Herald Investment Trust NAV Performance (excluding income)
The Herald Investment Trust (HIT) seeks to achieve capital appreciation through investments in smaller quoted companies, in the areas of technology, communications and multi-media. Investments will be made throughout the world. The business activities of investee companies will include information technology, broadcasting, printing and publishing and the supply of components, equipment and services to these companies.
There is no relevant benchmark, so a hybrid is used as a measure of performance, which is 2/3rd the Numis Smaller Companies Index including AIM in the UK and 1/3rd the Russell 2000 Technology Index in the US.
Live Herald Investment Trust price available from the London Stock Exchange.
The value of the investments may fall as well as rise.The shares of HIT will generally trade at a discount or premium to the market value per share of its investments. Most of the investments have limited liquidity and may not be realised in part or in full at the market value at any one time. The Directors consider it inappropriate to attempt to control the discount for a portfolio of this nature.Directors
Julian Cazalet (Chairman)
Julian Cazalet 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 chairman of The Lindsell Train Investment Trust plc and a director of Deltex Medical Group plc and a number of charitable trusts.
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.
Stephanie was appointed to the board in December 2018 and is chair of the audit committee. She qualified as a chartered accountant, moving on to hold various accounting and compliance roles at Wardley and UBS before joining Invesco Asset Management in 1996. When she left Invesco in July 2018, she was Head of Specialist Fund Company Secretariat and Accounts. Stephanie is a non-executive director and audit chair of Murray Income Trust plc.
Ian Russell was appointed to the board in August 2018. He qualified as a chartered accountant, moving on to work in a number of finance roles in industry and banking. He joined Scottish Power plc in 1994, initially as Finance Director, becoming CEO in 2001, a role he held until 2006. Since then, he has concentrated on non-executive roles. Currently he is Chairman of HICL Infrastructure Company Limited and Chair of the Scottish Futures Trust Limited, an independent company established by the Scottish Government with a responsibility for delivering value for money across public sector infrastructure investment.
Karl Sternberg was appointed to the board in 2015. He was a founding partner of 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 Logistics REIT 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 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 fundraising and mergers and acquisitions. James is chairman of The Scottish Investment Trust plc, and a non-executive director of Edinburgh Dragon Trust plc.
Julian Cazalet (Chairman)
20 Cursitor Street
Ltd Fifth Floor
100 Wood Street
Ernst & Young LLP
1 More Place
Herald Investment Trust plc
10-11 Charterhouse Square
Tel: 020 7553 6300
The Bank of New York
1 Canada Square
2879728 (England and Wales)
The Company is an investment company within the meaning of section 833 of the Companies Act 2006
Peel Hunt LLP
120 London Wall
Singer Capital Markets Ltd
One Hanover Street
Herald Investment Management Limited
10-11 Charterhouse Square
Tel: 020 7553 6300
Fax: 020 7490 8026
Link Market Services Limited
Tel: 01484 600900
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.