Shareholders in Henderson Technology investment trust should consider switching into the group's Glo...
Shareholders in Henderson Technology investment trust should consider switching into the group's Global Technology unit trust, according to Charles Cade an investment trust analyst at Merrill Lynch.
The £446m investment trust, managed by Brian Ashford-Russell, is currently trading on a premium of 6.9% compared with a discount of 20% just over a year ago. The unit trust is run by his colleague Tim Woolley.
Cade said: "This sharp rerating can be explained by its spectacular performance over the past year, both in absolute terms and relative to its benchmark, the FTSE World Index. However, the company's outperformance is primarily due to its investment mandate, rather than the manager's stock picking abilities.
"Technology is undoubtedly an area benefiting from strong secular growth and though valuations are high, it could well continue to outperform in a low inflationary environment where investors are willing to pay a substantial premium for growth. As a result we believe Henderson Technology remains an attractive investment on a medium term view."
On the downside he feels there are good reasons to switch out of the investment trust into the unit trust. If the technology sector were to suffer a setback and the hot money started to flow out of the sector the trust's rating could easily widen by 15% or more, according to Cade. The other problem for the investor is that of dilution. Cade said: "If technology stocks remain strong there is little further upside to the trust's rating, but investors' returns will be diluted by the trust's warrants and its performance fee, which pays 15% of outperformance against the FT World Index."
In the year to 30 April a performance fee of £4.5m was paid by the trust to Hendersons. Since the start of May this year Merrills estimates Hendersons has built up a performance related fee of almost £20m, equivalent to 5.5% of shareholders' funds.
Cade said he believed the bulk of this fee results from a mismatching of the benchmark index, rather than outperformance by the fund manager. Cade constructed his own global technology index, with a total market cap of $4,900bn equivalent to 21.6% of the FT World index, and found the trust's NAV underperformed over a five year period to November 1999.
In addition Cade said there was a difference in the performance of the investment trust compared to the unit trust.
He said: "Since the launch of Henderson Technology in December 1996, shareholder returns have lagged those of the unit trust, primarily from the dilution from the performance fee and warrants.
The unit trust tends to have a weighting in the US of 65% to 70%, compared with 50-55% in the investment trust, and it invests slightly further down the market cap scale.
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