Monthly Commentary

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June 2018

Market Review

Although equities were mixed in June, sterling weakness/dollar strength saw the FTSE World Index rise 0.4% during the month in sterling terms. The trade-weighted dollar (DXY) made a new year-to-date high, in part reflecting diverging global economic prospects and monetary policy. The US Federal Reserve raised rates by 25bps during the month, with the median dot-plot prediction of future rates now signalling four rate hikes this year and three in 2019. Trade war concerns may have also played a part and certainly dominated investor attention with the Chinese renminbi slipping -3.2% against the dollar and emerging markets underperforming considerably. The MSCI EM Index fell -3.4% (compounding a similar decline in May) whilst the Shanghai Composite Index declined -9.6% over the month – taking peak to trough decline to greater than -20%, officially entering a bear market (ironically during the month that A-shares were included in the MSCI global indices).

Whilst the global economic outlook has softened due to trade war and Brexit concerns, the US economy remains buoyant as tax cuts and spending provisions in the budget provide the economy with a significant dose of late-cycle fiscal stimulus. The NFIB US Small Business Optimism Index increased in May to the second highest level in its 45-year history and the highest since 1983. A noticeable divergence has hence been established between the US economy and the other major global economies over 2018. The recent trend in purchasing manager surveys is indicative of this divergence. The US ISM Manufacturing Index reached 60.2 in June up from 58.7 in May approaching the prior high reached in February (the highest reading since 2004) whilst the Eurozone Manufacturing PMI declined to 54.9 in June. This was the sixth consecutive monthly decline for the Index, in stark contrast to 2017 when the Index rose almost every month. The Manufacturing PMI Index in China fell to 51.5 in June while in Japan it rose modestly to 53.0.

Although we still believe the US is ultimately not interested in a trade war and just wants a better deal, for now US/China trade tensions continue to escalate. The US approved $50bn of tariffs on Chinese goods, the first tranche of which commence on 6 July with a 25% import tax being applied to $34bn of mainly Chinese industrial products. In turn, China will apply the same 25% tariff to $50bn of mainly US agricultural products which has prompted the US to explore additional tariffs which will be difficult for the Chinese to match given their trade surplus. This may help explain the recent renminbi weakness which could lead to future accusations of currency manipulation should it persist. We can only hope for now – like with North Korea – that President Trump is ultimately trying to strike a better deal, with brinkmanship designed to boost Republican results in the upcoming US mid-term elections.

Technology Review

The technology sector underperformed the broader market during the month, the Dow Jones World Technology Index declining -0.8% in sterling terms. Off-season reporting companies generally delivered mixed results against heightened expectations. After positively pre-announcing, Micron Technology* reported earnings at the high end of its revised guidance, exceeding consensus expectations. The DRAM pricing environment remains favourable and NAND gross margins increased – despite a declining pricing environment – due to mix and cost per bit performance. Cloud data centre demand remains robust for both DRAM and NAND. Broadcom* delivered results above expectations as strong enterprise storage and wired communications was offset by wireless weakness. There was also positive news that Marvell** received Chinese regulatory approval for its pending Cavium** acquisition, somewhat surprising given the ongoing trade tensions between the US and China but potentially a quid pro quo for the US reducing its penalties on Chinese telecom equipment provider ZTE earlier in the month.

After an exceptionally strong run of performance in software two bellwether names pulled back on results presaging a much needed subsector correction. Adobe Systems* – one of our long-held positions reported revenues and earnings exceeding expectations amid significant margin expansion. Experience Cloud (marketing) subscriptions grew +24% year-on-year (y/y) (despite a perpetual to subscription model transition). On the 25th anniversary of Acrobat and the PDF format, digital documents continue to experience a significant pace of innovation as the digitalisation of enterprises remains a top priority. However, the stock reacted negatively to guidance below elevated expectations as the company incorporated some caution around GDPR privacy regulation in Europe. Red Hat* – another of our software holdings – also reacted negatively as both subscription revenues and billings slowed largely due to FX headwinds tied to the stronger dollar.

GDPR privacy legislation came into force in Europe on 25 May and while there is some uncertainty over the short-term impact on Internet companies (users must “opt in” to storage of information and services required for advertising driven business models) – we believe the end result will prove more positive than the market is expecting. We believe platforms such as Facebook* and Google (Alphabet)* will ultimately benefit over smaller players, because email marketers and ad networks may face problems encouraging users to opt in. During the month Facebook disclosed that Instagram had reached 1bn monthly active users (MAU) and that the ‘Instagram Stories’ format exceeded 400m daily active users (DAU), up from 250m daily users one year ago. The stories format, across the various Facebook platforms, is currently significantly under-monetised compared to their newsfeed format offering another incremental monetisation opportunity. Magna Global significantly revised upwards its global ad market projection for 2018 from +5.2% to +6.4% with overall digital ad spend expected to reach $250bn and account for 45% of global ad revenue.

In eCommerce, Amazon* further extended its disruptive reach following the acquisition of online pharmacy PillPack**. As a measure of fear that Amazon now strikes upon entering a new area, the c.$1bn purchase price destroyed c.$15bn in market capitalisation of incumbents such as CVS Health**, Walgreens Boots Alliance** and Rite Aid**. Within payments, recently released data revealed that UK debit cards overtook cash for the first time during 2017 driven by contactless payment adoption. This significant milestone is supportive of our eCommerce and digital payments theme which represents one of our eight core themes. That said, as with software, payment valuations appear a little extended which is why we remain focused on a small number of growth stocks where there is valuation support such as Paypal Holdings*, Visa* and GMO Payments Gateway*.

Outlook

The technology sector continues to drive disruption across almost every industry, fuelled by the Internet, smartphones and artificial Intelligence (AI). This impact is being increasingly felt by incumbents everywhere that are having to undertake ‘digital transformations’ in order to ameliorate the impact of diminished relevance in a world of technology deflation, transparency and unbundling at the hands of disruptive data-driven technology companies. This fundamental divergence has been transposed on stock markets with the technology sector (remarkably) delivering nearly all (c.99%) of S&P500 returns year-to-date. Within the sector, returns have also become more concentrated as investors have gravitated towards secular growth/disruptors with limited exposure to trade-war escalation with Amazon, Microsoft* and Apple* combined explaining c. 2/3 of S&P year-to-date returns.

This narrower market, together with elevated software/payment valuations and a less certain macroeconomic outlook (courtesy of trade-war brinkmanship) has left us with more cash than we typically hold. This (together with a modest amount of NASDAQ put options) is designed to offset the impact of any near-term setback while providing us with firepower should trade-war escalation and/or pre-announcement season (where newsflow is typically negatively-skewed) present us with a buying opportunity. However, this near-term view should not be interpreted too negatively as higher valuations largely reflect a strengthening US economy and improved technology fundamentals. While we have selectively taken some profits, we believe current valuation levels should hold, allowing revenue/earnings/cashflow growth to drive stock performance, absent a US recession which we don’t see on the horizon (although we are watching the yield curve closely). We have been selectively adding to Internet and robotics-related stocks, although we will wait for second-quarter results (where we may see a further reset of investor expectations in robotics stocks) before adding more materially. Within Internet, we believe regulatory and GDPR concerns are overblown while valuations look attractive relative to revenue growth.

The best performing stocks in the Trust (and sector) year-to-date have largely been software related and that remained so during the month, although two of our largest active (overweight) positions Amazon and Advanced Micro Devices* also made significant contributions. Larger hardware related stocks such as Intel* and Samsung Electronics* have struggled amid slower smartphone demand and trade war fears; we remain significantly underweight both and significantly/structurally underweight hardware reflecting product maturation and the move to public cloud computing. While performance has been pleasing, it would have been better still had it been less diversified and less international as year-to-date returns have been dominated by software, payments and select Internet stocks. Our robotics exposure (pared, but not eliminated) has also dragged during a period of slower Apple capex and fears of automotive spend. Over the longer-term we remain convinced that a wider investment universe will provide us greater opportunity to add value (and avoid areas where expectations become inflated) rather than chase hot themes where momentum can become self-sustaining (and potentially detached from near-term fundamentals).

We remain excited about our new cycle thesis that appears to be gathering strength with every earnings season with a growing divergence between incumbents and next-generation companies now that the Cloud has become the default computing platform. This bifurcation is likely to intensify from here as workloads continue to gravitate towards the public cloud, while emerging technologies such as AI – where the Internet platforms enjoy a leadership position – are likely to accelerate this trend. If our thesis is indeed playing out, it should provide a multi-year tailwind for our growth centric investment approach at a time when technology indices may be weighed down by smartphone maturity and exposure to legacy technologies. We remain excited by eight core secular themes which include eCommerce and digital payments, digital marketing and advertising, cyber and physical security, Cloud computing and AI, Software as a Service (SaaS), digital content and gaming, robotics and automation and rising semiconductor complexity.

Ben Rogoff

* Held

** Not held

Disclaimer

Important Information: This document is provided for the sole use of the intended recipient and is not a financial promotion. It shall not and does not constitute an offer or solicitation of an offer to make an investment into any Fund or Company managed by Polar Capital. It may not be reproduced in any form without the express permission of Polar Capital and is not intended for private investors. This document is only made available to professional clients and eligible counterparties. The law restricts distribution of this document in certain jurisdictions; therefore, it is the responsibility of the reader to inform themselves about and observe any such restrictions. It is the responsibility of any person/s in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Polar Capital Technology Trust plc is an investment company with investment trust status and as such its ordinary shares are excluded from the FCA’s (Financial Conduct Authority’s) restrictions which apply to non-mainstream investment products. The Company conducts its affairs and intends to continue to do so for the foreseeable future so that the exclusion continues to apply. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Technology Trust plc, an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. In relation to each member state of the EEA (each a “Member State”) which has implemented the AIFMD, this document may only be distributed and shares may only be offered or placed in a Member State to the extent that (1) the Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD; or (2) this document may otherwise be lawfully distributed and the shares may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). As at the date of this document, the Fund has not been approved, notified or registered in accordance with the AIFMD for marketing to professional investors in any member state of the EEA. However, such approval may be sought or such notification or registration may be made in the future. Therefore this document is only transmitted to an investor in an EEA Member State at such investor’s own initiative. SUCH INFORMATION, INCLUDING RELEVANT RISK FACTORS, IS CONTAINED IN THE COMPANY’S OFFER DOCUMENT WHICH MUST BE READ BY ANY PROSPECTIVE INVESTOR.

Statements/Opinions/Views: All opinions and estimates constitute the best judgment of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. This material does not constitute legal or accounting advice; readers should contact their legal and accounting professionals for such information. All sources are Polar Capital unless otherwise stated.

Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein. 

Holdings:  Portfolio data is “as at” the date indicated and should not be relied upon as a complete or current listing of the holdings (or top holdings) of the Company. The holdings may represent only a small percentage of the aggregate portfolio holdings, are subject to change without notice, and may not represent current or future portfolio composition. Information on particular holdings may be withheld if it is in the Company’s best interest to do so. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document.  A list of all recommendations made within the immediately preceding 12 months is available upon request.  This document is not a recommendation to purchase or sell any particular security.  It is designed to provide updated information to professional investors to enable them to monitor the Company.

Benchmarks: The following benchmark index is used: Dow Jones World Technology Index (Total Return). This benchmark is generally considered to be representative of the Technology Equity universe. This benchmark is a broad-based index which is used for comparative/illustrative purposes only and has been selected as it is well known and is easily recognizable by investors. Please refer to www.djindexes.com for further information on this index. Comparisons to benchmarks have limitations as benchmarks volatility and other material characteristics that may differ from the Company. Security holdings, industry weightings and asset allocation made for the Company may differ significantly from the benchmark. Accordingly, investment results and volatility of the Company may differ from those of the benchmark. The indices noted in this document are unmanaged, are unavailable for direct investment, and are not subject to management fees, transaction costs or other types of expenses that the Company may incur. The performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. Information regarding indices is included merely to show general trends in the periods indicated, it is not intended to imply that the Company was similar to the indices in composition or risk.

Regulatory Status: Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment adviser with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD. FCA authorised and regulated Investment Managers are expected to write to investors in funds they manage with details of any side letters they have entered into. The FCA considers a side letter to be an arrangement known to the Investment Manager which can reasonably be expected to provide one investor with more materially favourable rights, than those afforded to other investors. These rights may, for example, include enhanced redemption rights, capacity commitments or the provision of portfolio transparency information which are not generally available. The Company and the Investment Manager are not aware of, or party to, any such arrangement whereby an investor has any preferential redemption rights. However, in exceptional circumstances, such as where an investor seeds a new fund or expresses a wish to invest in the Company over time, certain investors have been or may be provided with portfolio transparency information and/or capacity commitments which are not generally available. Investors who have any questions concerning side letters or related arrangements should contact the Polar Capital Desk at the Registrar on 0800 876 6889. The Company is prepared to instruct the custodian of the Company, upon request, to make available to investors portfolio custody position balance reports monthly in arrears.

Information Subject to Change: The information contained herein is subject to change, without notice, at the discretion of Polar Capital and Polar Capital does not undertake to revise or update this information in any way.

Forecasts: References to future returns are not promises or estimates of actual returns Polar Capital may achieve. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation. Forecasts are based upon subjective estimates and assumptions about circumstances and events that have not and may not take place. 

Performance/Investment Process/Risk: Performance is shown net of fees and expenses and includes the reinvestment of dividends and capital gain distributions. Factors affecting the Company’s performance may include changes in market conditions (including currency risk) and interest rates and in response to other economic, political, or financial developments. The Company’s investment policy allows for it to enter into derivatives contracts. Leverage may be generated through the use of such financial instruments and investors must be aware that the use of derivatives may expose the Company to greater risks, including, but not limited to, unanticipated market developments and risks of illiquidity, and is not suitable for all investors. Those in possession of this document must read the Company’s Investment Policy and Annual Report for further information on the use of derivatives.  Past performance is not a guide to or indicative of future results. Future returns are not guaranteed and a loss of principal may occur. Investments are not insured by the FDIC (or any other state or federal agency), or guaranteed by any bank, and may lose value. No investment process or strategy is free of risk and there is no guarantee that the investment process or strategy described herein will be profitable.

Allocations: The strategy allocation percentages set forth in this document are estimates and actual percentages may vary from time-to-time. The types of investments presented herein will not always have the same comparable risks and returns. Please see the private placement memorandum or prospectus for a description of the investment allocations as well as the risks associated therewith. Please note that the Company may elect to invest assets in different investment sectors from those depicted herein, which may entail additional and/or different risks. Performance of the Company is dependent on the Investment Manager’s ability to identify and access appropriate investments, and balance assets to maximize return to the Company while minimizing its risk. The actual investments in the Company may or may not be the same or in the same proportion as those shown herein. 

Country Specific disclaimers: The Company has not been and will not be registered under the U.S. Investment Company Act of 1940, as amended (the "Investment Company Act") and the holders of its shares will not be entitled to the benefits of the Investment Company Act. In addition, the offer and sale of the Securities have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"). No Securities may be offered or sold or otherwise transacted within the United States or to, or for the account or benefit of U.S. Persons (as defined in Regulation S of the Securities Act). In connection with the transaction referred to in this document the shares of the Company will be offered and sold only outside the United States to, and for the account or benefit of non U.S. Persons in "offshore- transactions" within the meaning of, and in reliance on the exemption from registration provided by Regulation S under the Securities Act. No money, securities or other consideration is being solicited and, if sent in response to the information contained herein, will not be accepted. Any failure to comply with the above restrictions may constitute a violation of such securities laws.

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Important Legal Information

Launched in 1996, Polar Capital Technology Trust plc (“PCT”) has grown to become a leading European investor with a multi-cycle track record. Managed by a team of dedicated technology specialists, the PCT aims to maximise long-term capital growth by investing in a diversified portfolio of technology companies from around the world. The managers’ core belief in rigorous fundamental analysis, and being unconstrained by not following a benchmark, enables PCT to deliver global equity market outperformance through exposure to a universe of over 3,000 companies.

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The information contained within this website is issued by Polar Capital Technology Trust plc (‘Polar Capital Technology Trust’) and is provided for reference purposes only. Nothing herein is intended to be construed as an offer, invitation or inducement to engage in investment activity, or investment advice or recommendation, in relation to the shares of Polar Capital Technology Trust and should not be relied upon as such by any person. Prospective investors should take advice from their financial or other professional advisers before making any investment decision.

The information contained within this website is intended to be used for reference purposes only by persons in the UK. Nothing on this website is directed at any person outside the UK where the publication or availability of such information is prohibited or restricted. In particular, the information contained within this website is not intended for, and must not be accessed by or distributed or disseminated to, directly or indirectly, in whole or in part, persons resident or physically present in the United States of America, including its territories and possessions, any state of the United States and the District of Columbia (together, the "United States"), Canada, Australia or Japan, and does not constitute an offer to sell or the solicitation of an offer to buy or acquire, any securities of Polar Capital Technology Trust in the United States, Canada, Australia or Japan. Polar Capital Technology Trust is an Alternative Investment Fund (“AIF”) under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Fund Manager (“AIFM”). In relation to each member state of the EEA (each a “Member State”) which has implemented the AIFMD, shares may only be offered or placed in a Member State to the extent that a fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD or as the shares may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). As at the date of this document, Polar Capital Technology Trust have been approved, notified or registered in accordance with the AIFMD for marketing to professional investors in any member state of the EEA.

The securities of Polar Capital Technology Trust referred to on this website (the "Securities") have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in or into the United States or to, or for the account or benefit of, US persons (as defined in Regulation S under the Securities Act) absent registration under the Securities Act or pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. Polar Capital Technology Trust will not be registered under the U.S. Investment Company Act of 1940, as amended, and investors in the Securities will not be entitled to the protections of that Act.

Polar Capital Technology Trust is managed by Polar Capital LLP; Polar Capital LLP is not responsible for the content or accuracy of any information contained within this website.

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General Risk Warning:

Please remember that past performance of an investment is not necessarily a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. The market value of the shares of Polar Capital Technology Trust may not reflect the underlying net asset value of the investments held by Polar Capital Technology Trust. Polar Capital Technology Trust is able to borrow to raise further funds for investment purposes if the fund manager and the board of directors consider that it may be commercially advantageous to do so. This is generally described as “gearing”. An investment trust which has made investments as a result of gearing may have a more volatile share price as a result; gearing can increase shareholder returns in rising markets but conversely can increase the extent to which the value of the funds attributable to shareholders decreases in falling markets. Tax assumptions may change if the law changes, and the value of tax relief (if any) will depend upon your individual circumstances. Investors should consult their own tax advisers in order to understand any applicable tax consequences.

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