Investment Trust

Julian Cazalet (Chairman)

Julian was appointed to the Board in 2008 and became Chairman in 2009. He was managing director – corporate finance at JPMorgan Cazenove until his retirement in December 2007. A chartered accountant, he joined Cazenove in 1973 and was made a partner in 1978. From 1989 he worked in corporate finance and advised investment trusts in addition to his work with industrial and commercial companies. He is a chairman of The Lindsell Train Investment Trust plc and a director of Deltex Medical Group plc, Private Equity Investor plc and a number of charitable trusts.

Tom Black

Tom Black was appointed to the board in 2013. He is chairman of Thruvision Group plc (formerly Digital Barriers plc), and is a non-executive director of Adept4 plc. He also has advisory roles with a number of smaller unlisted businesses and sits on the strategy advisory group of Wolfson College Oxford. He is chairman and trustee of the Black Family Charitable Trust, which is focused on supporting disadvantaged young people with their educational needs. He was previously chief executive of Detica Plc, a leading company in the field of large-scale information collection and analysis for intelligence and counter fraud applications. Tom is the senior independent director.

Karl Sternberg

Karl was appointed to the board in 2015. He was a founding partner of the successful fund management company Oxford Investment Partners Limited from 2006 until 2013, when it was acquired by Towers Watson. Much of his earlier career was spent at Morgan Grenfell (which became Deutsche Asset Management), where he rose to become Chief Investment Officer, Europe & Asia Pacific. Karl is a non-executive director of Clipstone Land plc, Monks Investment Trust plc, Lowland Investment Company plc, Alliance Trust plc, JP Morgan Elect plc, Island House Investment LLP, Jupiter Fund Management plc and Railpen Investments.

James Will

James was appointed to the board in 2015. He was until 2014 chairman and a senior corporate finance partner of law firm Shepherd and Wedderburn LLP . He also headed the law firm’s financial sector practice.  Over the last 20 years he has been involved in advising smaller quoted technology companies on a range of corporate transactions, including flotations, secondary fundraisings and mergers and acquisitions. James is a non-executive director of The Scottish Investment Trust PLC, and is chairman of Herald’s audit committee

Archived Annual and Interim Reports

Audit Committee – Terms of Reference

Nominations Committee – Terms of Reference

AGM and Proxy Results

The Alternative Investment Fund Managers Directive (“AIFMD”)

The Packaged Retail and Insurance-based Investment Products Regulation (“PRIIPS)

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The sector is now very large globally and under-represented in the UK stock market. Innovation continues to open up new markets, which smaller companies can often more readily exploit. However, this can cause negative disruption for some companies within the sector as well as in the wider market. The extreme examples are Amazon displacing high street book sales, and increasingly other products, while newspaper circulations decline in developed markets. A reminder – the most successful smaller companies become large. It is fulfilling to see Sage,  which was a highly successful investment when in the nursery stage for HIT, in the FTSE 100.

The US remains the leading market in terms of innovation, sales, profits and market value, and it is evident that the skills obtained by younger management in successful businesses are readily transferred to emerging businesses, leading to a remarkable ability to scale businesses repeatedly. The US also has a strong profit making culture, and a sophisticated awareness of profitable business models. The ability to generate high gross margins is a particularly desirable investment attribute, and one achieved by technological leadership and market position. However, stock market investors are also more enthusiastic about the sector in the US. In fact the US technology sector has performed abysmally this century, reflecting the excessive valuations at the millennium and the aggressive marketing of IPOs at full valuations leading to inefficiently fat balance sheets. This proved a drag in the credit boom. Although there are a multitude of interesting companies in the US it is difficult to find ones as undervalued as those in the UK. More recently the sector has outperformed the wider market in the US, as the credit crunch has taken a greater toll elsewhere, and returns for £ investors have been enhanced by currency on translation to £.

The UK is a particularly fertile country for innovation, and a reasonable culture for entrepreneurialism, but there is not the same proliferation of talent to commercially exploit large opportunities as effectively as in the US, and capital is so much more constrained. While there has been excess capital in the US, there has been too little in the UK. Ironically, although the pool of successful companies is smaller, the limited capital availability seems to make it an easier market in which to make returns for HIT’s scale. We are currently benefiting from the emergence of a number of successful companies that were funded in the early stages of the UK’s temporary infatuation with the sector in the “internet boom”.

Europe has a less entrepreneurial culture, but some deep technology. Unfortunately shareholders are not respected there as they are in the US, and the markets are even more illiquid than the UK. The number of quoted technology companies in the rest of Europe is similar in number to the UK.

The Far East is growing in importance in terms of revenues. There is a divergence between Japan and the emerging Asian economies. Japan has few interesting emerging companies, and some quality large ones who contend with a strong Yen, and the bureaucracy of scale. We do not believe there are sufficient low hanging fruit to devote the necessary resources to cover this market, so do not invest in Japan. Korea has the two outstandingly successful electronics subsidiaries born of the chaebols in Samsung. This has spawned a number of interesting companies, which supply them. However, sales are generally dominated by those to one or other of the big two, so should not command much of a multiple. Taiwan has been to the computer industry what the black country was to the motor industry in the UK, and manufacturing has increasingly moved to mainland China to exploit its low labour costs. Companies with pricing power are hard to find, but as Taiwan moves up the value chain opportunities are arising, though in general, justifiably, they do not command the valuations seen in the US.

The portfolio contains a high concentration of profitable companies with a recurring revenue model, in order to provide ballast in an uncertain economic environment, and more disruptive companies with higher growth, which are participating in new markets. The most dynamic markets currently relate to the expansion of the internet, including the companies enabling the upgrade of the networks, the component suppliers to device manufacturers, the mobile internet and the proliferation of devices other than personal computers that can exploit the expanding internet infrastructure. There will over time be far more devices with an IP address than there are computers! The improved network is enabling an explosion in remote computing, with a number of associated buzz words- cloud computing, SAAS (software as a service), virtualisation, etc.

Valuations seem particularly appealing in the UK, especially at the small end, hence the high weighting there,  and it is encouraging to see more interest than there has been for some time. Some are surprised by this, and feel the UK economy appears particularly bleak. The portfolio has modest exposure to the UK consumer and government sectors and is a material beneficiary of weak sterling on a lagged basis, either for improved pricing and competitiveness on exports or on translation of earnings from overseas subsidiaries.