It is well known that technology funds offer the potential for punchy returns, but they are also regarded as very volatile investments – a characteristic that we were reminded of last week when ‘The Donald’ surged to victory, prompting a sell-off among technology stocks, and at the same time a spike in biotechnology, in the immediate aftermath.

Volatility is certainly a feature of investments in this area, however our analysis of three key technology sectors shows that, on average, over the last ten years the difference between technology funds and their broader mainstream global growth focused cousins is far less than most people think.

The analysis

We examined trusts in the AIC’s three technology focused sectors (Technology, Media & Telecoms, Biotech and Healthcare, and Small Media, Technology and IT Companies) and found that while average annual returns are significantly greater, maximum drawdown – a figure representing the worst possible performance during a given period – was actually smaller for tech focused trusts.

In discrete terms to the end of October 2016, global funds have lost more in most years in the last ten and have slightly more on average over ten years than their tech focused counterparts.

At the same time, as the table below shows, tech funds have consistently outperformed their global counterparts and delivered a far higher annualised return over the period – 15.98% per annum as opposed to 8.7% per annum from IA Global funds.

TECH FUNDS OUTPERFORM GLOBAL FUNDS ON A DISCRETE BASIS

YET IN MOST YEARS DRAWDOWN RISK IS GREATER FOR THE AVERAGE IA GLOBAL FUND

Against this backdrop, we examine a sector which is in an interesting position.

The ascendency of Mr Trump saw biotech funds tick up sharply earlier this month. Trump is good news in particular for biotech trusts, which may benefit from a surge in M&A now that Hilary Clinton – seen as an emeny of the sector – has missed her chance at the White House.

Mainstream technology stocks meanwhile took a hit in the immediate aftermath of his surprise victory, hit by fears that his anti-immigration and ‘onshoring’ policies might affect the sector which is well known for employing foreign engineers in America, and hoarding profit offshore. The difference between what the new president said on the campaign trail and what he does in reality may be significant here.

We also cast the net wider to consider trusts which are not explicitly tech focused and may serve for those wish to gain more diversified exposure to the story.

The funds

Our analysis highlights a number of trusts in the technology and biotechnology area. Polar Capital Technology Trust is a core technology fund. Managed by an experienced team it is the best performing technology trust in 2016 to the end of October, and has also outperformed every trust in the UK All Companies and Global sectors bar Lindsell Train (losing out to Nick’s trust by 1%).

Over three, five and ten years the trust has delivered consistently strong NAV returns, whilst in each of these periods limiting downside, with a maximum drawdown of 9% over three and five years, and 33% over ten – seven times less than the returns it generated over that period.

Allianz Technology Trust is another pure ‘tech’ fund and with a more flexible mandate than PCT which it has used to invest in mid-caps, delivering consistent returns over each period whilst keeping a lid on maximum drawdown. The trust also has an informal discount control mechanism, designed to keep the trust’s discount (currently -5.43%) from falling beyond -7%.

Biotechnology stocks – in febrile mood since Hilary Clinton first took a swipe at the sector in September 2015, criticising the ‘price gouging’ which she said was going on among pharmaceutical businesses – have bounced sharply since the election, but could rise further with the prospect of a pickup in M&A in the sector.

International Biotechnology Trust is set to benefit from what looks like a return to form for healthcare stocks, one of the few clear positives that have emerged from the US election. The trust, on a discount of more than 10%, is managed by an experienced team under Carl Harald Janson, and invests in smaller companies than its nearest rival (Biotech Growth) with a ten percent weighting in unquoted. The trust also has a greater emphasis on managing downside risk applied since Carl Harald’s arrival – avoiding ‘key risk events’ by divesting as companies approach crucial clinical trials.

The Biotech Growth Trust is another healthcare focused trust which may be well positioned if biotech continues to benefit from the ascendency of the tiny handed one, this time focused more on the ‘big pharma’ end of the market. On a discount of 7.8% as at 14 October, beyond the level at which the board promises to buy shares back under the terms of its discount control mechanism, the trust has delivered 585% over the last ten years, delivering more than any other investment trust, unit trust or OEIC in any sector.

In terms of drawdown, both of these trusts have seen significant ups and downs, but drawdowns rarely exceed 30% in any period, and the maximum drawdown for these trusts is little more dramatic than that for the average trust in either the AIC UK All Companies or AIC Global sectors over ten years, and compares favourably on this basis with the average fund in the IA’s open ended tech sector (-31%) too.

Edinburgh Worldwide Investment Trust is the final trust in our analysis and like its sister trust Scottish Mortgage– which also has a significant tech slant – it is not a ‘true’ technology trust, sitting as it does in the AIC Global sector, but it has significant exposure to both technology, which makes up more than 40% of the portfolio, and healthcare (mainly in the form of healthcare innovation), which makes up a further 27%.

The trust, managed by Baillie Gifford’s Douglas Brodie has been trading on a double digit discount in recent months, having moved out from near zero earlier this year. Although the returns it has generated are less spectacular than those from its more focused tech cousins, it may be of interest to those who want exposure to technology, but do not want all of their eggs in one basket.