Monthly Commentary
September 2017

Market Review

While equity markets rallied in September, local gains were more than offset by Sterling (GBP) strength (+3.9% versus the US Dollar during the month) leaving the FTSE World Index falling 1.9% (in GBP terms). September proved to be an eventful month with both an escalation of geopolitical tension in North Korea and a highly destructive Atlantic hurricane season.  However equity markets moved convincingly higher with many indices reaching new all-time highs. Commodities topped the leader board during the month with Brent Oil gaining +7.5% (in US$ terms), rebounding strongly from the prior month’s fall.                                       

The broad-based recovery in global growth remains in place as robust economic data was witnessed once again in North America, Europe and Asia. The US ISM Manufacturing Index hit a 13-year high in September reaching 60.8. The final September Euro area manufacturing PMI was 58.1, the highest level for over six years. Encouragingly, there did not appear to be any negative impact of a stronger Euro on the manufacturing sector. The new orders sub-component of these surveys remains extremely strong in both the US and Europe and bodes well for the continuation of current economic growth. 

At its September meeting, the US central bank refrained from hiking interest rates but provided an updated ‘dot plot’ graph which indicated that committee members still anticipate an additional rate hike in 2017 and three further rate increases in 2018. This was noteworthy considering inflation expectations were marked down alongside these predictions. The market-implied probability of a rate hike in December has risen markedly over recent weeks, but the market remains less optimistic on the pace of rate rises over the coming years. This may reflect the uncertainties associated with unwinding of quantitative easing (QE) in the US, formally announced during the month.

At the end of September, we also received the much-anticipated release of the Republican US tax reform framework. Unfortunately, the document was big on cuts but devoid of details on where the funding will come from. Yields have been moving up since, on the assumption that these unfunded tax cuts stand a chance of being passed (good for the economy and our stocks, even if our sector is not a prime beneficiary). 

Technology Review

The technology sector lagged the broader market during the month, the Dow Jones World Technology Index falling 2.8% (in GBP terms). The few off-season reporting companies generally delivered positive results, following on from a strong Q2 earnings season. Several of our software holdings had newsflow in this month. Adobe* produced a beat and raise but uncharacteristically did not deliver as clean an earnings report as is typical. Bookings in the Digital Marketing business disappointed due to elongated sales cycles, explained by larger and increasingly complex deals. Red Hat* delivered a beat and raise with billings, revenues and operating margins all exceeding expectations. Large deal volume was a standout as was the accelerating growth in the App Development and Emerging Tech area. Hubspot* held its annual INBOUND conference where the company raised its Q3 guidance during an investor session, and shares performed strongly on the back of this. Oracle** also beat on revenues and EPS predominately through better than feared on-premise license decline, although we note that this was the second consecutive quarter of such decline – cloud bookings/guidance was the soft spot as they came in below consensus.

The last few weeks have seen a slew of product launch events and user conferences from many of our holdings. The most hotly anticipated was Apple’s* iPhone event where the company unveiled 3 new iPhone models; the iPhone 8, iPhone 8 Plus and a special 10th anniversary model called the iPhone X.  The iPhone 8 and 8 Plus subsequently received moribund reviews while the iPhone X arguably met heightened expectations, but with a later than expected release date. In a typical “sell the news” move, Apple’s share price fell by 6% in September. Although Apple remains one of our largest positions, it also represents our most significant underweight holding against our benchmark. However, this is ameliorated by a number of holdings skewed to the iPhone X due to content gains versus prior generations such as Dolby (Vision), Lumentum (3D sensor), Nitto Denko (film), Samsung (OLED) and Universal Display (OED).

The semiconductor* sector performed well during the month with strength well supported by fundamentals. Applied Materials* hosted an Investor Day where the company provided a FY2020 EPS target that surprised to the upside. A robust Wafer Fab Equipment (WFE) market outlook was delivered with expectations of market share gains and a faster growth rate for its recurring service revenues. Micron** reported impressive results with a beat and raise quarter driven strong DRAM pricing. Management discussion of broad-based strength in end markets and lean channel inventory added further lustre to results. 

Outlook

There are several significant upcoming events that individually or collectively will influence financial markets. These include ECB tapering, US tax reform, Fed rate hikes and changes to the composition of the Fed Committee. With the recent move upwards in US Treasury yields it appears that the market has started pricing in some probability of US tax reform. A speech by Fed chair Janet Yellen following the September Fed meeting appeared to confirm the view that the Fed is refocusing on its two-part mission of getting the balance sheet deleveraging underway and resuming rate normalisation.

While equity markets have experienced strong year-to-date gains, we remain constructive and continue to see significant opportunities within the technology sector for the remainder of 2017. We believe that the current investment backdrop remains unique, with accommodative policy (albeit now likely peaking) and the prevailing rate of inflation supportive of current equity valuations.  As ever, there are risks to this relatively sanguine view both to the upside and downside, not least because the post US election drivers such as rate hike, tax reform and reduced regulation have seemingly recaptured investor attention. For instance, should any tax reform be passed in the US, we could see some market rotation towards financials/value. However, technology should benefit from a stronger economy while policies focused on accelerated depreciation and a repatriation holiday for overseas cash could drive a stronger investment cycle, special dividends and spur sector M&A.

Our longer-term confidence is grounded, not in the macro but in a new cycle thesis we first articulated almost a decade ago driven by a belief that the Internet would reorder the technology landscape.  If our thesis is indeed playing out, it should provide a multi-year tailwind for our growth centric investment approach at a time when technology indices may be weighed down by smartphone maturity and exposure to legacy technologies. We remain excited by eight core secular themes which include eCommerce and digital payments, digital marketing and advertising, cyber and physical security, Cloud computing and artificial intelligence (AI), software as a service (SaaS), digital content and gaming, robotics and automation and rising semiconductor complexity. We remain near fully invested reflecting strong next-generation results in the first-half of 2017. Feedback from recent company meetings provides us with additional confidence that this strength will continue into Q3 aided by a robust global economic outlook.   

Ben Rogoff

* Held 

** Not held 

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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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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