Polar Capital Technology beats benchmark again as pandemic drives adoption

Polar Capital Technology (PCT) has published unaudited results for the half-year to 31 October 2020. In NAV per share terms, PCT returned 28.1%, while the market return came in at 18.1%. The benchmark Dow Jones World Technology Index delivered a return of 23.9%.

‘Internet and software subsectors lead relative performance’

PCT’s manager, Ben Rogoff, had this to say: “Internet companies have proved the greatest beneficiaries of the crisis, with e-commerce penetration having soared from c.16% of US retail spending in Q1’20 to a peak of over 40% in May before moderating somewhat. Surging ecommerce was evident at Amazon which delivered a strong Q2 with its online grocery business tripling y/y while AWS become a $40bn revenue business on a trailing twelve-month basis.

The need to accelerate digital transformations and support remote work provided strong tailwinds for the software sector during the period. Against a backdrop of weaker IT budgets, cloud migration continued apace, evident by 29% y/y growth at Amazon Web Services (AWS) in Q2 and Q3 while averaging 40-50% at both Microsoft Azure and Google Cloud during the same period.

At the stock level, strongest relative performance was delivered by COVID beneficiaries concentrated in the Internet and software subsectors. The dramatic acceleration in online spending due to lockdowns benefited e-commerce companies such as Zalando (+87%) as well as digital payment platforms such as PayPal (+47%) and Square (+131%). This was particularly true in food delivery (with restaurants closed and/or severely restricted) helping drive strong returns at Meituan Dianping (+169%), GrubHub (+50%) and Ocado (+42%). However, the strongest performance was enjoyed by Peloton (+240%) where sales of its connected home gym equipment (and software subscriptions) have surged during COVID. In addition, the need to find new (and retain existing) customers during lockdown has proved a boon for digital marketing companies including HubSpot (+67%), as well as social media platforms such as Pinterest (+177%) and Snap (+117%).

Within software, demand for modern software able to support remote work has been most evident at Zoom (+231%), but a number of other cloud software vendors have also experienced sustained strength including Twilio (+141%), Cloudflare (+114%) and CrowdStrike (+78%). Accelerating Cloud adoption has also taken its toll on legacy vendors as IT budgets continue to migrate away from enterprise-centric solutions. The Trust benefited from continued underperformance of the likes of Cisco, IBM and Oracle where we have zero exposure (because we perceive them to be negatively impacted by technology change) as well as by travails at both Intel and SAP where we had limited exposure and which we exited during the half-year. Alternative energy stocks also deserve a special mention, benefiting from sharply lower risk-free rates, accelerating electric vehicle (EV) adoption and a growing list of countries announcing their intention to achieve carbon neutrality. The portfolio benefited from some remarkable performances in a number of smaller positions including Tesla (+141%), SolarEdge (+124%) and BYD (+207%).

In terms of negatives, liquidity and our NASDAQ put options represented the most significant drag on performance during the period as markets moved sharply higher. The average cash position of just under 5%, dragged on relative performance by 1.1% while our NASDAQ put options (which had added significantly to performance during the last financial year) detracted by 0.9% in absolute terms. At the stock level, Apple (+45%) proved the most significant detractor to relative performance as our largest underweight position cost 109bps during the half year. In addition, the portfolio was negatively impacted by a number of travel-related stocks such as Visa (cross-border transactions) and Uber which were challenged by COVID-related lockdowns. As ever, there were also a few genuine disappointments with FLIR Systems and Ciena both falling short of expectations, but these were largely contained to the portfolio tail.”

PCT: Polar Capital Technology beats benchmark again as pandemic drives adoption

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