Allianz Technology Trust reports that it underperformed its benchmark over the year ended 30 November 2016. The NAV increased in the period by 23.8%, finishing at 835.9p as at 30 November 2016 compared with 675.1p as at 30 November 2015. The benchmark index, the Dow Jones World Technology Index (sterling adjusted, total return), increased by 31.7% over the same period creating an underperformance for the portfolio of 7.9% in NAV terms. The majority of the reported increase in the both the NAV and the benchmark index arose from the 17% fall in the value of sterling against the US dollar over the period as the large majority of the assets of both are denominated in US dollars. The shares performed modestly better than the NAV rising 26.4% over the year from 632.0p to 799.0p with the discount narrowing from 6.4% to 4.4%.
The manager’s report details which stocks had the greatest impact on returns. Their underweight position in Apple helped relative performance. The stock fell after sales and June quarter guidance fell short of expectations. Management blamed global macro pressures for weaker demand for the company’s products, but it is worth mentioning that there is also a longer upgrade cycle for iPhones and less excitement for the incremental upgrades. However, shares rose after the launch of the iPhone 7 and 7 Plus exceeded expectations, as some new features, along with attractive upgrade deals from carriers, stimulated demand for the device.
Computer Sciences (CSC) was also among the top relative contributors during the period. Shares rose sharply after the company announced a proposed merger with HPE Enterprise Services which is expected to complete by the end of March 2017. HPE is spinning off its services business and then intends to merge with CSC. The combined new company is expected to generate about $26 billion in annual revenues and it should have over 5,000 customers in 70 countries, but this deal is more about cost synergies. In addition to the operating income of more than $1 billion from HPE Services, the merger is expected to deliver significant first year synergies of about $1 billion after the deal closes. Revenue growth will likely remain under pressure from the migration to cloud computing. However, the acquisition provides the scale needed to compete more effectively in the marketplace, and the combined company should have the financial strength to pursue the right business investments in next-generation solutions.
Amazon.com performed well for the majority of the period, as strong earnings results in the first half drove the stock higher. Amazon’s Prime membership has maintained growth at a very high level, and there’s strong evidence that its retail businesses are gaining share of purchases against other online retailers and traditional retailers. Amazon’s cloud infrastructure business, AWS, continued to sustain a very high rate of growth and has maintained its dominance in this market. they maintain conviction in Amazon’s long-term growth opportunities based on the company’s leadership in e-commerce and cloud computing. they believe AWS is benefitting from a sustainable inflection in cloud infrastructure spending which is presently underappreciated with shares at current levels. While they like Amazon’s long-term prospects, they reduced their position size in the latter part of the period as they think its shares may lag relative to the broader market in the short-term. Investors have used large positions like Amazon as a source of funds to move assets to more economically sensitive sectors such as financials and industrials following the US election. Amazon also boosted spending to improve logistics and product offerings ahead of the holiday shopping season, which limited profit growth in the most recent quarterly report.
On the negative side, their positions in security companies including Palo Alto Networks and Sophos Group detracted from relative returns. Sentiment toward the security group turned negative in 2016, despite strong performance from some of the company management teams. The growth rate in the security industry as a whole declined, and some of the higher growth companies reported less robust growth than investors were expecting. From a company-specific perspective, Palo Alto Networks continues to gain share in the security market and it maintains a solid technological lead relative to peers. However, the stock declined after management reduced near-term guidance for hardware revenue. Despite the short-term headwind and negative sentiment, they believe the company remains well-positioned as the long-term share gainer in the network security market. The company is driving a shift to more products delivered as software-as-a-service (SaaS)-like services, which should increase earnings visibility over time and enhance the network effect as the customer base grows.
Similarly, Sophos Group reported solid overall results. While billings growth for the network segment slowed, the endpoint segment showed good acceleration. Endpoint billings are almost all subscription based, so greater recurring revenues over time should be positive for Sophos Group. The UK based company is a leading supplier of corporate endpoint and network security to a global midmarket customer base. Sophos has strong recurring billings, global reach and a strong cash position that allows for reinvestment. they see opportunities for Sophos to continue to grow faster than the market over the medium to long-term.
Their position in Tableau Software also detracted from relative performance. Early in the year, the company reduced forward revenue guidance citing broad-based spending softness, particularly in North America, a more crowded market, and longer approval cycles. Shares declined sharply as it was the first time Tableau had lowered guidance as a public company. Throughout 2016, investors have had little patience with high growth companies showing signs of slower growth. Later in the period, Tableau reported disappointing earnings and reduced guidance for 2017, reflecting multiple headwinds associated with longer sales cycles and transitioning to a more subscription based business model. Although this shift could benefit the company over time, there is very little visibility into Tableau’s ability to make the transition smoothly. Given the lack of clarity and ongoing challenges, they decided to exit their position in the stock.
ATT : Allianz Technology underperforms in 2016