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Questor: Britain’s forgotten tech trust has rewarded our faith – so why the 17pc discount?

Computer with UK flag
Computer with UK flag

Questor’s recommendation that readers buy the Herald Investment Trust has been one of this column’s quiet successes.

Since we tipped the shares in early 2019 they have risen by 78.7pc as the manager, Katie Potts, has built on her extraordinary record since she floated the fund in 1994. Yet for much of her 27 years as an investor in technology companies, Potts’s achievements have gone unheralded, if readers can excuse the pun.

Herald’s shares have traditionally traded at a wider discount to its assets than those of other technology trusts, such as Allianz and Polar Capital, also tipped by this column.

Both the Allianz and Polar Capital funds have been buoyed by the soaring shares of American technology giants such as Amazon, Microsoft and Facebook. Investors have responded by repeatedly pushing shares in those trusts to premiums over the past few years.

Yet a similar rating has proved elusive for Herald. The shares briefly threatened to match the value of its assets late last year, when the discount shrank to just 1pc, but since then Herald seems to have regained its status as Britain’s forgotten technology trust.

That could be down to an approach which, unlike that of its mainstream technology rivals, defies neat categorisation. Potts holds none of America and China’s dominant tech companies and prefers to focus more on smaller stocks closer to home.

British companies account for half the trust’s assets and, while American and Asian firms combined make up around a third, they are not household names.

Since the turn of the year the divergence between the performance that Potts has generated from the companies she holds and that of the trust’s shares has been striking. While the trust’s assets have gained about 14pc in 2021 so far, the shares have lost 3pc. This has resulted in their discount rising to 17pc, substantially wider than those of rival trusts and remarkable given the shares’ strong returns.

Richard Curling, who holds Herald in his Jupiter Fund of Investment Trusts, said it was unmerited. He bought into the trust’s flotation in 1994 when a fund manager at Morgan Grenfell and has held its shares in the various funds he has run ever since.

“Katie Potts has got an enormous amount of experience and I have every confidence that she’ll continue to deliver,” Curling said. “So many trusts and managers come and go and lack that longevity. It is really quite valuable, especially when you’ve got a record like hers.”

Herald’s shares have drifted this year as fears over a rise in inflation have threatened to knock technology stocks from the stock market ascendancy they have enjoyed for the best part of a decade. Despite this, Potts has continued to grow Herald’s assets at an impressive rate in a stock market environment supposedly turning against the sort of companies she holds.

Curling pointed to her different approach. “There are obviously more technology companies in America than there are in Britain and in many ways the technology in America is more advanced. But there is also more capital chasing those companies in the US,” he said. “I think maybe you can get better value and therefore make more money from British tech companies.”

Questor is well aware of the spectacular returns that can be made investing in British technology. Some of this column’s most successful tips in recent years have been London-listed firms that operate in just that field and are held by Herald.

Shares in GB Group, Herald’s top holding, have gained more than 200pc since Questor tipped the cybersecurity specialist five years ago, as have shares in Gamma Communications and Team17. Volex, another Herald stock, is 350pc higher since a Questor tip in 2018.

A large portfolio of 349 stocks means that Herald is not betting the farm on any of these companies, however. Given the trust’s focus on small technology, a sector that can yield spectacular failures as well as outstanding successes, this diversification is no bad thing.

Potts’s record suggests that her approach works and doesn’t merit the discount the market has given to her trust’s shares. Keep buying.

Questor says: buy

Ticker: HRI

Share price at close: £21.80

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.