Allianz Technology Trust has announced its interim results for the six months ended 31 May 2016. During the period the Trust’s NAV fell by 1.5% to 665.1p and its share price fell by 5.4% to 598.0p, both of which underperformed the trust’s benchmark, the Dow Jones World Technology Index, which increased by 2.7%. The discount between the share price and the NAV widened to 10.1% at the period end compared with 6.4% at 30 November 2015. The Board says that it will consider buying back shares whenever the discount is over 7% but will only do so after considering all other factors. However, towards the end of the reporting period the Trust made one purchase of 22,666 shares and since the period end, a further 85,333 shares have also been repurchased.
In terms of performance attribution, the managers say that heightened risk aversion has impacted stocks within the technology sector in different ways. In their view, the large, value tech stocks that pay dividends are perceived as “safer” stocks, and investors have migrated to these stocks as fear and uncertainty have been elevated during the period. In contrast they say that the smaller, high growth tech stocks are considered “high risk” stocks, and these stocks have been sold heavily so far this year.
Reflecting this, the managers say that the overweight positons in high-growth, high-valuation stocks have had a negative impact on the relative performance. Stocks in the cyber security, software-as-a-service, data analytics, and solar industries have declined sharply because investors have rotated away from these stocks toward stocks with “safer” characteristics. However, the managers believe that investors have been resetting expectations for an extended period of low global growth, and they believe that this reset period should moderate during the second half of the year. The managers say that this process is reducing expectations and valuations to reasonable levels, particularly for those companies that are able to continue growing rapidly. As a result, the managers are expecting that stronger high-growth companies should be very attractive investment opportunities for the next several years.
In terms of individual stocks, the trust’s holding in Amazon.com was among the top contributors to the portfolio with a relative return of 0.9%. The managers say that Amazon is executing well in two businesses – ecommerce and cloud computing. They say that, as the former becomes more profitable and the latter grows at a high rate, over the next decade they think Amazon could become the most valuable company in the world. The trust’s position in NVIDIA was also among the top performers for the period with a relative return of 0.5%. The managers say that its shares rallied after the company reported strong earnings results and raised guidance for the year. In their view, the company is undergoing a transition from a PC component vendor to a supplier into key long-term secular trends: gaming cards, technology important to artificial intelligence, cloud analytics, virtual reality and autonomous driving and datacenter (cloud/deep learning). They say that the shift towards a higher margin business mix should drive attractive long-term revenue and earnings growth, and they believe management is effectively executing this transition. The trust’s underweight position in Apple was also a significant contributor to relatrive performance, as where overweight positions in Computer Sciences and Paycom Software which together contributed a relative return of 2.4%. The managers say that they are underweight Apple, relative to the benchmark, as they are not excited about the next release of the iPhone which seems only modestly incremental to the existing model. However, they say that computer Sciences has been a leader in transitioning its service business to the cloud by buying leading implementation partners of Software as a Service and Cloud Computing. The managers say that these will now merge with the services business of Hewlett Packard to form one of the largest services businesses in the world and the managers think that cost cutting and rationalisation can result in earnings doubling over the next few years.
In terms of performance detractors, the trust’s position in Tableau Software detracted from relative performance by 0.6%. The managers say that the company’s earnings results fell short of expectations, and it reduced forward revenue guidance for the first time as a public company as they have out-grown their sales infrastructure. The managers say that the trust’s position has been reduced to minimise the impact of the near-term headwinds; however, they believe the company still offers attractive long-term growth potential and believe the stock will recover. Palo Alto Networks was also among the top detractors from relative performance losing the portfolio 0.5%. The managers say that the shares declined after the company reported a significant deceleration in product revenue and provided in-line guidance for fiscal Q4. Other active detractors included overweight holdings in Security companies, Imperva (the trust’s position has since been exited) and Sophos, as well as Fitbit (also exited) which together resulted in a relative return of -2.25%. The managers say that Imperva continued to disappoint and has been impacted by the web services companies like Amazon.com as customers move applications to the cloud providers and buy security services from them. Sophos is the trust’s largest holding in the UK at 2.0% of the portfolio. The managers say that Sophos (a security company) has been transitioning its business model and products, and they think that the transition is ending and growth should accelerate in the future. The managers say that they had hoped that Fitbit would be able to offset the cyclical impact of their consumer products with penetration of the corporate health area, but the traction there has been slow. They say that, since it is primarily a consumer electronics product, they believe it has peaked in momentum and decided to exit the stock completely.
In terms of outlook, the managers say that they think the economy will remain slow until there is some fiscal stimulus, which they think is unlikely until 2017 at the earliest, and so they’re expecting a continued period of slow growth and low interest rates. They expect that, as investors become reconciled to this slow period, many sectors of technology will do well, and that companies that are continuing to grow at double digit rates will be valued at higher multiples again after the recent major decline in those valuations. The managers believe we are in a period of fear associated with economic weakness which has caused pressure on the high growth companies but they think this will pass in the next few months, and that the sector will move into another period of good performance.
Allianz Technology underperforms benchmark as investors seek safer stocks : ATT