Herald Investment Trust PLC · LSE:HRI
Herald Investment Trust — Shareholder Meeting (April 2022)
74 slides from Herald Investment Trust's shareholder meeting presentation, Apr 19, 2022
Slide 1: Herald Investment Trust plc AGM presentation
Herald Investment Trust plc AGM presentation 19th April 2022
Slide 2: Disclaimer
Please not that past performance is not a reliable indicator of future returns. You should determine for yourself what weight, if any, to place on such past performance. Markets and currency movements may cause the value of shares, and the income from them, to fall as well as rise, and you may get b
Slide 3: Chair's statement: record year-end net asset value
It is a relief to report another record year-end net asset value after another challenging year of Covid, supply chain issues and a tight labour market. KATIE POTTS HERALD INVESTMENT TRUST 3
Slide 4: Herald Investment Trust introduction
INTRODUCTION Herald Investment Trust (HIT) launched in 1994 Herald Global small cap TMT Investment Median market cap c. £261m Trust Significant provider of primary capital to emerging business, £624m since inception Long term performance - NAV up > 29x Intellectual property important profit driver i
Slide 5: 2021 Highlights
2021 HIGHLIGHTS 2021 Highlights NAV UK IRR N AMERICA IRR +19.0% +23.3% +11.0% 2021: Media outperformance, supply chain issues prominent across many portfolio companies 2021 HIGHLIGHTS: PLACINGS PLACINGS IPOS TAKEOVERS* £62m 58 16 £103m * 2021 YTD announced takeovers. Cash proceeds from takeovers in
Slide 6: HIT performance since inception
2021 HIT performance since inception Total return rebased to 100 at Feb-1994 26x NAV TOTAL RETURN SINCE INCEPTION 12.2% NAV ANNUALISED RETURN SINCE INCEPTION HERALD INVESTMENT TRUST 6 Source: Refinitiv and Russell Investment Group to 31/03/2022
Slide 7: Performance figures
2021 Performance figures Reporting Period: 31/12/2021 TWR 31/12/2007- Inception to date * Q4 2021 2021 31/12/2021 TWR TWR IRR All figures stated as % returns TWR Annualised Annualised Asia* -1.2 19.4 591.8 1,610.4 11.6 9.9 Europe Middle East and Africa 8.9 46.8 1,173.7 7,351.3 16.7 14.0 North Americ
Slide 8: TMT Returns – 2021 divergence
2021 TMT Returns – 2021 divergence Bloomberg Weightings (%) HIT Sectors* Main sectors are Media 22.3 15.6 84.4% of Herald Software 25.0 36.6 equity investments Technology Services 13.7 9.4 Semiconductors 15.5 9.4 Technology Hardware 23.5 13.4 Main Sectors Total 100.0 84.4 2021 tech sector * Market c
Slide 9: TMT returns in 2021
2021 Companies above $700bn market cap → Aggregate market value $9tn value • Microsoft +52.5% • Apple +34.6% • Alphabet +65.3% • Meta Platforms +23.1% • Nvidia +125.5% TMT returns Big 5 c. 1/3 of the value at year end, but c. 60% of the tech sector returns in 2021 Whole sector above $3bn → Aggregate
Slide 10: 2021 Highlights and commentary
2021 2021 Highlights and commentary NAV Numis ex INV Trust plus AIM Russell 2000® Technology +19.0% +20.0% +15.3% • UK media sector outperformance, benefiting from positive economic recovery • Software sell off, with strong device market (predominantly semiconductors) • Tech demand resilient, broad-
Slide 11: Number of IPOs
2020 & 2021 IPOs Change in remit – number of IPOs (raise £3m to £300m) Average Average % No of IPOs 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 12-19 20-21 Change Asia 39 66 97 115 97 83 90 91 68 94 85 81 -4% Europe 3 5 14 21 17 34 32 17 33 76 18 55 205% North America 33 47 50 24 24 39 42 44 6
Slide 12: IPO value raised
2020 & 2021 IPOs Change in remit – value of IPOs (raise £3m to £300m) Value of IPOs Average Average % 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (£,m) 12-19 20-21 Change Asia 522 1,441 2,697 1,782 1,413 1,147 2,161 2,146 1,794 2,819 1,664 2,307 39% Europe 112 93 857 945 796 1,708 1,335 328 1,
Slide 13: Number of companies in remit – expanded opportunity
2021 Number of companies in remit – expanded opportunity 2019 - 2021 HIT Remit* 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 % Change Developed Asia 1,183 1,350 1,442 1,518 1,606 1,787 1,649 1,786 1,947 2,041 14% UK 119 144 150 137 132 140 138 128 136 149 16% Western Europe (ex UK) 299 321 321
Slide 14: Performance figures – to March 31st 2022
Q1 2022 Performance figures – to March 31st 2022 Reporting Period: 31/03/2022 TWR 31/12/2007- Inception to date * Q1 2022 2021 31/12/2022 TWR TWR IRR All figures stated as % returns TWR Annualised Annualised Asia* -12.3 19.4 506.7 1,400.0 11.0 8.9 Europe Middle East and Africa -19.1 46.8 930.6 5,929
Slide 15: HIT historic P/E by region from 2020 accounts
P/E BY REGION HIT historic P/E by region from 2020 accounts Source: Herald Investment Trust Annual Report 2020 HERALD INVESTMENT TRUST 15
Slide 16: HIT historic P/E by region – derating since 2020
P/E BY REGION HIT historic P/E by region – derating since 2020 Portfolio p/e by 2013 2014 2015 2016 2017 2018 2019 2020 2021 Q1 2022 region UK 16.9 15.8 16.4 15.9 19.6 15.9 21.7 26.2 23.8 21.0 EMEA 14.9 13.4 16.3 17.5 21.4 17.7 25.0 34.9 33.3 29.4 Asia 9.6 12.3 13.2 13.1 14.8 16.3 20.7 25.0 23.0 15.
Slide 17: 2022 Q1 Update
Q1 2022 2022 Q1 Update NAV UK IRR North America IRR -14.0% -16.7% -11.0% • Sell off across all regions reflecting: • Rising interest rates • Continued COVID and supply chain issues • Inflationary pressures – Energy prices, raw materials and tight labour market • Russia’s war in Ukraine • Generally,
Slide 18: Summary
SUMMARY TMT sector attractive in an inflationary world- higher growth, margins & pricing power attainable Cash to deploy in uncertain markets Smaller companies disproportionately benefit by renting low cost global cloud infrastructure Summary Small caps can provide more value and investment trust an
Slide 19: Appendix
Appendix HERALD INVESTMENT TRUST 19
Slide 20: Herald and ESG: an integrated approach
HERALD APPROACH Herald and ESG: an integrated approach Broad corporate Long term Actively Technology engagement & shareholders and investing in sector naturally participation in advocates for several green low carbon governance issues management to adopt technologies sector stakeholder capitalism Co
Slide 21: Geographic Returns
Geographic Returns Technology sector offers exciting emerging companies HERALD INVESTMENT TRUST 21
Slide 22: HIT Geographical returns – 2019 to 2021
GEOGRAPHIC DETAIL HIT Geographical returns – 2019 to 2021 70 NORTH UK AMERICA EMEA ASIA HIT 60.7 GEOGRAPHICAL RETURN* (STERLING, %) 60 57.9 53.8 50 46.8 40 38.8 36.5 37.0 32.4 30.4 30.1 30 27.5 22.7 19.4 19.0 20 10.9 10 2020 2019 2020 2020 2021 2019 2019 2021 2019 2021 2020 2020 2019 2021 2021 0 * T
Slide 23: Geographical weightings
GEOGRAPHIC DETAIL Geographical weightings GEOGRAPHICAL SPREAD OF EQUITY INVESTMENTS AS AT 31 DEC 2021* NORTH UNITED AMERICA KINGDOM EMEA 22.3% 47.7% 11.4% 2020: 24.4% 2020: 8.6% ASIA 2020: 49.3% 11.8% 2020: 10.1% *Comparative year figures to 31/12/2020 Source: Herald Investment Management Limited 31
Slide 24: TMT Disruption
TMT Disruption Technology sector offers exciting emerging companies HERALD INVESTMENT TRUST 24
Slide 25: TMT investment characteristics
TMT DISRUPTION • Disruptive – technology innovation opens up new markets • Scalable – strong business models; sector has unusual TMT ability to earn super-normal margins (software, semiconductor, internet) investment • Structural Growth - attractive growing end markets characteristics • Recurring Re
Slide 26: Technology disruptors
TMT DISRUPTION Ubiquity of Collapsing Open-source internet and hardware software Technology connectivity cost disruptors Centralised vs. Subscription Cheap distributed model vs. energy compute & storage Capex Artificial intelligence and machine learning HERALD INVESTMENT TRUST 26
Slide 27: Diverse portfolio exposure
TMT DISRUPTION Diverse portfolio exposure BATTERY & CLEAN TECH SECURITY & IDENTITY TELECOMS, NETWORKING & CONNECTIVITY SEMICONDUCTORS SOFTWARE INTERNET & MEDIA Portfolio companies engaged in disruptive markets HERALD INVESTMENT TRUST 27
Slide 28: Broad technology opportunity
TMT DISRUPTION Broad technology opportunity ADAS – Driver Monitoring Robotics Cloud 5G 15.5% WORLDWIDE TOTAL RETURN PER ANNUM Machine Learning & Digital Media NFV and SDN Digital Transformation Artificial Intelligence Energy Storage and Cyber Security Big Data Advance Semiconductors 13.3% Hydrogen F
Slide 29: HIT winners since inception
TMT DISRUPTION HIT winners since inception Investment Descriptions Gain/Loss (£m) Diploma Distributor of components and systems 63 Next Fifteen Communications Supplier of marketing communications services 54 Future Multiplatform media company 54 GB Group Intelligent identity data, software and servi
Slide 30: The Herald Approach
The Herald Approach HERALD INVESTMENT TRUST 30
Slide 31: Achieving Capital Growth
HERALD APPROACH Achieving Capital Growth Herald invests, generally on a long-term basis, using fundamental analysis. The telecommunications, What we do multimedia and technology sector comprises of over 5,000 quoted companies, and many more unquoted. The manager, Herald Investment Management Limited
Slide 32: What we do / History of the company
HERALD APPROACH WHAT WE DO Analysis entails a prolific number of development capital, then holding meetings with companies, either at Herald’s investments for long periods, regularly offices, site visits or at conferences globally, providing further capital when needed. as well as broker hosted meet
Slide 33: Herald Investment Management
HERALD APPROACH • Team with in-depth knowledge of the technology sector: • Investment experience in large cap, small cap and unlisted companies • Global perspective Herald • Established team of 7 with >125 years TMT experience • Over 1,500 meetings per year with company Investment management with Te
Slide 34: Investment landscape and approach
HERALD APPROACH Investment landscape and approach INVESTMENT UNIVERSE Global TMT c. 5,000+ Stocks Small Cap Public Companies IDEA GENERATION Company Meetings Publications & Market Data Knowledge of the Sector STOCK SELECTION Financials Business fundamentals & growth prospects Strong management team
Slide 35: Investment Approach
HERALD APPROACH • Fundamental analysis – review of balance sheet • Understanding of supply chains & technology ecosystems • Knowledge of technology drivers • Bottom-up fundamental research – avoid chasing overcrowded niches • Fund manager intolerant of financial engineering and greedy Investment man
Slide 36: Understanding the technology value chain
HERALD APPROACH Understanding the technology value chain Investing across the technology value chain gives HERALD INVESTMENT TRUST 36 us unique insights
Slide 37: The Team
HERALD APPROACH The Team Specialist global team with over 85 years of Herald experience. The responsibilities of the team are split by sector and geography. Katie Potts Katie founded Herald in 1994, she is the lead fund manager. Prior to founding Herald, she worked at Barings Investment Management a
Slide 38: External research and resources (post MiFID II)
HERALD APPROACH External research and resources (post MiFID II) Manager spending Contracts with over Coverage includes significant budget 70 brokers globally regional brokers in on research and c. 20 countries corporate access HERALD INVESTMENT TRUST 38
Slide 39: Sector Drivers
Sector Drivers HERALD INVESTMENT TRUST 39
Slide 40: New technologies presents new opportunities
TECHNOLOGY DRIVERS New technologies presents new opportunities In an increasing number of tasks, do • Evolving technologies continuously creates new markets computers perform better than the average for innovative companies to exploit. human? • Ubiquitous bandwidth (networking), processing power & T
Slide 41: Cloud: long term growth stimulant
CLOUD Cloud: long term growth stimulant • Cloud acts as long-term enabler. • Cloud migration partway though multi year transition. • Offers smaller businesses lower barriers to entry. • Opex not capex thereby allowing businesses to scale compute & storage resources with limited capital. • Cost at sc
Slide 42: Software: the cloud enables more intelligence and scale
SOFTWARE Software: the cloud enables more intelligence and scale • Modern technology allows business to effectively scale on third party infrastructure and tools. • Early-stage business access leading edge technology in the cloud: • CPU & GPU compute nodes • Open Source software • AI & ML libraries
Slide 43: Software: unregulated utility with growth
SOFTWARE Software: unregulated utility with growth • Software is a key enabler of ‘digital transformation’ for governments and enterprise. • Increase capability of software and the importance of data to enable automation and insight gained through machine learning (ML) & artificial intelligence (AI)
Slide 44: Semiconductors: connectivity, processing & sensing
SEMICONDUCTORS Semiconductors: connectivity, processing & sensing • Semiconductor technologies enabling new capabilities, with increasing content per device. • Semiconductors offering low-cost connectivity, processing and sensing enabling IoT and smart edge computing. • Connected devices in turn ena
Slide 45: Semiconductors: of strategic importance
SEMICONDUCTORS Semiconductors: of strategic importance • Advanced semiconductor technology important to enabling growth within modern economies. • Few companies and countries possess the capability to manufacture at the leading-edge geometries. • Geopolitical tensions between China & USA highlights
Slide 46: Semiconductors: AI adding intelligence to data centre & edge
SEMICONDUCTORS Semiconductors: AI adding intelligence to data centre & edge • Machine learning, a subset of AI, consists of taking data, training a model, and using the trained model to make predictions on new data. The more data, the better the results. • The two main steps in machine learning are
Slide 47: Networking: provides backbone technology
NETWORKING Networking: provides backbone technology • 5G mobile networks offers: • Better performance & speeds • Enhanced mobile broadband • More applications for consumers & enterprises • Broad use cases for IoT • Densification in populated areas • More options for connectivity in rural areas • Sil
Slide 48: Security: an evolving landscape
SECURITY Security: an evolving landscape • Hackers (both criminal and nation states) evolving quickly and constantly deploying new tactics. • The perimeter of the network is hard to define. Users log in remotely, data sits in third party software, and infrastructure and security is no longer defined
Slide 49: Media: advertising platforms & content
MEDIA Media: advertising platforms & content • Advertising used to benefit content owners – Newspapers / TV broadcasters BUT internet advertising benefits search (Google), marketplaces (Amazon) and a social media network (Facebook). • Publishers suffer 50% leakage in digital advertising. • Brand adv
Slide 50: Media: internet advertising & competition
MEDIA Media: internet advertising & competition • Advertising marketplaces differentiated by methods of delivery / logistic: • Parcel packed retails → Amazon • Digital content → App Store & Google Play • Indexed information → Google Search • Google replacing third party tracking “cookie” – basis of
Slide 51: Long Term Capital
Long Term Capital HERALD INVESTMENT TRUST 51
Slide 52: Portfolio lifecycle
LONG TERM CAPITAL Portfolio lifecycle • Capital growth - The portfolio aims to offer exposure to higher risk parts of the market through a portfolio that has lower risk through diversification. • Diversification is offered in three dimensions: geography, sub-sector and maturity of company. Large num
Slide 53: Life cycle - throughout company history
LONG TERM CAPITAL Life cycle - throughout company history Cost Market Realised Unrealised Coupon / Total Gain/ Profit and Loss Summary (£m) Value (£m) G/L (£m) G/L (£m) Dividend Loss (£m) Top 20 Holdings 66.2 488.6 165.8 422.4 25.2 613.4 2nd 20 Holdings 73.8 258.2 41.8 184.4 12.6 238.8 3rd 20 Holdin
Slide 54: Life cycle – favourable risk reward
LONG TERM CAPITAL Life cycle – favourable risk reward Market Value / £3.3m Cost Average book cost of top 20 Top 20 Holdings 7.4 2nd 20 Holdings 3.5 £24.4m 3rd 20 Holdings 3.2 Next 46 Holdings 1.7 5th Bottom 50 Holdings 1.4 Avg. market 4th Bottom 50 1.4 value of top 3rd Bottom 50 1.1 20, c. 7x return
Slide 55: Split of assets – long term holdings
LONG TERM CAPITAL Split of assets – long term holdings Value % of Avg. Holding Average Holding Period (Years) 70.0% Holdings Holdings (£m) Period Years 16 of value of Value 14 investments is in top 100 Top 20 488.6 29.8 13.6 12 holdings 10 2nd 20 258.2 15.7 9.1 8 3rd 20 171.5 10.4 9.6 13.6 yrs 6 4th
Slide 56: Split of assets – diversity by maturity
LONG TERM CAPITAL Split of assets – diversity by maturity Market Cap Value of Holdings (£m) Holdings Value (%) Number Number (%) Mix of mature and early-stage >£1bn 781.7 48 84 24 companies to £300m - £1bn 331.3 20 74 21 provide £100m - £300m 369.5 23 101 28 balanced £50m - £100m 90.9 6 40 11 portfo
Slide 57: Holdings by sub industry as % of equity investments
LONG TERM CAPITAL Holdings by sub industry as % of equity investments Market value % of equity Total return Total return equity portfolio portfolio equity portfolio equity portfolio 31 Dec 2021 31 Dec 2021 31 Dec 2021 31 Dec 2020 Software 600.2 36.6 39.3 180.1 Technology Services 153.3 9.3 44.8 17.2
Slide 58: Holdings by sub industry as % of equity investments
LONG TERM CAPITAL Holdings by sub industry as % of equity investments Sub-Industry No of Holdings Software 125 36.6% Technology Hardware 49 13.4% Semiconductors 27 9.4% Technology Services 42 9.3% Advertising & Marketing 13 7.6% Internet Media & Services 23 4.5% Electrical Equipment 10 3.0% Telecomm
Slide 59: Takeovers, Placings & Buybacks
Takeovers, Placings & Buybacks HERALD INVESTMENT TRUST 59
Slide 60: HIT announced takeovers since 2007
LONG TERM CAPITAL HIT announced takeovers since 2007 £789m 120 25 HIT Proceeds from Acquisition (£m) 100 in takeovers 20 In context negative £91m of net 80 outside capital after No. of completed and pending 15 circa £186m of buybacks 60 £211m 10 40 bids 5 Net assets as at 20 31 Dec 2008 - 0 2007 200
Slide 61: HIT Takeovers
LONG TERM CAPITAL HIT Takeovers Average Holding Takeover Year Period (Years) AVERAGE HOLDING PERIOD (YEARS) 2021 5.4 10 2020 7.4 9 2019 6.9 8 2018 8.0 2017 7.2 7 2016 8.3 6 2015 9.5 5 2014 8.5 2013 7.9 4 2012 8.9 3 2011 6.0 2 2010 7.2 1 2009 2.0 0 2008 6.2 2007 5.9 Takeovers mostly of more mature ca
Slide 62: HIT participation in primary placings
LONG TERM CAPITAL HIT participation in primary placings 70 90 60 80 1,014 placings since 70 inception with a 50 value of 60 Number of Placings / IPOs £624m Value of Primary Capital (£m) 40 50 30 40 30 20 10 20 695 10 placings since Jan 2007 with a 0 0 value of 1996 2000 2009 1994 1995 1997 1998 1999
Slide 63: HIT share buybacks
LONG TERM CAPITAL HIT share buybacks £186m of shares 30 repurchased since Jan 2007 25 Buyback Value (£m) 20 15 >22.8m shares 10 repurchased, representing 5 26.0% 0 of shares 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 outstanding as of 1st Jan 2007 Source: Herald Inves
Slide 64: Top Holdings
Top 20 Holdings HERALD INVESTMENT TRUST 64
Slide 65: Next Fifteen Communications
TOP 20 HOLDINGS Next Fifteen Communications Next 15 is a group of businesses designed to help companies grow. Next 15 perceive themselves as more than marketing consultants and as growth consultants. They help their clients in four different ways. Firstly, they use data to generate the insights that
Slide 66: Diploma
TOP 20 HOLDINGS Diploma Diploma is an international group supplying specialised products and services to a wide range of end segments in three sectors of life sciences, seals and controls. Diploma's businesses are focused on supplying essential products and services which are critical to customers'
Slide 67: Nordic Semiconductor
TOP 20 HOLDINGS Nordic Semiconductor Nordic Semiconductor is a fabless semiconductor company specialising in wireless technology for the IoT. Nordic’s reputation is built on leading-edge technology and development tools that shield designers from RF complexity. The company pioneered VALUATION £31.5m
Slide 68: Silicon Motion Technology
TOP 20 HOLDINGS Silicon Motion Technology Silicon Motion Technology is a global leader in developing NAND flash controllers for SSDs and other solid state storage devices and has over 20 years of experience developing specialised processor ICs that manage NAND components and deliver high-performance
Slide 69: Future
TOP 20 HOLDINGS Future Future is a global platform business for specialist media with diversified revenue streams. Its content reaches 1 in 2 adults online in the UK and 1 in 3 in the US. Future is organised into two divisions, Media and Magazines The Media division has demonstrated high-growth with
Slide 70: Radware
TOP 20 HOLDINGS Radware Radware is a global leader of cyber security and application delivery solutions for physical, cloud, and software defined data centers. Its award-winning solutions portfolio secures the digital experience by providing infrastructure, application, and corporate IT protection a
Slide 71: BE Semiconductor Industries
TOP 20 HOLDINGS BE Semiconductor Industries BE Semiconductor Industries (Besi) is a leading supplier of semiconductor assembly equipment for the global semiconductor and electronics industries offering high levels of accuracy, productivity and reliability at a low cost of ownership. Besi develops le
Slide 72: ITM Power
TOP 20 HOLDINGS ITM Power ITM Power designs electrolyser products which generate hydrogen gas, based on Proton Exchange Membrane (PEM) technology. This technology uses electricity and water to generate hydrogen gas on-site with oxygen as the only by-product. ITM Power manufactures integrated VALUATI
Slide 73: DiscoverIE
TOP 20 HOLDINGS DiscoverIE discoverIE Group is an international group of businesses that designs and manufactures innovative components for electronic applications. The Group provides application- VALUATION £18.0m specific components to original equipment manufacturers (“OEMs”) internationally. By d
Slide 74: Kainos
TOP 20 HOLDINGS Kainos Kainos is a UK-headquartered IT services provider, operating through two specialist business divisions, Digital Services and Workday Practice. The Digital Services division helps customers to solve their business problems by using technology. Working collaboratively with VALUA
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