Monthly Commentary

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June 2019

Market Review

The year-to-date rally in global equities resumed during June, with the MSCI All Country World gaining 6%, in sterling terms. The S&P 500 reached new highs towards the end of the month – its best June since 1955 and best first half of the year since 1997 – as the market shrugged off concerns about global growth, buoyed by the prospect of monetary easing from global central banks and improved US/China relations at the G20 summit.

The US remains a relative bright spot in the global economy, despite softening data during the month. Non-farm payrolls were only up 75,000 in May (180,000 expected) while average hourly earnings increased 0.2% (0.3% expected), however the unemployment rate remains at 3.6%, close to 50-year lows. Furthermore, the weaker than expected Employment Situation Report was taken positively by the market because, in conjunction with muted inflation pressure (the May core PCE price index was up a moderate 1.6% y/y), it gives the Fed more room to manoeuvre. The Federal Open Market Committee (FOMC) voted 9-1 to keep the federal funds rate unchanged at its June meeting. The policy statement had a dovish tone, inferring that the Fed will no longer be “patient” regarding future adjustments to the rate, reassuring investors that it “will act as appropriate to sustain the economic expansion” amid increased uncertainties to the outlook.

Ten-year US treasury yields continued to decline, falling below 2% for the first time since 2016, while market-implied rates priced in 100% chance of a July rate cut. This may be a bit presumptuous given that the lone (dovish) dissenter, St Louis Fed President James Bullard, is only calling for a 25bps cut. The fact that bond yields are falling, the US economy is softening, yet equities are rising suggests investors believe the Fed can avoid a more significant slowdown.

Geopolitical tensions remain heightened. Brent Crude futures surged during the month (aided by the weaker dollar) amid escalating tensions in the Middle East after the US blamed Iran for attacks on two oil tankers in the Gulf of Oman and for shooting down a US military drone over the Strait of Hormuz. President Trump said the US military was “cocked and loaded” for a retaliatory strike but called it off with 10 minutes to spare, stating the loss of life would not have been proportional to the downing of an unmanned drone. A more moderate approach from Trump was evident in trade negotiations which progressed on several fronts during the month. The market had been caught off guard in May when the US announced tariffs on Mexican imports; enforcement was averted when a deal was reached shortly afterwards with Mexico committing to reduce the flow of illegal migration through its borders. Relations between the US and China also appear to have thawed somewhat after a meeting between Trump and President Xi at the G20 summit resulted in a temporary truce. There will be a resumption of negotiations with the US agreeing to hold off on any additional tariffs and remove restrictions on exports to Huawei that do not impact national security while China agreed to purchase agricultural products from the US.

Technology Review

The technology sector rebounded strongly in June, outperforming the broader market during the month, the Dow Jones World Technology Index gaining 6.8% in sterling terms. The trade-sensitive semiconductor sector witnessed the strongest rebound as the SOX Semiconductor Index gained 12.3%, with the majority of this performance notably delivered in the run-up to the G20 summit.

The near constant stream of M&A transactions continued in June with the analytics space at the epicentre as two noteworthy transactions were announced within a week of each other. The first came from Alphabet as they announced their intensions to buy private company Looker for $2.6bn (estimated 15-20x FY20 revenues). This was followed a matter of days later by Salesforce.com announcing it had entered into a definitive agreement to acquire Tableau in an all-stock deal valued at $15.7bn (9.6x FY20 revenues) and at a c40% premium to the previous day’s close. This will become the second piece of large M&A Salesforce.com has undertaken in the past 18 months. The Trust not only benefited through its holding in Tableau but also the subsequent appreciation of all data analytics companies, including our holding in Alteryx.  

In other M&A, the speculation from April proved true as Dassault Systemes announced it was acquiring Medidata Solutions in an all-cash transaction valued at $5.8bn (6.8x FY20 revenues). At $94.25 this was a 3% discount to the last closing price but a 17% premium to where Medidata Solutions was trading before the deal speculation surfaced. Semiconductor consolidation activity continued as Infineon agreed to acquire Cypress Semiconductor for €9bn (c50% premium) to enhance its industrial microcontrollers offerings and further increase its automotive exposure. This acquisition has changed the investment case for the stock so we significantly reduced our position size as we expect a prolonged period of valuation-multiple derating.

Arguably the most noteworthy piece of technology news from June was the announcement that Facebook is making its first serious foray into finance and payments. The Facebook-led Libra Association released its white paper during the month which declared plans for a new cryptocurrency named Libra. It will be built on blockchain and backed by a reserve of government-backed currencies, deposits and securities. The white paper contained admirable intentions to better serve and empower the under-banked population around the world. We still know relatively little about how Libra will operate, and there are significant regulatory and technological obstacles to overcome. On the surface, Libra promisingly seems to address some of the issues that have held back widespread cryptocurrency payment adoption thus far: high volatility, slow transaction throughput, and questionable governance.

The news had a positive impact on Facebook’s share price, with an even bigger, perhaps linked, move in Bitcoin that gained 44% over June. Regulators and politicians globally wasted little time in making demands for the project to be halted or convening hearings on the topic. The road ahead with lawmakers is clearly going to be highly challenging, but if successful it could be a highly disruptive proposition.

Off-season reporting generally delivered robust results during June. In the software sector the Salesforce.com earnings results were well received as revenue, operating margin and billings beat expectations. Strong bookings from recent acquisition MuleSoft was cited as a contributor as this business continues to exceed management’s expectations. Billings growth of 25% y/y relieved fears of a slowdown and keeps Salesforce.com on track to maintain its 20% y/y growth profile.

A solid earnings release was delivered by Adobe Systems that included a positive surprise above expectations on Digital Media ARR and strong performance across all business units. Guidance was modestly below expectations but likely conservative as they lap the anniversary of both the Magento and Marketo acquisitions.  Our zero/underweight position in Oracle was a detractor as the company delivered consensus-beating results on revenues, operating margin and EPS. A strong rebound in licence revenues was driven by strong sales of database and database options. Aggressive share repurchases assisted the bottom-line EPS growth, but the debate remains on how durable Oracle’s growth rate will be as IT budgets continue to be shifted towards the cloud. 

Outlook

Trade war headlines continue to dominate the headlines and investors’ risk appetite alike. The latest turn is the trade war truce made between Presidents Trump and Xi at the G20 which has paved the way for the resumption of trade talks. However, uncertainty is continuing to put a strain on the global economy, evidenced by continued softness in Chinese data (leading economic indicators remaining subdued) while US ‘fast’ economic data remains mixed. Fortunately, the weaker economic backdrop has been met with looser financial conditions as a result of the Fed’s signalling of interest rate cuts and the ECB’s potential resumption of QE. Muted inflation (and perceived risk to the downside) continues to underpin the alignment of policymaker and investor interests, helping risk assets and supporting our view that a soft landing remains the base case for this business cycle.

Trade-related uncertainty has resulted in sharply lower bond yields leaving a record $12.5trn of bonds trading with negative yields, surpassing the last peak in 2016. This has clearly been supportive for risk assets, with equities trading moderately above recent history, but remaining attractive relative to both cash and bonds. Likewise, valuations of growth stocks appear elevated relative to history but against a backdrop of sub-trend global growth and trade war machinations that continue to weigh on earnings estimates, it is little wonder that companies able to deliver top-line growth should command higher than average premia. As both the source of and saviour from disruption, the technology sector continues to boast more than its fair share of the fastest growers while a select group of software, internet and payment companies with limited China/EM exposure have continued to deliver remarkable (30%+) growth leading to a Nifty Fifty-type market. While the narrative tends to focus on the divergence in valuations between growth and value stocks, it spends much less time on the divergence in fundamentals that underpin this generational shift.  

However, there are (always) pockets of valuation exuberance which we do our best to avoid, epitomized by a handful of recent high-quality software IPOs, many of which capture the zeitgeist of this cycle. It is never easy to correctly value ‘winners’ – something we have tried to hardwire into our investment approach – but as a rule we are unwilling to invest in ‘winners’ where the market appears to have already priced in medium-term bullish outcomes. Fortunately, while valuations have expanded, there are still plenty of reasonably priced stocks, including many of our preferred holdings where forecast growth is strong enough to withstand some multiple compression should it occur. While we remain alive to the risk of a near-term valuation setback, strong fundamentals give us confidence in our portfolio that should deliver growth in excess of the benchmark while avoiding the loftiest individual valuations.  

The combination of trade uncertainty, a narrower market, strong year-to-date performance and the upcoming pre-announcement season (where news flow is typically negatively skewed) has left us with a little more liquidity than usual. However, this remains tactical as we are hopeful that a trade resolution will be reached (both sides remain highly motivated to avoid inducing a recession) while muted inflation should allow central banks to absorb downside risks to growth in the meantime.

Importantly, next-generation technology fundamentals remain in rude health with the digital transformation imperative continuing to trump macroeconomic buffeting for now. A large number of recent company meetings have buttressed this view, while premiums being paid in recent technology M&A are supporting next-generation valuations.

We continue to focus on a number of secular themes where growth should be resilient against anything other than the most challenging economic backdrop and remain excited about an accelerating pace of technology adoption and broadening disruption, fuelled by artificial intelligence, cloud computing and demographic change. As a result, we continue to invest in our own investment capability and are delighted to have added two new members to the team in June – Ali Unwin and Nick Williams. This takes us to nine dedicated technology investment professionals and reinforces our position as the largest team in Europe which should enable us to broaden our research coverage at a time when technology is rapidly expanding its addressable market. 

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.

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.

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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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