Hi-tech on the high wire

The fall in the technology sector has hit investment trusts especially hard
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The Independent Online

The recent freefall in technology stocks is particularly bad news for those with investment trusts. Unlike technology unit trusts, which are priced at the true cost of their underlying assets, technology investment trusts have dual pricing, which means their shares collectively can be worth substantially less or more than the real value of the assets held.

The recent freefall in technology stocks is particularly bad news for those with investment trusts. Unlike technology unit trusts, which are priced at the true cost of their underlying assets, technology investment trusts have dual pricing, which means their shares collectively can be worth substantially less or more than the real value of the assets held.

At the moment, investment trusts are trading at big premiums; the shares are worth more than the assets in the trust and are significantly overvalued. So even though technology unit trusts have also taken a battering in recent weeks, their single pricing - unlike the dual pricing of investment trusts - reflects the true value of the underlying assets.

Investment trusts have grown in popularity in recent years, partly as a result of the Association of Unit Trust (AITC)'s "Its" advertising campaign. They enable investors to purchase a range of shares across a spread of companies through a single vehicle. Investment trusts are quoted on the stock exchange and their shares are traded like those of any other company - but their business is investing in other firms.

They have certainly caught on: sales of individual savings accounts (ISAs) operated by investment trusts and their managers have grown substantially. According to the AITC, sales rose by 71 per cent in the third quarter of this year, compared with the same period in 1999, amounting to nearly £25m.

But even though their popularity is growing, investment trusts remain complicated, particularly for first-time investors. Some are structured in such a way that even experienced investors have trouble understanding them. And these structures are not always successful. Aberdeen Asset Managers was recently bailed out by UBS Warburg because its European Technology and Income Trust is so highly geared that the dip in technology stocks resulted in severe losses which had to be covered. Retail investors weren't affected, as this trust is targeted at institutional investors. But it does underline the importance of finding out exactly what you are investing in and making sure you understand it.

"The Aberdeen [case] was a bit of an exception," says Tim Cockerill, investment manager at independent financial adviser (IFA) Chartwell Invest- ment. "But the investment trust technology sector is a bit horrible at the moment."

Henderson Technology Investment Trust illustrates this, currently trading at £3.23 a share, down from a high of £5.76 earlier this year, a fall of 44 per cent. Yet despite this dramatic fall, it is trading at a premium of 18 per cent - so clearly it's overvalued.

"Technology is [still] a good investment, with new ideas and products being produced every day," says Mr Cockerill. "But I can't see why anyone would hold something which is 18 per cent overvalued."

Henderson Technology Investment Trust is not alone. Amerindo Technology is trading at a 12 per cent premium and Finsbury Technology at 10 per cent. But not all investment trusts are in this position; Flemings is trading at a small discount, as is Invesco. With the majority trading at high premiums, however, many financial advisers are telling investors to steer clear of technology investment trusts for now.

But if you already possess an investment trust, don't be too quick to sell it, advises Mark Dampier, head of research at IFA Hargreaves Lansdown. "My view is that once they rise to premiums of 15 per cent, only then should you think about selling," he says. "There is a tremendous buying opportunity coming up elsewhere in the tech sector. Shares are down in good companies, too, so there are going to be some great opportunities out there."

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