Herald Investment Trust (HRI) has announced its interim report for the six months to 30 June 2024. The company delivered a NAV total return of 11.4% and a share price total return of 13.7% comfortably outperforming comparative benchmark returns. The company noted that there was a large divergence across geographies during the period. The best of these was its North American assets which returned 30.9%, thanks mostly to HRI’s largest holding, Super Micro Computer, which contributed a gain of £74.0m. Positively, even excluding Super Micro the North American portfolio still delivered a 7.6% return. Elsewhere, the company noted the UK proportion of its net assets has fallen to 38.7%, which is the lowest reported level since inception. As of the time of publishing HRI traded on a discount of -10.05%.
Commenting on the performance, and the outlook for the trust, chair Andrew Joy noted;
“In general, trading in investee companies has been satisfactory, and it is pleasing to see some early-stage companies bearing fruit. It is noteworthy that the company’s UK return (and the general UK small-cap indices returns) is significantly ahead of the median return in North America. The success of the Magnificent Seven US technology leaders, and Super Micro, masks the indifferent performance among US smaller technology companies more generally.
“The UK market has faced heavy cash outflows from UK collective vehicles, which are predominantly used by domestic investors. However, perhaps because of these outflows, there has been a high level of takeovers, which has relieved the selling pressure. For the company, IQGeo, Spirent Communications, and Gresham Technologies are the material takeovers in progress at the period end date. All the takeovers of companies in which the company has been invested have been made by overseas entities. In my last statement, I mentioned the effect of rising interest rates, but more recently, it seems that in some cases, domestic investors are realizing capital gains for fear of an increase in the tax rate, and the inflows are from overseas corporates, private equity, and more recently, direct investing from US investors in some of the larger names held by the company. We hope that the pessimism from UK investors is misplaced. Now that overseas investors own the majority of the value in the UK market, a change of sentiment would be damaging. This explains the manager’s progressive reduction in weighting despite the relatively attractive valuations in the UK, where the headwinds to earnings growth from the rise in corporation tax and the costs of implementing ESG policies are now partially reflected in results.
“In the UK, the company’s historic co-investors have either disappeared from the market or are similarly cash-constrained by redemptions. The primary markets are not going to function without a functioning secondary market, which requires many players. Successful active fund management is not scalable, and this is particularly the case for investing in smaller companies. Meanwhile, the costs of active fund management have risen materially. Markets will wither and die if new capital is not provided to fund the next generation of growth companies, and some of these companies will not attract funding elsewhere. Passive funds do not provide primary capital nor efficient stock market valuations. Should attractive investment opportunities in the UK market continue to decline, the manager has demonstrated its ability to generate strong returns in overseas markets and is confident that many existing UK holdings can be realized with patience at materially higher prices through takeovers, in part because so many of them have a global presence.”
HRI : Herald kicks of 2024 with a bang.