At the Annual General Meeting in 2012 shareholder approval was obtained for a simplified investment policy. This did not change the investment objective but provides a clear and appropriate set of up to date investment restrictions in line with the Financial Conduct Authority and HM Revenue and Customs current requirements.
The portfolio was managed under and in accordance with the old policy and restrictions in the year to 30 April 2012 and up to 4 September 2012 when the change was approved by shareholders.
Asset allocation
Technology may be defined as the application of scientific knowledge for practical purposes and technology companies are defined accordingly. While this offers a very broad and dynamic investing universe and covers many different companies, the portfolio of the Company (the “Portfolio”) is focused on companies which use technology or which develop and supply technological solutions as a core part of their business models. This includes areas as diverse as information, media, communications, environmental, healthcare, finance, e-commerce and renewable energy, as well as the more obvious applications such as computing and associated industries.
The Board has agreed a set of parameters which seek to ensure that investment risk is spread and diversified.
The Board believes that this provides the necessary flexibility for the Investment Manager to pursue the investment objective, given the dynamic and rapid changes in the field of technology, while maintaining a spread of investments.
The Company uses the Dow Jones Global Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes) as the Benchmark against which Net Asset Value (NAV) performance is measured for the purpose of assessing performance fees. From 1 May 2013 the benchmark was calculated using a net basis which adjusts the Benchmark income element to reflect withholding taxes which would be suffered by a UK based investor.
However, the Benchmark is neither a target nor an ideal investment strategy. The purpose of the Benchmark is to set a reasonable return for shareholders of PCT above which the Investment Manager is entitled to a share of the extra performance it has delivered.
Risk diversification
PCT will at all times invest and manage its assets in a manner that is consistent with spreading investment risk and invests in a Portfolio comprised primarily of international quoted equities which is diversified across both regions and sectors. PCT will satisfy the following investment restrictions:
- PCT’s interest in any one company will not exceed 10 per cent. of the gross assets of PCT from time to time, save where the Benchmark weighting of any investee company in PCT’s portfolio exceeds this level, in which case PCT will be permitted to increase its exposure to such investee company up to the Benchmark ‘neutral’ weighting of that company or, if lower, 20 per cent. of PCT’s gross assets.
- PCT will have a maximum exposure to companies listed on emerging markets (as defined by the MSCI Emerging Markets Index) of 25 per cent. of its gross assets from time to time.
- PCT may invest in unquoted companies from time to time, subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 10 per cent. of the gross assets of PCT (measured at the time of acquisition of the relevant investment and whenever PCT increases the relevant holding).
In addition to the restrictions set out above, PCT is subject to Chapter 15 of the UK Listing Authority’s Listing Rules which apply to closed-ended investment companies with a premium listing on the Official List of the London Stock Exchange. In order to comply with the current Listing Rules, PCT will not invest more than 10 per cent. of its total assets at the time of acquisition in other listed closed-ended investment funds, whether managed by the Investment Manager or not. This restriction does not apply to investments in closed-ended investment funds which themselves have published investment policies to invest no more than 15 per cent. of their total assets in other listed closed-ended investment funds. However, PCT will not in any case invest more than 15 per cent. of its total assets in other closed-ended investment funds. PCT must not conduct any trading activity which is significant in the context of its group as a whole.
Borrowing, Cash and Derivatives
The Company may borrow money to invest in the Portfolio over both the long and short-term. Any commitment to borrow funds is agreed by the Board and the AIFM.
The Company’s Articles of Association permit borrowings up to the amount of its paid up share capital plus capital and revenue reserves but any net borrowings in excess of 20% of the Company’s net assets at the time of drawdown will only be made with the approval of the Board.
The Investment Manager may also use from time to time derivative instruments as approved by the Board such as financial futures, options, contracts-for-difference and currency hedges. These are used for the purpose of efficient portfolio management. Any such use of derivatives will be made in accordance with PCT’s policies on spreading investment risk as set out in this investment policy and any leverage resulting from the use of such derivatives will be subject to the restrictions on borrowings set out above.
Changes to investment policy
Any material change to the investment policy will require the approval of the Shareholders by way of an ordinary resolution at a general meeting. PCT will promptly issue an announcement to inform Shareholders and the public of any change of its investment policy.
The Board monitors the portfolio’s exposure to different geographical markets, sub-sectors within technology and the spread of investments across different market capitalisations. Cyclical changes in markets and new technologies will bring certain sub-sectors or companies of a particular size or market capitalisation into or out of favour.
Market parameters
Notwithstanding the ability to invest up to 100% of the portfolio in any one market, with current and foreseeable investment conditions the Portfolio will be invested in accordance with the objective across worldwide markets within the following geographical and market parameters:
- North America up to 85% of the Portfolio
- Europe up to 40% of the Portfolio
- Japan and Asia up to 55% of the Portfolio
- Rest of the world up to 10% of the Portfolio
The Board has set specific upper exposure limits for certain countries where they believe there may be an elevated risk.
Cash
PCT may hold cash or cash equivalents if the Investment Manager feels that these will, at a particular time or over a period, enhance the performance of the Portfolio. The Board has agreed that management of cash may be achieved through the purchase of appropriate government bonds, money market funds or bank deposits depending on the Investment Manager’s view of the investment opportunities and the benefits of diversification.
Gearing
The Company has drawn down a three year fixed rate term loan of JPY 15bn from The Bank of Nova Scotia. The JPY loan has been fixed at an all-in rate of 2.106% pa. This loan is due to be repaid in September 2027 at which time the loan facility will be reviewed and may be replaced. The Company has repaid the two, two-year loan facilities with ING Bank N.V of USD 36m and JPY 3.8bn on 30 September 2024.
Fund Manager Commentary As at 31 October 2024
Key points
Market review
Global equity markets were soft in October, although this was more than offset by US dollar strength (trade-weighted dollar +3.2%) leaving the MSCI All Country World Net Total Return Index +2% in sterling terms for the month.
Equity markets largely shrugged off rising US treasury yields, driven by the prospect of a strengthening economy following the 50bps rate cut by the Federal Reserve (Fed) in September and higher than expected employment and inflation data in October. Treasury yields were also impacted by rising odds of a Donald Trump US presidential election victory, with proposed policies expected to further widen the budget deficit. The US labour market reaccelerated in September, adding 254,000 jobs – the strongest growth in six months and higher than the average monthly gain of 203,000 over the previous 12 months.
While inflation has fallen meaningfully from peak levels, wage growth during the month remained high, with average hourly earnings increasing +0.4% month on month (m/m) in September, above forecasts of +0.3%. Likewise, the US Consumer Price Index (CPI) increased +0.2% m/m in September, above forecasts of +0.1%. Although the annualised inflation rate decelerated for a sixth consecutive month, to +2.4% year on year (y/y), core CPI (which excludes volatile items such as food and energy) unexpectedly edged up to +3.3% from the +3.2% recorded during the previous two months.
The minutes from the September Federal Open Market Committee (FOMC) meeting revealed uncertainty ahead of its decision to cut the target range for Fed Funds[1] by 50 basis points (bps)[2]. While this was the first reduction in borrowing costs since March 2020, the Fed noted that the 50bps reduction should not be interpreted as evidence of a less favourable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path.
Since then, there have been several events that might influence the future path of US interest rates. First, very weak October employment numbers (just +12,000 jobs with a material downward revision to September) although these were likely distorted by hurricanes and strikes in the US. While suggesting a weaker labour market, unemployment remained at 4.1% while consumer confidence came in at 108.7 (the largest m/m increase since 2021).
More importantly, Donald Trump achieved a resounding victory in the US presidential election, while the Republican Party looks likely to have achieved a so-called ‘clean sweep’ (presidency as well as controlling both the Senate and House of Representatives). This was received well by equity markets and the US dollar, delighted by a decisive outcome and a pro-business/anti-regulatory policy agenda which should be supportive for corporate investment and capital deployment.
Lower US tax rates and a potentially stronger dollar may also boost inbound investment. On the negative side, higher bond yields reflect the upside risk to budget deficits, inflation and potential tariffs, especially on Chinese imports. This may also have implications for monetary policy (fewer interest rate cuts than previously anticipated) but net, and against a stronger economic backdrop, this should be highly supportive of equities.
Sector review
The technology sector marginally outperformed the broader market in October; the Dow Jones Global Technology Net Total Return Index (W1TECN) returned +3.5% in sterling terms.
Large-cap technology stocks outperformed their small and mid-cap peers, the Russell 1000 Technology Index (large cap) and Russell 2000 Technology Index (small cap) returning +4% and +2.7% respectively. The Philadelphia Semiconductor Index (SOX) declined -0.3%, while the NASDAQ Internet Index and Bloomberg Americas Software Index returned +4.3% and +2.2% respectively.
Against an uncertain backdrop ahead of the US presidential election, AI (artificial intelligence) strength continued. In the semiconductor sector, Taiwan Semiconductor Manufacturing Company (TSMC) posted a very strong ‘beat and raise[3]’ quarter with strength in both gross and operating margins. TSMC now expects c30% y/y growth in 2024 and management noted Chip-on-wafer-on-substrate (CoWoS[4]) demand far exceeds its ability to supply, even after doubling capacity this year. CoWoS supply is expected to double again next year, although this will “still not be enough”.
Leading High Bandwidth Memory (HBM) manufacturer SK Hynix also posted a very strong quarter, growing revenue 94% y/y and posting a record operating profit. Results from Advanced Micro Devices (AMD) were in line with expectations and the company increased its expected sales of AI graphics processing units (GPU) for 2024 to >$5bn, up from >$4.5bn last quarter and >$2bn at the beginning of the year. However, this was offset by a sluggish recovery in its non-AI businesses which weighed on the stock. Semiconductor chip maker Monolithic Power Systems delivered a beat and raise quarter due to broad-based strength; however the shares were weak after its AI power segment was flattish quarter on quarter (q/q), despite growing 86% y/y.
In semiconductor capital equipment, ASML Holding delivered a Q3 order number well below consensus expectations and reduced its 2025 revenue guide. Both Intel* and Samsung Electronics* are struggling with their foundry businesses and it seems have now begun to reduce equipment spending.
In contrast, ASM International posted a solid quarter. The company sees revenues growing >20% in 2025 and 2026 as spending on the most advanced nodes and transistor technologies appears robust. Similarly, KLA beat and guided above analyst expectations, citing leading-edge technologies driving strong process control demand. In Japan, Advantest beat strongly with revenues +37% y/y and raised guidance above expectations on AI/GPU tester strength. Longer GPU test times, NVIDIA’s Blackwell chip as well as ASICs and AI smartphones should continue to support demand next year. Meanwhile, Disco had a slight Q2 shipments miss but strong sales, operating profit and margins. The company expects continued growth in HBM shipments while advanced packaging has emerged as an additional driver with CoWoS tool demand accelerating in the second half.
In hardware, Amphenol saw strong growth and orders driven by IT and data communications (datacom). This was underpinned by continued acceleration in demand for AI-exposed products and robust growth in data centres. Management expects mid-single-digit sequential growth in Q4 taking IT and datacom sales up >50% in 2024. Despite weakness elsewhere, automotive sales proved robust, increasing 4% q/q.
Apple results were largely in line with a modest iPhone upside offsetting a 2% miss in its services business. Next quarter revenue guidance of low-to-mid single digit was slightly below consensus expectations of c7%. The recently rolled out Apple Intelligence saw an install rate over the first three days twice that of iOS 17.1, but it is unclear if this will be a catalyst for an accelerated iPhone upgrade cycle.
In the internet sector, Meta Platforms’ revenues grew 20% y/y and the company guided expectations for Q4 revenues towards the high end of the range. Margins were healthy, c3% above expectations, while the company lowered its operating expenditure guide. Improvements to the company’s AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone. Meta Platforms now expects capex spending of $38-40bn in 2024 to support its AI infrastructure buildout, with investors said to be anticipating close to $60bn in 2025.
Amazon beat expectations for operating profit driven by regionalisation efforts, lower cost to serve as well as efficiency gains. Amazon Web Services’ (AWS) growth was lower than expected at +19% y/y, but management noted that generative AI (GenAI) is now a multi-billion run-rate business growing triple digits – three times as fast as AWS achieved at the same stage of development during the cloud era. Alphabet results were solid, in line with expectations across Search and YouTube, while GCP (Google Cloud Platform) growth impressed at +35% y/y. The stock was further supported by comments from the new CFO, who articulated plans to drive further efficiencies and fund more AI investment (Alphabet’s capex will increase again in 2025).
Netflix delivered another reassuring set of quarterly results, adding five million net new subscribers and growing revenues 15% y/y. Margins were strong and management see significant operating leverage in the business. Netflix still only captures less than 10% of viewing time, so management believes there is still a significant addressable market ahead.
In the software sector, Microsoft beat consensus expectations for revenue by 2% and earnings per share (EPS) by 6%, but the stock was weak after a lacklustre guide for its Azure cloud business and the higher than anticipated ‘Other Income’ losses from its OpenAI investment. Microsoft expects its AI business to reach >$10bn in annual revenue run rate next quarter, the fastest business in its history to reach this milestone. ServiceNow results were robust with Q3 bookings growth ahead of expectations. The company also gave further disclosures around AI product contribution with Annual Contract Value at $90-100m, up from c$30m in the previous quarter.
In automotive, Tesla posted a stronger than expected quarter with gross margins ex-credits at 17.1%, well above consensus expectations of 14.9%. The company expects to achieve slight growth in vehicle deliveries during 2024 despite challenging macroeconomic conditions, while energy storage deployments are set to more than double y/y. Most importantly, Tesla said plans for new vehicles remain on track, including starting production of a more affordable model during 1H25.
[1] The overnight lending rate among US banks
[2] A common unit of measure for interest rates and other percentages in finance. One basis point equals 0.01%
[3] Beating expectations and raising its own outlook
[4] Chip on Wafer on Substrate: an advanced way of combining and connecting different semiconductor chips to make processors much faster and more efficient
[5] An out of the money put option on the NASDAQ 100 Index (NDX) allows a holder the right to sell the Index at a specified (‘strike’) price before or on a certain expiration date
[6] A measure of a stock's volatility compared to the market/ an index; the market/index has a beta of 1 with each stock rated at +/-1 in comparison
[7] Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta Platforms and Tesla
Ben Rogoff
Ben joined Polar Capital in May 2003. He is lead manager of Polar Capital Technology Trust plc and is a Fund Manager of the Polar Capital Global Technology Fund and Polar Capital Artificial Intelligence Fund.
Alastair Unwin
Alastair joined Polar Capital in June 2019 as a Fund Manager. Prior to joining Polar Capital, Alastair co-managed the Arbrook American Equities Fund. Between 2014 and 2018 he launched and then managed the Neptune Global Technology Fund and managed the Neptune US Opportunities Fund. Prior to Neptune, Alastair was a technology analyst at Herald Investment Management.
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