old yet expects the next few years to be good for tech, albeit with periods of high volatility along the way. The superb track record suggests that this would be a great way for your more adventurous clients to gain exposure to the sector.



Fund Facts

Name:                                                             MFM Techinvest Technology

Type:                                                   OEIC

Sector:                                                Technology and Telecommunications

Fund size:                                           £47.3m

Launch Date:                                      May 2003

Yield:                                                  0%

Ongoing Charges:                               1.27%

Manager:                                             Techinvest Limited 



West Coast Know-How

RCM Technology Trust

There are only two investment companies operating in the tech sector, but the performance of the RCM Technology Trust has been truly spectacular. Over the last five years the share price is up almost 220%, whereas its Dow Jones World Technology benchmark has only risen 138%.

The fund was formed in 1995 but was re-launched by RCM in 2007 with a global technology mandate. Its team of experienced managers is based in San Francisco, close to Silicon Valley, the home of many of the best tech companies. As you would expect, almost 80% of the £146m portfolio is invested in the US, with the majority of the rest in the Far East and Continental Europe.


Walter Price and his co-managers aim to identify major trends ahead of the crowd and tend to favour the mid caps because of their better growth prospects. Their key investment themes include cloud computing and mobile internet, both of which account for 15% to 20% of the portfolio. Despite the strong performance the shares still trade on a narrow 2.8% discount to NAV.

In total there are 73 holdings with the majority of them being high growth companies, although about a third of the fund is classified as value stocks. These include Microsoft and Apple, which Price describes as companies with lots of upside potential but very little downside risk.

The top 10 holdings make up 38.5% of the assets with the largest being Facebook, Google and Sunpower. It is a fairly concentrated portfolio although no stock is allowed to exceed a weighting of 15%.


In common with much of the rest of the industry the fund’s fees have recently been renegotiated. During the last year the annual management fee has been cut to 0.8% and the performance fee reduced to 12.5% of the outperformance. This is calculated on a high watermark basis and is capped at 2.25% of the fund’s NAV.

Price has been investing in tech companies for 40 years and the key members of his team have worked together for 29 years. The performance in the last 18 months has been especially strong and the discount has narrowed accordingly, but it is hard to argue against such a fantastic set of returns.



Fund Facts

Name:                                                             RCM Technology Trust Plc (RTT)

Type:                                                   Investment Company

Sector:                                                Technology

Market Cap:                                        £146m

Launch Date:                                      December 1995 

Yield:                                                  0%

Ongoing Charges:                               1.21%

Manager:                                             Allianz Global Investors Europe



Star Turn

GAM Star Technology

One of the more recent entrants to the sector is GAM Star Technology, which was launched in February 2011. The fund invests in a global portfolio of tech companies and has returned 69.1% in the last 3 years putting it at the top of its peer group. It is managed by Mark Hawtin, who uses a bottom-up stock picking approach to identify the best opportunities based on the underlying fundamentals.

GAM is well known for its conviction investing, and at the end of January the top 10 holdings accounted for a massive 40.6% of the fund. They are mostly household names and include the likes of Google, Facebook and Apple. According to the latest accounts, in August there were just 50 stocks in the whole £464m portfolio. Most are based in the US, with the rest divided between Europe and the Far East.

The recent performance has largely been driven by the quarterly results season in America. Hawtin’s main winners were Facebook, Google and Rentrak, while Apple, Yahoo! and Amazon all announced disappointing numbers that detracted from the overall return. Like the other managers, his primary investment themes include mobility, the cloud, and the internet.

Perhaps the biggest downside of the fund is the relatively high TER of 1.73%. This is largely because of the investment manager and sponsor fees that together equate to 1.5% per annum. There is also a performance related fee of 10% that is measured against the MSCI World Information Technology Index, calculated on a high watermark basis. It remains to be seen whether the pressure on fees across the industry will result in a reduction.

GAM Star Technology has an annualised standard deviation of just over 14%, which is 3% more than the benchmark. The good news is that Hawtin has achieved a Sharpe Ratio of 1.1, which suggests that he is able to use the extra risk to add value. It is certainly a highly concentrated approach with the onus on the manager to make the right stock selection decisions. If the past is anything to go by, it seems as though he is up to the task.


Fund Facts

Name:                                                 GAM Star Technology

Type:                                                   OEIC

Sector:                                                Technology and Telecommunications

Fund size:                                           £464m

Launch Date:                                      February 2011

Yield:                                                  n/a

TER:                                                    1.73%

Manager:                                             GAM Fund Management



Concentrated Exposure

db x-trackers Stoxx Europe 600 Technology UCITS ETF

A specialist field like technology should be an area where a good active manager can add significant value, but if your clients are looking for a cheaper alternative there are several sector ETFs to choose from. One example is db x-trackers Stoxx Europe 600 Technology, which is listed in London.

The underlying benchmark is designed to capture the performance of the biggest European companies in the technology sector. Its holdings are drawn from the STOXX Europe 600 Index, which comprises 600 of the largest stocks in the region by free float market capitalisation. These are then categorised according to their primary source of revenue.

Index weightings are based on the market values, subject to 30% capping for the largest companies and 15% capping for the second largest. This ensures compliance with the UCITS III standards for portfolio diversification. Rebalancing takes place quarterly, although intra-quarter capping will be triggered where the largest holding exceeds 35% or the second largest goes beyond 20%.

Despite these precautions, the ETF is based on a highly concentrated portfolio of just 22 constituents. The top 5 make up an incredible two-thirds of the fund and these will inevitably dictate the performance. They are: SAP AG 25.11%, Ericsson 13.09%, ASML 10.99%, Nokia 9.55% and ARM Holdings at 7.67%. Overall the fund has an average PE ratio of 52 times earnings and a dividend yield of 1.18%.

In the 12 months to the end of February, the ETF was up just over 18%, broadly similar to the gain of a year earlier – although in the preceding 12 months it had made a loss of 8%. Typically the annual returns have been within 30 or 40 basis points of the benchmark, which reflects the TER of 0.3%. It has assets under management of €16m and uses a fully collateralized swap to replicate the performance. 

The problem with a fund like this is that it is driven by a handful of holdings that have been selected purely on the basis of their market capitalisation. When one of them struggles because their products become unpopular, as has been the case with Nokia, it can undermine the overall performance.  


Fund Facts

Name:                            db x-trackers Stoxx Europe 600 Technology UCITS ETF (XS8R)

Type and Exchange:   ETF listed in London

Sector:                        Technology

Fund Size:                   €16m

Launch Date:              June 2007

Yield:                            0%

TER:                            0.30%

Manager:                     Deutsche Asset & Wealth Management



Mercia Enterprise Investment Schemes (EIS)

High net worth individuals may prefer a technology orientated Enterprise Investment Scheme. These invest in smaller, higher risk companies but offer generous tax savings, with the main benefit being 30% upfront income tax relief on investments of up to £1m.

Any capital gain on the sale of the shares is free of CGT as long as they have been held for at least 3 years, while a loss can be offset against other income. The holdings are also exempt from inheritance tax. But higher risk means that EIS funds may not be suitable for all clients.

Mercia Fund Management, a Midlands-based venture capital fund manager, is becoming well known for its range of EIS and VCT products. Like other products of its kind, the Mercia Growth Fund 3 is designed to be open for subscription for only a limited period – in this case, until May 2014.

Like the preceding Mercia Growth Funds 1 & 2, Growth Fund 3 invests across five high-growth technology-focused sectors that play to the particular skills of the investment team. The Fund aims to maximize capital gain from a portfolio of investments which are projected for profitability within no more than four years from the initial investment, and it targets compound annual growth of 10-50% (excluding tax breaks).

Mercia says that its portfolio is chosen to provide “a strategic blend of early stage, development and growth capital to create an optimal balance between capital growth, portfolio risk and time horizon”. Businesses are vetted by an external, independent investment panel before adoption by the manager.

Deal flow for the Fund is built through the manager’s extensive network including partnerships with eight universities, including Warwick and Birmingham, as well as star performers from the existing Mercia portfolio. These have included the rapidly growing Warwick Audio Technologies, a spin-out from Warwick University, which specialises in the development and retail of pioneering high-tech loudspeakers; and the University of Birmingham spin-out Smart Antenna Technologies (SAT), which aims to replace the various separate antennae used in mobile phones by 3G/4G, Bluetooth, WiFi, GPS etc with a single antenna that will cope with everything.

With venture partners such as Mike Hayes (ex CEO of Sega Games), Mercia has also become a dominant investor in the high growth sectors of gaming, e-commerce and FinTech, with notable investments to include nDreams, DabGaming and SkyAuth.


Fund Facts

Type:  EIS & SEIS Fund

Sector:  Non-listed UK Technology

Fund size:  £7.5m (£6m EIS, £1.5m SEIS)

Launch:  December 2013

Close:  May 2014

AMF:  1.8%

Manager:  Mercia Fund Management


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