Monthly Commentary
November 2017

Market Review

Although equities continued their strong run during November, Sterling strength left the FTSE World Index essentially unchanged (+0.1%) during the month in GBP terms. A significant dispersion of returns was witnessed across global equity markets although these were ameliorated by currency movements. While Japan continued to demonstrate leadership, the S&P 500 Index continued its amazing run of positive monthly total returns (in local terms) – now thirteen consecutive months – eclipsing the prior record of twelve months seen in 1935-36 and 1949-50. The opportunity to reach a full calendar year of positive total returns remains in sight and would represent a significant waypoint on the post-financial crisis recovery.

The financial sector was a noteworthy outperformer, particularly in the final days of November, as the prospect of US tax reform returned to the fore, leading to sector rotation similar to that following President Trump’s surprise election victory a year earlier. Mirroring the earlier period, technology stocks gave up some ground as investors took advantage of exceptional year-to-date returns to lock in gains on the premise that the sector is not the main beneficiary of the proposed tax cuts.  That said, if the tax bill is passed, then repatriation of overseas cash into the US at a lower tax rate would benefit the technology sector disproportionately and may accelerate M&A activity and/or boost earnings via buybacks.

Macroeconomic data certainly remains supportive with US third-quarter (Q3) GDP revised higher to an annualised +3.3%, reflecting improved economic momentum (a view supported by the upbeat tone in our recent company meetings). The US Federal Reserve committee minutes showed the members broadly agree with this prognosis and provided further evidence supportive of a December rate hike already largely anticipated by the market. Globally economic data also remained robust as the Eurozone composite and manufacturing PMI’s rose to 57.5 (a six-year high) and 60.0 (a 17-year high) respectively. Even in China both the Manufacturing PMI and Non-Manufacturing PMI increased in November, confounding expectations of a modest decline.

Technology Review

The technology sector underperformed the broader market during the month as investors locked in profits in favour of year-to-date underperforming sectors and perceived beneficiaries of tax reform, the Dow Jones World Technology Index TR falling 1.1% in Sterling terms. November witnessed two of the biggest eCommerce shopping events of the year. In the US the Monday following Thanksgiving, commonly known as Cyber Monday (CM), was the largest online sales day in history with US$6.59 billion spent. This represented online sales growth of +17% year-on-year (y/y) for Cyber Monday and +14% growth for the whole five-day holiday weekend. Amazon* was a clear beneficiary as they announced that CM was the company’s single biggest shopping day ever. In China the Singles’ Day promotion (a similar discounted sales event) witnessed a record high gross merchandise value (GMV) of CNY 168 billion (US$25bn) on Alibaba’s* Tmall platform. This represented growth of +39% y/y, an acceleration from +32% in 2016. Both events aptly highlight the trend of consumers increasingly shifting their discretionary spend to online channels, relatively low eCommerce penetration and the faster growth available in Asian markets. Notably the Nintendo* Switch was named as one of the top selling items on Cyber Monday along with the Amazon Echo (a voice-activated home hub) and Google’s Chromecast (a video streaming accessory).

The month also witnessed a continuation of strong technology results during what has been an impressive third-quarter earnings season. In Internet, Tencent* produced another stellar quarter with even greater revenue acceleration. Mobile gaming revenue growth of +84% y/y was the key driver alongside >100% growth in Tencent Video, which has become the leading video streaming platform in China. Tencent also hit a significant milestone intra-month as its market-cap broke through the US$500 billion level and surpassed Facebook in market value to become the world's fifth most valuable company. In software, Salesforce.com* delivered a strong quarter with revenues and EPS beating consensus and total billings of +24% y/y significantly exceeding expectations. This came alongside operating margin expansion, albeit with the tailwind benefit of the annual Dreamforce conference falling in Q4 this year. A conservative Q4 guidance implying billings growth of only 16% was the slight disappointment, but is against a difficult comparison.  Meanwhile Splunk* reported a strong quarter that exceeded expectations across all major metrics – license revenue +29% y/y with strong growth in the Public Sector and the EMEA region whilst its Cloud solution reached 7% of total revenues.  Management noted multiple deals done through AWS this quarter, alongside announcing partnerships with Booz Allen and Accenture – which could significantly improve sales efficiency should they prove successful. 

In Networking (a sector where we have limited exposure) Cisco (** not held) beat on revenues and earnings through higher service revenues and a more modest decline in switching. While sales fell -1.7% y/y, management surprised by guiding for y/y growth to resume next quarter for the first time in five quarters. Another company we don’t hold, Palo Alto Networks**, continued its own turnaround story with a third consecutive beat on billings growth, a piece of welcome news in the security space where spending trends have been more mixed recently.  Within this sector we have focused our exposure on email security and privileged account management (Proofpoint*, Mimecast* and CyberArk*) and continue to avoid more mature areas (firewall/AV and perimeter security companies) as the threat landscape evolves.  Whilst companies have yet to see any benefit, we are optimistic that European spend will increase here around GDPR regulations – due to come into force in May 2018 – which mandate breach disclosure and penalties of up to 4% of global turnover for failure to take sufficient protective measures.

Despite performance to the contrary during the month semiconductors and semiconductor equipment sector results continue to impress with Applied Materials* reporting strong results with a beat and raise and upbeat FY18 revenue guidance predicting a fifth straight year of consecutive growth. Management highlighted the technology inflection drivers of AI, Big Data and IoT that are driving sustained demand for sensors, memory, storage and advanced compute and that will maintain wafer fab equipment demand at the current high levels.  Semiconductor M&A roared back with Broadcom** making an audacious US$102bn bid to acquire Qualcomm** which if successful, would represent one of the largest technology deals ever. This was followed by the acquisition of Cavium** by Marvell Technology** for US$6bn. 

Outlook

Global growth remains at levels ‘just about right’ to keep earnings estimates ticking higher, but insufficient to accelerate inflation and the pace of interest rate tightening. While the number of Americans collecting unemployment benefits has recently fallen to the lowest level since Richard Nixon was President, labour market improvement has (thus far) had limited impact on core inflation in advanced economies. As we have previously suggested, persistently soft wage growth suggests that the labour market is less robust than headline employment data might indicate (in-line with our view) that technology and globalisation have changed the labour/capital relationship.  Absent an economic shock, we therefore expect interest rates to continue rising gradually and for further tapering/removal of quantitative easing (QE) in 2018 due to the strengthening global economic outlook (a good thing for our sector and companies).  This gradualist view was recently supported by the nomination of Jay Powell to the position of Federal Reserve chair.

Absent an inflation shock we therefore expect policymakers to tread carefully but continue the current path of interest rate normalisation. Against this backdrop (and with valuations already above their longer-term averages) significant multiple expansion for both the market and the technology sector is likely to prove more challenging which – all things being equal – should see earnings/cashflow/dividend growth become the key drivers of investment returns.  If so, this could suggest a continuation of the existing favourable tailwinds for our approach although lower corporate taxes, rising interest rates and a strengthening global economy may also increase the relative appeal of other sectors such as financials. Technology fundamentals certainly remain robust.  According to the Merrill Lynch Equity & Quant Strategy team, Q3 2017 results saw 71% of S&P 500 technology companies report earnings/revenue ahead of consensus expectations.  Not only was this the strongest reading of any S&P 500 sector but it was an acceleration (from 67% in Q3, 62% in Q2 and 61% in Q1) and the highest quarterly reading of any sector since Q1 2014. This data supports our view that technology outperformance is driven by secular adoption trends and expansion of the addressable market for technology companies as they disrupt and capture the profit pools of other previously unrelated industries. We expect the pace of innovation (and associated disruption) to accelerate in coming years as artificial intelligence (AI) further enriches those companies that successfully embrace it.

It is no surprise to see some profit-taking as we approach year end following a strong run of performance. We have done the same ourselves by modestly increasing our cash position to 5.6% and via a 13bp purchase of QQQ (NASDAQ) ETF put options in order to reduce portfolio risk in the event of either the current rotation worsening or a market sell-off between now and Q4 earnings season. Despite this, we remain constructive on equity markets and the technology sector alike based on the uniqueness of the current investment backdrop and our new cycle thesis first articulated almost a decade ago driven by a belief that the internet would reorder the technology landscape.  We still remain high conviction in our 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.

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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