Polar investment trust chair warns of tech fund issues with Mifid II

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Polar Capital Technology Trust chair Michael Moule has warned tech funds will face more hurdles than others from Mifid II due to their reliance on high quality research and use of US brokers.

The comments came in the investment trust’s annual results for the period ended 30 April, which represent Moule’s last with the fund before he is succeeded by Sarah Bates.

The £1.25bn trust delivered 56.1 per cent over the period versus a 53.4 per cent total return for the benchmark in Sterling. In local currency terms the benchmark rose by 35.5 per cent due to its dollar weighting.

Moule told shareholders: “I was hoping to bring you some positive news that the dreaded Mifid II had been abandoned or at least deferred for another year, but no such luck. This piece of EU led legislation is now scheduled to come into force at the start of January 2018.

“While it has the laudable objective of providing investors with greater transparency in the costs of their investments it is not of universal application and will not apply to asset managers in the USA, Switzerland et al, so could put European managers and investors at a disadvantage.”

Moule says tech funds are at a particular disadvantage when it comes to Mifid II rules around research, which require costs to be unbundled, because the rapidly evolving sector needs access to good research, much of which is paid in US dollars.

Moule says the team tends to pay a “high rate” for its research. It results show brokerage costs, which are paid in US dollars, of £2.3m in sterling terms of which £1.5m was for research.

Tilney Group managing director Jason Hollands believes Moule is right and that funds focused on life-sciences, biosciences and cyber security will also rely heavily on specialist research.

“Global investment banks invariably focus on large and mid-cap companies rather than small-cap stocks, which typically represent an important tail part of the portfolio for specialist funds.

“Tech and biotech funds also need to be acutely aware of interesting unquoted companies, on occasion investing pre-IPO, or merely to be aware of new disruptive technologies that are in the pipeline.”

Hollands adds that a lot of tech research comes from the US, where the exchange rate would have pushed up costs in sterling terms over the last year.

“The US tech and biotech industries are well served by the venture capital industry and the NASDAQ market, so inevitably it is key for funds specialising in these areas to have access to US based research.”