Jenny Lowe reveals why technology-based investment trusts are making a comeback.

Investor fashion appears to favour funds offering high dividend yields. However, once the market rotates away from income and higher-yielding companies, many investors will be looking for the next big idea.

Users of F&C’s investment trust website reveal that they have begun switching their investment focus, with 46 per cent saying they are now investing purely for growth.

A further 39 per cent claim to be aiming to achieve a mix of growth and income from their investments, with the remaining 15 per cent investing purely for income.

With interest rates at an all-time low, the dividend yields available on equities – not to mention on other asset classes like commercial property – can provide an important boost for an income-seeking investor. However, growth investors can benefit from this too, as reinvestment of dividends can provide an important boost for future growth.

Time for tech
Some analysts are predicting that technology funds could be set for a comeback, with some calling them the ‘investment opportunity of the decade’. Most of you will remember the dot-com crash of 2000, and many of you will no doubt have suffered losses. Similarly, funds within the sector took a beating and many were forced to close to investors.

However, Oriel Securities, whose analysts actively follow the sector, claims that this could be a good time to buy: ‘The tech sector looks set to outperform the market as a result of being rich in companies with strong balance sheets, low leverage and the genuine prospect of rising recurring earnings.’

Discounts abound
Polar Capital Technology trust, for example, increased the value of its portfolio by 7.2 per cent over the three months to July, versus a gain of 5.4 per cent on the Dow Jones Technology Index. The £299 million trust, managed by Ben Rogoff and Craig Mercer, is currently trading at a 14 per cent discount.

The other remaining technology-based investment trusts – RCM Technology Trust and Herald Investment Trust – are also trading at a significant discount. RCM Technology has all of its top 10 holdings in the US, which is still the most thriving market for tech stocks. Herald is different, and more risky, because it is weighted towards smaller growth stocks and has more holdings, a number of which are in the UK.

The technology fund sector has remained under a cloud since the tech bubble burst in the early 2000s. However, Oriel’s analysts are confident that if there is a market rotation in favour of growth stocks, then the technology fund sector will be a prime beneficiary.