Monthly Commentary
April 2018

Market Review

Equities rebounded modestly in April which – aided by weaknesses in the British Pound – saw the FTSE World Index gain 3.0% (in GBP terms). Commodity markets enjoyed a strong month with, Brent Crude rising +8.5% reaching a multi-year high on improved demand/supply dynamics whilst the CRB Index rose +3.4%, reaching its highest level since 2015. This strength likely contributed to higher ten-year US Treasury yields which briefly crossed the 3% level for the first time since 2014, resulting in greater equity market volatility during the month.  Meanwhile, a strong start to first-quarter earnings and the cooling of trade war rhetoric between the US and China helped lift market/investor sentiment.  A historic summit meeting between the leaders of North Korea and South Korea confirming the common goal of a nuclear-free Korean Peninsula hopefully set the tone for the critical upcoming summit meeting between President Trump and President Kim Jong-un.

Macro data globally remains supportive; Q1 US GDP came in above expectations at an annualised rate of +2.3%, although the Employment Cost Index showed wages and salaries rose +2.9% year-on-year (y/y).  This fits with the Federal Reserve’s (Fed) preferred inflation gauge, the PCE Index, which rose +2.0% in March achieving the Fed’s target rate. Whilst the US economy remains in good shape, European Q1 GDP slowed to an annualised +1.7%, below the +2.8% annualised average of 2017, largely due to unseasonably cold weather in March and ongoing political uncertainty. In Asia the Chinese Manufacturing PMI Index printed at 51.4 while the Non-Manufacturing PMI Index was 54.8, both above consensus expectations.

Technology Review

The technology sector underperformed the broader market during the month, the Dow Jones World Technology Index advancing 1.7% (in GBP terms). The semiconductor sector faced a multitude of headwinds in April as the SOX Index declined -6.4% with a clear divergence of performance between smartphone and PC/Server related stocks. The world’s largest foundry TSMC* surprised the market with second-quarter guidance significantly below expectations, citing order weakness in the smartphone segment and growing uncertainty in the crypto mining economy.  Apple* and the iPhone X was a key contributor to softness at TSMC, resulting in sustained weakness across the smartphone supply chain. With limited smartphone exposure, and buoyed by +24% y/y growth in its Data Center Group (DCG), Intel* proved a standout by delivering a ‘beat and raise’ quarter. Advanced Macro Devices* (AMD) also bucked the negative trend with strong performance in both microprocessors and graphics while clarity on cryptocurrency-related revenue and trends reassured investors.  On the negative side Xilinx* and Infineon Technologies* detracted from performance during the month as both were caught up in the semiconductor malaise.

Elsewhere, first-quarter earnings season provided a welcome return to company fundamentals as the main driver of stock returns. The majority of the technology bellwethers made a return to form this earnings season and importantly for sentiment, the internet FANGs got their bite back after a period of underperformance. Amazon* produced a strong earnings report including a second consecutive quarter of acceleration in its Amazon Web Service (AWS) business unit. AWS is now a US$19bn business on a trailing 12-month basis and grew an incredible +48% y/y on a constant currency (cc) basis. Along with top-line momentum Amazon delivered operating profit above expectations, predominately due to both AWS and North America Retail. In possibly the most hotly anticipated earnings release of the season given recent negative press, Facebook* delivered strong results confounding sceptics.  User growth, revenues and guidance exceeded expectations. Advertising revenues grew +43% y/y cc and importantly one million DAUs were added in North America, reversing the widely discussed decline last-quarter. Alphabet* also delivered impressive top-line revenue growth (+23% y/y cc), although in this case the muted stock reaction was due to an offset from elevated operating costs tied to growth opportunities in areas such as hardware, Cloud infrastructure, YouTube, artificial intelligence and Waymo (self-driving cars).

However, some of the strongest performances thus far were delivered within the software sector led by Microsoft* where growth accelerated to +13% y/y cc alongside operating margin expansion. Revenue, operating margins and EPS were all ahead of consensus as broad-based strength was seen across all markets. ServiceNow* also continued its run of strong results with revenues, subscription billings and operating margins above expectations. Emerging products have grown to 30% of the new business mix, highlighting ServiceNow’s momentum selling into non-IT use cases. Customer Service Software as a Service (SaaS) vendor Zendesk* delivered a particularly strong quarter with accelerating billings growth and further evidence of enterprise traction showing up in their key business metrics including net retention rate. Sales execution continues to improve following their sales team restructuring and the share price received a positive reaction. Likewise, email-security software leader Proofpoint* reported another beat on revenues, billings and operating margins. Billings growth of +35% y/y and a raised 2018 guidance demonstrates the strength of Proofpoint’s emerging products that now represent over 20% of new and add-on business in Q1.

Post month-end, Apple delivered robust headline earnings/guidance that positively surprised against very low expectations – while units only grew 4% y/y on a sell through basis, an 11% ASP increase drove 14% y/y iPhone revenue growth, accompanied by strong services growth +31% y/y.  While the better than expected quarter and positive share price reaction supports our decision to retain a sizable (but material underweight) position in this powerful franchise, it also served to remind that the best of the smartphone market is behind us.

Market Outlook

We remain constructive on equity markets and the technology sector with first-quarter earnings season thus far delivering requisite growth against a backdrop of tax cuts and elevated investor expectations. However, this long expansionary cycle continues to defy the norm with recent economic acceleration fuelling unusually strong earnings growth. As of 4 May 2018 (at which point 81% of the companies in the S&P 500 had reported), the blended y/y revenue and earnings growth were 8.5% and 24.2% respectively (the latter aided by lower corporate tax rates) with 78% of S&P 500 constituents delivering a positive EPS surprise which – if it holds for the quarter – would mark the highest percentage since FactSet began tracking this metric in 2008. Despite this, global equities remain 6-7% off their January highs as earnings progress has been overshadowed by heightened volatility and rising inflation expectations. Against a backdrop of a flattening US yield curve, the power of first-quarter earnings season has been sapped by concerns over ‘peak’ economic and corporate earnings growth.

While we do not profess to be ‘top-down’ experts, we regard these fears as ‘healthy’ and part of the proverbial ‘wall of worry’ that has been ever-present during this long bull market. Of course, US earnings growth is being flattered by a one-time (but enduring) tax benefit, but strong revenue growth likely reflects more synchronised upward revisions to global growth and growing CEO and consumer confidence “as the shadow of the great financial crisis is removed”. That said, and as we have previously suggested, we expect late-cycle strength to create market headwinds (tighter labour markets, rising interest rates/yields) which together with heightened political risk (in all its many current forms) have taken their toll on volatility and valuations. In the US, the combination of softer markets and Q1 earnings progress has seen the forward twelve-month PE ratio of the S&P 500 fall back to 16x, in-line with five-year averages (16.1x). As such, we remain constructive on equity markets although we expect returns to become increasingly dependent on underlying earnings growth (which should favour our approach).

More importantly, our sanguine view reflects strengthening technology fundamentals and greater confidence in our long-held ‘new cycle’ thesis that appears well supported thus far during earnings season. According to FactSet (and backing out the impact of the DowDuPont combination on the materials sector), the technology sector is currently delivering the highest blended revenue growth of any S&P sector (+16% y/y) and nearly 2x the overall market (+8.5%) rate. In addition to the improved macroeconomic backdrop, the technology sector appears to be a significant beneficiary of fiscal reform via increased capital spending and burgeoning IT budgets as companies opt to reinvest their tax windfalls in order to reinvent themselves/stay relevant during a period of (what we believe is) unprecedented disruption. According to Gartner, worldwide IT spending is now projected to reach US$3.7trn in 2018 with forecast growth of 6.2% y/y the highest in a decade, a view supported by results from many of our holdings and recent company visits.

Despite this strong backdrop, and FX tailwinds, many legacy stocks such as IBM** and Oracle Corp** have continued to deliver moribund earnings – a reminder that technology companies rarely age gracefully as the value of incumbency atrophies thanks to deflation and the so-called Innovator’s Dilemma.  In contrast, next-generation technology companies – unencumbered by legacy products and pricing – are continuing to deliver strong growth and market share gains, epitomised by the remarkable success of public cloud pioneer AWS. With Cloud adoption estimated at c.21% today, the new cycle is becoming increasingly pernicious. We expect this disruption to intensify over the coming years as deflation permeates up the computing stack while slower (and potentially negative) smartphone unit growth will further increase the pressure on incumbents. In addition, risk associated with trade dislocation is likely to be most keenly felt by mature companies relying on underpenetrated international markets to support their (likely modest) growth aspirations. As such, we believe our jaundiced view of the value of incumbency is likely to continue to be rewarded as these growth-challenged winners of yesterday struggle to meet expectations, maintain margins and engage in greater M&A in order to remain relevant.

In contrast – and so far evident during Q1 earnings season – next-generation companies have continued to deliver ahead of expectations, aided by strong secular drivers such as Cloud adoption and eCommerce. While legacy companies may yet enjoy a cyclical reprieve, we expect next-generation companies to prove the greatest beneficiaries of improved IT spending and budget reallocation as purveyors of the infrastructure, applications and tools necessary to deliver the digital transformations critical to surviving technology-fuelled disruption. As such, we remain confident in our sector’s expanding market opportunity and our belief that the internet is reordering the technology landscape. If our long-held thesis is indeed playing out, it should provide a multi-year tailwind for our ‘active’ 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, 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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