Monthly Commentary

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July 2019

Market Review

Although July witnessed more modest gains during the month, pronounced sterling weakness following the appointment of Boris Johnson as UK Prime Minister saw the MSCI All Country World Index gaining 4.1% in sterling terms. Macroeconomic data continued to deteriorate in July. The European Manufacturing PMI fell to 46.4 (a six-year low), down from 47.6 in June, remaining firmly in the contraction zone. In the US, the ISM manufacturing index declined to 51.2, a near three-year low, but crucially remains in expansion territory. In China, the Caixin Manufacturing Index stabilised in June but remains in contraction territory.    

Over the recent months while trade tensions remained unresolved and economic data points deteriorated, markets had begun pricing in and demanding policy easing by the world’s central banks. At their respective meetings in July the major central banks responded to these demands. Unfortunately, recent market action suggests that both the European Central Bank and Federal Reserve failed to meet heightened expectations. The ECB indicated a significant degree of monetary stimulus is both needed and forthcoming, but the lack of immediate action proved disappointing to markets. The Fed went beyond signalling and delivered its first rate cut since 2008 as it lowered rates by 25bps. Chairman Jerome Powell characterised the move as a “mid-cycle adjustment” which tempered market expectations for a series of further cuts.

The growing market optimism on US/China trade negotiations was dealt a blow in early August as President Trump announced the decision to impose a 10% tariff on the remaining $300bn tranche of Chinese imports so far exempt from tariffs. After seemingly agreeing a truce at the G20 summit in June, and the delaying of these tariffs, the sudden reversal was a surprise to markets.

Technology Review

The technology sector continued to outperform the broader market during July, the Dow Jones Global Technology Index gaining 7.7% in sterling terms. Second quarter technology results were mixed overall, as were the stock price reactions. In the software sector, Microsoft reported better than expected top and bottom-line results, with Microsoft Azure growing 68% y/y constant currency (cc), while the on-premise server and tools segment was up 7% y/y cc, despite warnings from other infrastructure companies. Microsoft’s muted share price move post earnings suggested that much of the good news had already been priced in. Microsoft and ServiceNow expanded their partnership, announcing that ServiceNow is planning to make its full software-as-a-service platform available on Microsoft Azure to better serve government customers. ServiceNow later disappointed the market with its 3Q19 billings guidance, but management reassured the market that the business is simply becoming increasingly Q4 weighted, given the higher mix of large deals. At the end of the month Zendesk reported 37% y/y revenue growth and 340bps of operating margin expansion y/y, but the stock was down on the day as the magnitude of the beat was less than prior quarters.

In the video game subsegment, UBISOFT Entertainment reported revenues above consensus expectations, driven by Assassins Creed and Rainbow Six Siege. Facebook signed an exclusive deal with UBISOFT Entertainment for Oculus VR versions of Assassins Creed and Splinter Cell and announced it was potentially interested in acquiring game studios, adding to similar assertions from Sony earlier in the month. We expect to see a race for content as new platform providers try to penetrate the market with streaming services. Electronic Arts (EA) also reported encouraging results, with a reacceleration of Live Services, driven by FIFA Ultimate Team, Apex Legends and The Sims 4.

Within payments, Paypal Holdings reported revenues slightly below consensus as strong growth in core total payment volume and Venmo was offset by take-rate pressure and eBay softness, and management lowered full-year revenue guidance due to delayed price increases and product integrations. Visa results were modestly better than expected, benefiting from an uptick in cross-border transactions. Mastercard beat top and bottom-line estimates, while management noted “consumer sentiment and spending remain relatively strong with some moderation versus 2018”. We believe contactless payment adoption and e-commerce growth will continue to drive cash-to-card conversion, underpinning strong transaction growth for the payment networks.

In the internet sector, Alphabet exceeded expectations and advanced by more than 10% following better than expected earnings. Sentiment was low coming into the earnings report, but websites growth reaccelerated to 21% y/y versus expectations for a deceleration given the miss last quarter. The company also began giving disclosure on Google Cloud, which is at an $8bn annual revenue run rate, while new ad formats are an upcoming catalyst in Q4 2020. Facebook ad revenue accelerated to 32% y/y in the quarter, driven by continued Facebook app growth along with Instagram adoption. Investors largely brushed off guidance for revenue to decelerate sequentially throughout the remainder of 2019 as typical conservatism. Amazon took another run at the $1trn market capitalisation level in the lead up to Amazon Prime Day, which was over two days for the first time.  The company surpassed its Black Friday and Cyber Monday sales combined as Amazon Prime members purchased north of 175 million items. However, the stock pulled back after AWS missed its growth ‘bogey’ and the company missed profit expectations. Regulatory risk remains the greatest threat to the sector. In Europe, France passed a 3% digital tax on sales for large internet companies. Amazon faces a full-blown EU antitrust probe as Competition Chief Margrethe Vestager prepares a summer finale to her five-year crackdown on big tech, while Facebook faced continued regulatory opposition to Libra and executives from Facebook, Alphabet, Amazon and Apple faced regulatory hearings on Capitol Hill.

Semiconductors outperformed during the month, buoyed by better than expected earnings and optimistic commentary from several industry bellwethers. Taiwan Semiconductor noted that, while business continues to be impacted by the global slowdown, “we have also passed the bottom of the cycle”, guiding 3Q up 18% q/q due to the return of Huawei orders and renewed demand from the broader smartphone market, as well as from 5G and high performance computing in 2H19. Texas instruments also posted better than expected results, with management commentary implying a cyclical upturn in 4Q19 or 1Q20. ASML rallied despite weak Q3 guidance, as management maintained their full year outlook (implying a stronger Q4) as lower memory spend is being offset by stronger logic spend. The sector also benefited from the resumption of trade talks between the US and China and Huawei-exposed names performed well after President Trump met with Huawei suppliers and reportedly agreed to “timely licensing decisions from the Department of Commerce, but only for products that do not jeopardise national security”.

Outlook

The trade relationship between the US and China continues to dominate the headlines and investor risk appetite. The latest setback in negotiations makes a near-term deal look unlikely. The hope is that another truce is negotiated during August and a further delay of tariffs due in September. 

Uncertainty continues to place a strain on the global economy. Economic data on balance continues to soften but is being met with looser financial conditions. With the Fed acting and the ECB opening the door for further action, monetary policy remains aligned with investor interests and as such a soft landing still appears the most likely outcome for this business cycle. However, a consequence of this has been falling risk-free rates such that about one third of the global government bond market and one quarter of the global aggregate bond market now sport negative yields. Even the Swiss ultra-long 2064 government bond now has a negative yield, taking the entire universe of Swiss government debt into negative territory.

This uncertainty largely explains our above average cash level, augmented by a modest amount of NASDAQ put options which are designed to ameliorate our higher than market beta. This remains tactical (rather than structural) and we remain upbeat on likely market progress. This relatively sanguine view reflects technology fundamentals that, beyond those areas directly impacted by trade war uncertainty, remain robust. This is particularly true for next-generation software stocks that continue to benefit from digital transformations and limited exposure to trade war uncertainty.

While valuations of growth stocks appear elevated relative to history, we remain of the view that companies able to deliver 30%+ growth at a time of trade war and macroeconomic uncertainty deserve to trade at higher than average premia. As previously discussed, this valuation divergence is a manifestation of sustained outperformance of growth stocks and, in our opinion, reflects a fundamental bifurcation of fortunes driven by an accelerated pace of technology change and the need for companies to digitally transform themselves in order to take advantage of new technologies such as AI. Without doing this they will struggle to remain relevant in a cloud/smartphone-centric world. However, we remain alive to the risk associated with investing in perceived ‘winners’ where investors may have already priced in excessively bullish outcomes. Instead we prefer to continue investing in more reasonably priced stocks where forecast growth is strong enough to withstand some multiple compression should it occur.

At present, the market is experiencing a valuation setback that we have previously highlighted as a risk; we are hopeful this will prove short-lived and ultimately another good buying opportunity. As ever we will continue to look for bottom-up opportunities that present themselves in a top-down market selloff, particularly within the software subsector where fundamentals remain strongest and most insulated from trade-related disruption. We continue to focus on our favoured secular themes where growth should prove resilient against anything other than the most challenging economic backdrop and remain excited about an accelerating pace of technology adoption, fuelled by demographic change, cloud computing and AI.

Ben Rogoff

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.

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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.

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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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