Aberdeen Investments

Katie and team have moved to Aberdeen Investments.

As part of the package that facilitated Saba Capital’s exit, Aberdeen Investments replaced Herald Investment Management Limited (HIML) as HRI’s AIFM on 1 August 2026. Katie Potts and several members of the HIML team moved to Aberdeen on that date.

Aberdeen brings greater scale and access to a broader pool of investment expertise. This should be particularly helpful in Asia, where markets can be complex and Aberdeen’s established Asian smaller companies franchise complements HRI’s exposure to the region. Aberdeen also has a strong track record of marketing investment companies to private investors, an increasingly important source of demand as institutional ownership of the sector declines.

Market update

War in Iran, trade uncertainty and AI have dominated market sentiment this year.

Market newsflow this year has been dominated by the war in Iran, renewed trade uncertainty and continued enthusiasm for artificial intelligence. The conflict, which began at the end of February, disrupted shipping through the Strait of Hormuz, drove energy prices sharply higher and triggered a broad market sell-off. Smaller companies and growth stocks were particularly sensitive to the resulting rise in inflation and interest-rate expectations.

Markets subsequently recovered strongly from their March lows, as fears of a prolonged energy-supply shock eased and corporate earnings remained resilient. The rebound was led by AI-related shares, particularly semiconductor, memory, networking and data-centre equipment companies, as major technology groups maintained high levels of infrastructure spending.

More recently, that trend has partially reversed. Profit-taking and growing doubts over the returns that companies will earn on their AI investment have weighed on semiconductor and other technology shares, while investors have rotated towards cheaper and less crowded areas of the market. Nonetheless, equity markets remain firmly higher for the year: as at 18 September, the S&P 500 had gained 11.8%, while the S&P SmallCap 600 was up around 15.2%. UK equities have also performed strongly, with the S&P United Kingdom index rising about 7.3% year-to-date and trading close to its record high.

Of particular relevance to HRI is the performance of smaller company indices. Figure 1 shows two representative indices: the Bloomberg US 2000 Technology Index, covering small- and mid-cap US technology stocks, and the Deutsche Numis Smaller Companies Plus AIM Ex Investment Companies Index, representing the bottom 10% of the UK market.

Figure 1: Markets over 12 months to 31 August 2026, indices rebased to 100

The two indices followed a broadly similar path until the beginning of March 2026, when they diverged sharply and the Bloomberg US 2000 Technology index pulled ahead. This coincided with the market low following the initial shock caused by the Iran war, and the subsequent recovery in risk appetite. The rally broadened beyond the largest US technology companies, with smaller technology stocks particularly strong.

More recently, the gap has narrowed as investors took profits in technology shares, questioned returns on AI spending, and showed greater support for UK smaller companies. This is shown by the convergence of the indices in Figure 1.

Less supportive monetary policy

The Federal Reserve and ECB raised interest rates in September, with the Bank of England keeping its on hold.

The Federal Reserve increased its target interest rate to 3.75-4% on 17 September, while the European Central Bank (ECB) raised its deposit facility rate by 25 basis points to 2.5% at its latest meeting. The Bank of England held its policy rate at 3.75% at its September meeting, although three of the Monetary Policy Committee’s (MPC) nine members voted for an increase to 4%.

Across all three regions, higher and more volatile energy prices have disrupted the disinflationary trend and raised concerns about second-round effects on wages and other prices. This has reduced expectations for near-term rate cuts and kept bond yields elevated – normally a headwind for smaller companies and highly valued growth stocks, whose expected future earnings become less valuable when discounted at higher interest rates.

Figure 2: Interest rates over two years to 22 September 2026

HRI – benefitting from the AI capital expenditure boom

AI capital expenditure has broadened to benefit smaller suppliers.

HRI has benefitted from the surge in AI-related capital expenditure, particularly as the opportunity has broadened beyond the handful of larger companies that initially drove returns. Earlier gains for HRI had been concentrated in larger holdings such as Super Micro Computer, Fabrinet, and BE Semiconductor Industries, but more recently the market has increasingly recognised that a much wider range of smaller suppliers are also benefitting from ongoing hyperscaler investment.

HRI has identified 49 such smaller holdings exposed to this investment boom, which collectively outperformed its larger AI beneficiaries during the first half of its financial year. These holdings generated an internal rate of return of 146.7%, compared with 97.0% from HRI’s top 10 AI holdings. Contributors included Silicon Motion Technology and Vicor, alongside newer positions such as DigitalOcean and Vishay Precision. In the latest Interim Report, the chairman noted that effectively all of HRI’s NAV growth since the start of 2023 has come from companies in the AI supply chain.

Katie cautions that the current pace of capital expenditure and the pricing power enjoyed by infrastructure suppliers cannot continue indefinitely. The sharp re-rating of AI-related holdings in the second quarter gave the team a timely opportunity to realise profits and raise cash to help fund the tender offer and more. With share prices having since eased from those levels, the team is now selectively adding to positions where valuations have become more attractive.

Moving from the infrastructure to the application stage of AI

Katie believes the AI opportunity will move from infrastructure to applications.

While HRI has benefitted strongly from the build-out of AI infrastructure, Katie feels that the next phase of the opportunity will increasingly lie in applications. She draws a parallel with the development of the internet, where early beneficiaries such as Cisco Systems and EMC supplied the networking and storage infrastructure before companies such as Amazon, Alphabet and Meta emerged as the bigger application-layer winners.

Katie believes that AI is currently still in the infrastructure phase, but that applications will come next. The emergence of agentic AI systems, which are already extending beyond coding into broader knowledge work, provides an early indication of how this transition could develop.

This shift should create a different opportunity set for HRI. Software shares came under pressure in the first quarter of 2026 as investors worried that cheap, AI-native products could displace incumbent software-as-a-service providers. Katie believes this pessimism was overdone, and the sector subsequently recovered during the second quarter. Even so, valuations across much of the technology sector outside the AI infrastructure winners have fallen, creating potentially attractive opportunities as HRI looks to redeploy cash. However, identifying those companies that are capable of translating AI into commercially successful applications will be key.

Asset allocation

HRI has continued to shift assets away from the UK.

A consistent theme in our notes on HRI has been the steady increase in exposure to North America, and corresponding decline in the UK. In recent months, to 31 August 2026, the North American exposure ex-cash has reduced a little, to 38.3%. UK exposure saw a further fall to 24.8% from 30.0% as at the time of our last note (which used data as at 30 September 2025). In comparison, less than five years ago HRI had double the allocation to the UK compared with North America (47.7% and 22.3%, respectively, in December 2021).

The most recent figures, as at 31 July 2026, were distorted by the high cash weighting of 19.5% that was built up ahead of the July tender offer. HRI’s manager raised liquidity gradually to avoid becoming, or being perceived as, a forced seller of often relatively illiquid holdings. The numbers in Figures 3 and 4 are therefore ex-cash. With the tender now complete, we expect cash to return towards its more normal, single-digit level.

Whilst geographic allocation remains an important consideration, Katie and the team emphasise that most portfolio companies generate revenues internationally rather than relying on their domestic markets. They generally favour businesses with a global reach, as these tend to have stronger competitive positions and a broader opportunity set.

Figure 3: Geographic allocation as at 30 September 2025 (ex-cash)*

Figure 4: Geographic allocation as at 31 August 2026 (ex-cash)*

Top 10 holdings

Figure 5 shows HRI’s top 10 holdings as at 31 August 2026 and how these have changed since our last note (which used data as at 30 September 2025). BizLink has risen to become the largest holding, with the previous top holding Celestica dropping out of the top 10.

Figure 5: Top 10 holdings as at 31 August 2026

There are four new names in the top 10: BizLink, Red Violet, Tripod Technology and Varonis Systems. These have replaced Celestica, Fabrinet, Silicon Motion Technology and Super Micro Computer. We look at these new entrants in some detail below. These are not new names in the portfolio, but instead companies where positions have been built up over time, and in many cases have enjoyed very strong recent share price performance.

The allocations across the top 10 holdings are lower than would ordinarily be expected. Again, this is due to the need for HRI to hold significant cash prior to the tender offer.

BizLink

Figure 6: BizLink (TWD)

BizLink (www.bizlinktech.com) is a Taiwan-listed manufacturer of cables, connectors and other interconnect products used to transmit power and data. Its products are supplied to a broad range of markets, including data centres, semiconductor manufacturing equipment and medical technology. The company has progressively moved beyond individual components towards more complex, higher-value connectivity systems.

As computing density within data centres increases, considerably more power has to be delivered to servers while much larger amounts of data need to move between processors and other components at high speed. BizLink supplies both power and data connectivity equipment into this infrastructure. It is also expanding its role within the AI server rack: in June 2026 it agreed to acquire Interplex Datacom, which manufactures mechanical and structural components used within the rack.

Recent growth has been strong. Second-quarter 2026 revenue increased 37% year-on-year to NT$23.3bn, while net income rose 47% to a quarterly record NT$3.0bn. BizLink was already among HRI’s strongest performers in 2025, and moved into the trust’s top 10 AI performers during the first half of 2026.

Red Violet

Figure 7: Red Violet (USD)

Red Violet (www.redviolet.com) is a US data and analytics company specialising in identity intelligence. Its technology brings together large amounts of information relating to people, businesses and assets, using this to help customers establish identities, assess risk and identify potential fraud. Its main platforms are IDI, which is used by businesses including financial services providers, insurers and debt collectors, and FOREWARN, which provides identity and safety information to real-estate professionals.

An important part of the investment case for HRI is the combination of Red Violet’s proprietary data with its technology for determining connections between otherwise disparate pieces of information. The company describes its platform as cloud-native and AI-embedded, with an identity graph that is continually updated as new data is added. This gives the business characteristics of a scalable software platform: once the underlying data and technology infrastructure have been built, additional customers and searches can be supported without costs increasing at the same rate.

Growth has accelerated during 2026. Second-quarter revenue increased 23% year-on-year to a record $26.7m, while adjusted EBITDA increased 48% to $11.2m. Red Violet also added a record 447 new IDI customers during the quarter, taking the total above 10,800, while FOREWARN had more than 417,000 users at the end of the preceding quarter. The company subsequently raised $115m through a share issue, leaving it with more than $160m of cash to invest in further growth.

Tripod Technology

Figure 8: Tripod Technology (TWD)

Tripod Technology (www.tripod-tech.com) is a Taiwanese manufacturer of printed circuit boards (PCBs), the boards on which electronic components are mounted and connected. Its products are used across servers, memory modules and consumer devices. Although PCBs are a mature part of the electronics industry, increasingly powerful computing systems require boards capable of handling greater data speeds, power requirements and component density.

Tripod has been held by HRI for several years, but its recent move into the top 10 reflects the much stronger earnings environment for the Asian hardware companies benefiting from AI-related infrastructure spending.

Demand has been particularly strong for server and memory-related PCBs as investment in AI computing has increased. At the same time, other PCB manufacturers have been directing more capacity towards the most advanced GPU and AI-server products, creating opportunities for Tripod to pick up additional conventional server business. Higher-value products have also improved the company’s sales mix and profitability.

The effect was particularly visible in its latest results. Second-quarter 2026 revenue increased 39% year-on-year to a record NT$24.9bn, while net profit rose 59% to NT$3.9bn.

Varonis Systems

Figure 9: Varonis Systems (USD)

Varonis Systems (www.varonis.com) is a US cybersecurity software company specialising in protecting corporate data. Rather than concentrating primarily on networks or devices, Varonis monitors where organisations’ sensitive information is stored, who can access it and how it is being used. Its platform can identify excessive permissions, classify sensitive information and detect unusual behaviour that could indicate either an external cyberattack or misuse by an employee. HRI has been a long-standing shareholder.

Varonis has expanding from its traditional data-security products into securing AI applications themselves, including through its Atlas AI Security Platform and integrations with widely used AI tools. Another major change is Varonis’s transition from self-hosted software to a cloud-based software-as-a-service (SaaS) model. This has proved disruptive: the shares almost halved on 29 October 2025 after disappointing third-quarter results and a reduction in full-year annual recurring revenue guidance.

Subsequent results have demonstrated continued growth in the cloud business. SaaS annual recurring revenue reached $726m at the end of the second quarter of 2026, up 52% year-on-year, or 25% excluding customers converted from the old model. The shares have since recovered part of their losses, with takeover interest providing an additional catalyst.

New holding

Vishay Precision is a relatively new position that performed strongly after purchase; albeit much of the gain has been subsequently given back.

Vishay Precision

Figure 10: Vishay Precision (USD)

Vishay Precision Group (VPG, www.vpgsensors.com) is a US-listed specialist in precision measurement and sensing technologies. Its products include high-precision resistors, strain gauges, load cells and measurement systems, which are used in applications where accuracy and reliability are particularly important, including semiconductor manufacturing equipment, data centres, aerospace and defence, industrial automation and transportation.

Through VPG, HRI gains exposure to several growing technology markets through components that are often relatively small but critical to the performance of the systems in which they are used. Demand for VPG’s precision resistors is benefitting from investment in AI-related semiconductor equipment and data centres, while the company is also developing an interesting position in robotics. Indeed, during the second quarter, VPG received a vendor nomination from its first humanoid robotics customer, potentially positioning it to supply sensors as production ramps.

Q1 results in May were well ahead of expectations, and the shares subsequently performed exceptionally well. More recently, most of this gain has been given back, with forward guidance not supporting the pace of growth that investors had been pricing into the shares.

Performance

HRI has strongly outperformed the Deutsche Numis Smaller Companies plus AIM ex-Investment Companies Index.

As Figures 11 and 12 show, HRI has substantially outperformed the Deutsche Numis Smaller Companies plus AIM ex-Investment Companies Index – which captures the performance of the wider UK small-cap market – in NAV terms over the five years to 31 August 2026, primarily due to a strong first half this year. Relative performance was volatile during 2024 and 2025, but was very strong during the first half of 2026, as HRI generated strong absolute returns while the UK small-cap benchmark made comparatively modest progress against a difficult backdrop, including the war in Iran. Conversely, it was a very strong half-year for the technology sector. Some of this outperformance has been given back in recent weeks.

HRI’s performance relative to the Bloomberg US 2000 Technology Index has been more challenging. HRI recovered much of its earlier relative underperformance during the first half of 2025 and briefly moved ahead of the index, but this improvement subsequently reversed, with the divergence becoming particularly pronounced during the first half of 2026, despite strong absolute NAV returns. This reflects the particularly strong returns generated by US smaller technology companies. That trend reversed sharply during July. As detailed on pages 6-7, HRI’s allocation to the US has increased over time, but the portfolio remains considerably more geographically diversified than this US-focused comparator.

Figure 11: HRI’s NAV total return relative to relevant indices, over five years to 31 August 202

Figure 12: Cumulative total return performance over periods ending 31 August 2026

HRI’s elevated cash position ahead of the tender offer has had a mixed impact on performance, limiting participation in stronger markets but potentially providing some protection during periods of pressure on growth stocks.

Dividend

HRI is focused primarily on generating capital growth, and dividend income makes up only a small part of returns. The consequence of this is that HRI only declares a dividend where this is necessary to retain investment trust status, and in practice, no dividend has been declared since 2012.

Premium/(discount)

Over the five years ended 31 August 2026, HRI traded on an average discount of 12.6%. However, over the last 12 months the trust has traded at a narrower average discount of 9.5%. The range over the 12 months was between 5.7% and 13.4%.

As shown in Figure 13, HRI’s discount narrowed sharply towards the end of 2024, with the shares briefly trading at a premium around the year-end and again in early 2025. This was driven in large part by substantial buying by Saba. Following the defeat of Saba’s proposals, the shares returned to trading at a discount, although this generally remained narrower than the five-year average through 2025 and the first half of 2026.

The recent tender offer has removed the overhang associated with Saba’s large shareholding. All else being equal, this should see a lower discount. However, the full impact will become clearer once trading in the substantially reduced share capital has settled.

Figure 13: HRI premium/(discount) over five years to 31 August 2026

Whilst the board’s general policy is not to attempt to control the discount, given the limited liquidity available within the underlying portfolio companies, the trust will repurchase shares opportunistically. As shown in Figure 14, 2023 and 2024 saw particularly high levels of repurchases compared with previous years, before activity moderated in 2025. However, such ad-hoc purchases have been dwarfed by the repurchase made in the tender offer in July.

Figure 14: HRI share repurchases over the past 10 calendar years

Fund profile

More information can be found at the trust’s website: www.heralduk.com.

Established in 1994, HRI invests globally in small technology and communications companies with the aim of achieving capital growth. It is the only listed fund of its type. The trust invests globally. Historically, it has had a strong bias towards the UK, although this has been reduced significantly in recent years.

New investments in the fund will typically have a market capitalisation of $5bn or less, but are generally much smaller when the first investment is made. If successful, these can grow to be a multiple of their original valuation. This type of investing is longer-term in nature and so the trust’s portfolio tends to have low turnover. Reflecting the risks inherent in this type of investing, and the liquidity constraints of having a small-cap investment remit, the trust maintains a highly diverse portfolio of investments (typically in excess of 250) to help mitigate this risk.

HRI’s lead fund manager, Katie Potts, has managed HRI from its launch, and continues to do so after its recent move to Aberdeen Investments. Her track record shows the importance of experience in markets such as these.

Aside from the numerous advantages of HRI we outline in this note, one notable benefit has been the considerable experience provided by Katie and her team. Katie was a highly-regarded technology analyst at SG Warburg (later UBS) prior to launching the fund.

Katie is supported by a specialist investment team that combines longstanding Herald experience with the broader research resources available through Aberdeen. This provides continuity in the trust’s investment process, and preserves much of the specialist technology and smaller-company expertise that has been built up over many years.

The move has therefore changed the organisational structure around HRI without altering its investment mandate or the stock-picking approach developed under Katie. Aberdeen also brings greater distribution, marketing and investment-trust resources, while the core investment decisions remain with Katie and the team that has moved across from Herald.

Noteworthy members of the team include Danny Malach, CFA, who joined Herald Investment Management in 2016, supports the UK portfolio and is responsible for client liaison and shareholder communications; James de Jonge, CFA, who joined in 2022 and manages the European portfolio, with analytical responsibility for the communications sector globally; Hao Luo, CFA, who joined in 2004, leads HRI’s Asian portfolio and retains global responsibility for the hardware sector; and Matthew Lloyd, CFA, who joined in 2019, co-manages the Asian portfolio and has analytical responsibility for the semiconductor sector globally.

HRI’s closed-ended structure can be advantageous during market selloffs.

The HRI team has navigated several downturns and has benefitted from its ability to select companies capable of weathering difficult conditions. HRI’s closed-ended structure has also been used to great effect. Whilst open-ended funds are often forced sellers, HRI can capitalise on its ability to gear and to pick up lines of stocks at attractive prices.

HRI’s size and focus on smaller companies, and the depth of expertise within the management team, all mean that it plays an important role as a provider of much-needed capital to listed technology companies looking for expansion capital. This is particularly valuable in a downturn and has offered HRI further opportunities to generate alpha when others may not have been able to.

HRI offers a liquid route for any investor looking to gain access to this part of the market, and we believe that an investment in HRI complements an investment in one of the large-cap technology funds.

SWOT analysis

Figure 15: SWOT analysis for HRI

Bull vs. bear case

Figure 16: Bull vs. bear case for HRI

Previous publications

Readers interested in further information about HRI may wish to read our previous notes. You can read the notes by clicking on them in Figure 17 or by visiting our website.

Figure 17: QuotedData’s previously published notes on HRI

IMPORTANT INFORMATION

This marketing communication has been prepared for Herald Investment Trust Plc by Marten & Co, which is authorised and regulated by the Financial Conduct Authority (FCA). It constitutes non-independent research as defined under the UK MiFID II regime and the onshored Commission Delegated Regulation (EU) 2017/565.

This communication is intended for use by investment professionals as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

Marten & Co is not authorised to provide advice to retail clients. Accordingly, if you are not a professional investor, or are otherwise restricted from receiving this information, you should disregard it.

Charts and data are sourced from Bloomberg unless otherwise stated. Please read the important information at the back of this document. The note does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.

The note has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. The analysts who prepared this note are not constrained from dealing ahead of it, but in practice, and in accordance with our internal code of good conduct, will refrain from doing so for the period from which they first obtained the information necessary to prepare the note until one month after the note’s publication. Nevertheless, they may have an interest in any of the securities mentioned within this note.

This note has been compiled from publicly available information. This note is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this note is prohibited.

Accuracy of Content: Whilst Marten & Co uses reasonable efforts to obtain information from sources which we believe to be reliable and to ensure that the information in this note is up to date and accurate, we make no representation or warranty that the information contained in this note is accurate, reliable or complete. The information contained in this note is provided by Marten & Co for personal use and information purposes generally. You are solely liable for any use you may make of this information. The information is inherently subject to change without notice and may become outdated. You, therefore, should verify any information obtained from this note before you use it.

No Advice: Nothing contained in this note constitutes or should be construed to constitute investment, legal, tax or other advice.

No Representation or Warranty: No representation, warranty or guarantee of any kind, express or implied is given by Marten & Co in respect of any information contained on this note.

Exclusion of Liability: To the fullest extent allowed by law, Marten & Co shall not be liable for any direct or indirect losses, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note. In no circumstance shall Marten & Co and its employees have any liability for consequential or special damages.

Governing Law and Jurisdiction: These terms and conditions and all matters connected with them, are governed by the laws of England and Wales and shall be subject to the exclusive jurisdiction of the English courts. If you access this note from outside the UK, you are responsible for ensuring compliance with any local laws relating to access.

No information contained in this note shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction.

Investment Performance Information: Please remember that past performance is not necessarily a guide to the future and that the value of shares and the income from them can go down as well as up. Exchange rates may also cause the value of underlying overseas investments to go down as well as up. Marten & Co may write on companies that use gearing in a number of forms that can increase volatility and, in some cases, to a complete loss of an investment.