Monthly Commentary
February 2018

Market Review

After a prolonged period of calm and low volatility across nearly all asset classes, February witnessed the return of higher volatility with the FTSE World Index declining 2.8% (in GBP terms) as US Dollar strength ameliorated equity market weakness. Higher beta equity markets led the declines as the prevailing mentality switched firmly into ‘risk-off’/profit taking mode.  The Chinese Shanghai Stock Exchange Composite Index fell 6.4% while the German DAX Performance Index declined -5.7% in local currency terms. The S&P 500 Index ended its stretch of 15 positive monthly total returns while suffering its first 10% correction in two years, at February lows.

Whilst technology stocks were far from the epicentre of this correction, they were certainly impacted.  The VIX Volatility Index (“VIX”) leapt unusually sharply – exceeding 50 intraday on 6 February.  Whilst normally this would be a sign of panic, the accompanying equity sell-off remained orderly.  The sell-off was initially triggered by strong jobs/earnings data which pushed bond yields and interest rate expectations higher.  The move in the VIX appears to have been exacerbated by speculative structured products designed to profit from declining volatility (inverse VIX) – investors in many of these products took severe losses which may have triggered margin calls and profit taking elsewhere.   

Gently rising bond yields due to an improving economic outlook are not necessarily to be feared.  Whilst higher yields may cap valuation multiple expansion, as long as inflation remains under control equities should correlate positively (growth and estimate revisions driving stocks higher). The 10-year US Treasury yield peaked mid-month at 2.94% before settling down to 2.87% at month-end but will have to break through the psychologically/technically important 3% level soon and may trend towards 3.5% over the course of this year.  In addition, outside the US both the Central Bank of Japan (“BoJ”) and European Central Bank (“ECB”) recently changed their policy language (BoJ suggesting exit policy for Quantitative Easing (“QE”) may commence April 2019 and ECB wording suggesting further policy intervention is unlikely).  Macro data certainly remains supportive of tightening policy, the US manufacturing ISM hit 60.8 in February, the highest level since May 2004 and whilst some of the forward indicators for Europe and China may have peaked short term, they remain robust in general.

Technology Review

The technology sector demonstrated ongoing leadership, outperforming the broader market during the month. Aided by the stronger US Dollar, the Dow Jones World Technology Index gained 2.2% (in GBP terms) during the month. Technology outperformance was driven by a strong fourth-quarter (Q4) earnings season, with secular tailwinds and the stronger economy benefiting many companies. Software was a stand-out, especially those with a rental or Software as a Service (SaaS) business model, with Zendesk*, New Relic*, HubSpot*, RedHat* and Five9* all delivering strong returns. Other outperformers included Aixtron*, Lumentum Holdings*, Axon Enterprise* (formerly Taser) and Box* although the latter issued lacklustre guidance for largely stock specific reasons and fell post month-end.

Zendesk delivered strong results exceeding expectations for revenue, operating margins, free cashflow (“FCF”) and billings. Growth in billings of +41% year-over-year (y/y) was the strongest rate in six quarters. Larger deal sizes were witnessed as Zendesk closed over 25% more contracts with an annual value of US$50k or more versus the same period a year ago.  The headwinds following the reorganizational changes to the sales and marketing division now appear firmly in the rear-view mirror. HubSpot produced strong results with a ‘beat and raise’ alongside billings growth and FCF above expectations.  New product innovation remains hugely impressive with the new Customer Hub product launch on schedule for 1H 2018, although against this backdrop guidance for 29% y/y growth was a little disappointing (hopefully as normal conservative). Five9 continued its run of consistent results with an earnings report showing all major metrics ahead of consensus. Their Enterprise segment continues to grow strongly and now represents 74% of total revenue.

Three stocks we didn’t own outperformed during the month detracting from our relative performance: Cisco Systems Inc**, Intel* (subsequently repurchased) and Nokia OYJ**. Apple* supply chain stocks, particularly those with disproportionate exposure to the iPhone X and/or OLED including Universal Display Corp*, Nitto Denko* and robotics/machine vision related stocks such as Cognex Corp* (“Cognex”) and Harmonic Drive Systems* (“Harmonic”) dragged on performance too. PayPal Holdings* also underperformed following Ebay Inc’s* decision to bring payment processing in-house.

Universal Display Corp announced a strong headline beat on sales, albeit with an additional tailwind of some material sales pulled forward from Q1. The disappointment came from the 2018 sales guidance which missed expectations likely due to lower Samsung Electronics* fab utilisation (a function of weaker iPhone X sales and more price competition from LCD in low-end rigid displays).  We have reduced exposure for now but continue to believe in longer-term OLED adoption trends.

Harmonic and Cognex both reported robust results but concerns over high-end smartphone weakness weighed on the broader robotics/vision segment. Harmonic saw operating profit exceeding expectations. Orders were also strong with gross margin lower due to a worse product mix. Importantly demand remained healthy from their key customer segments; industrial, auto, SPE and FPD.  Cognex* beat revenue expectations but delivered in-line EPS below some expectations. With full-year 2017 revenues at +44% and a long runway for double digit growth ahead, we remain committed to our position in one of the leading machine vision companies but for now prefer Keyence* which has a stronger balance sheet and less smartphone/OLED related exposure.


It is encouraging to see the technology sector continue to demonstrate leadership, outperforming the major broader market indices in both the upside move during January and through the correction/rebound in February. With the pace of innovation as fast as we can remember and with new technologies such as artificial intelligence (AI) and machine learning (ML) gaining traction, disruption is only likely to intensify over coming years.  This is allowing early adopters – often but not always the technology providers – to reinvent an ever-growing number of industry verticals, expanding the sector’s total addressable market (TAM) as new profit pools become addressable. The combination of strong secular trends, an expanding market opportunity and a strong global economy is likely to drive sustained growth in 2018 and beyond.  

Nine years into this bull market traditional valuation measures are unsurprisingly above long-term averages and with bond yields/interest rates set to rise, market volatility may remain elevated.   There will undoubtedly be periods of short term angst – particularly as key bond yield and inflation thresholds are surpassed.  However, we believe against a robust global economic backdrop and with repatriated cash likely to be used in part for M&A, current valuation levels should persist allowing robust fundaments/growth to drive performance.  More volatile markets may require a more active approach to portfolio management – we may trade around position sizes more than we have in recent years.  For those willing to take a longer-term view, some volatility can be beneficial, and we believe this may be a more supportive backdrop for active managers, particularly those with a growth bias.  We have used the sell-off to reduce our cash position as company fundamentals remain robust.

Short term, there is another factor weighing on investors’ minds – the prospect of a global trade war.  This would clearly be undesirable for all involved, but we believe because of this the risks may be overplayed.  As has been seen with President Trump’s initially aggressive stance towards North Korea (now leading to the prospect of historic talks between their respective leaders), we believe this is his opening gambit in trade negotiations rather than presaging something more ominous. 

We have said this before, but this new technology cycle appears to be gathering strength with every earnings season now that the Cloud has become the default computing platform. This bifurcation is likely to intensify from here as workloads continue to gravitate towards the public cloud, while emerging technologies such as AI – where the internet platforms enjoy a leadership position – are likely to accelerate this trend.  We have been travelling extensively recently and the feedback from our company meetings remains very constructive, echoing the tone from Q4 earnings calls.  This is hardly surprising given the powerful secular tailwinds now supported by a stronger global economy.   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 AI, SaaS, digital content and gaming, robotics and automation and rising semiconductor complexity.  

Ben Rogoff

* Held 

** Not held 


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 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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