Fund Research

Allianz Technology Trust

31 October 2018 View latest version

Allianz Technology Trust is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

Please see the important information by following this link or at the bottom of the page.

Summary

Around a year after it developed a specific “Brexit” page, the FT newspaper app now has a dedicated Technology section. Either this marks the very top of the market (we think not), or it is a rather late acknowledgement from the FT that the technology sector impinges ever more in every aspect of our lives and at the same time has delivered exceptionally strong returns for investors in these companies.

For investors wanting exposure to this area, Allianz Technology Trust (ATT) represents a very actively managed specialist investment trust, managed by one of the most experienced technology investment teams in the world, which has delivered excellent returns over the years.

Despite some clouds continuing to hang over the technology sector’s largest names, the portfolio has witnessed a significant re-shaping since September 2017. It has shifted capital away from mega caps to mid caps, and has continued to increase the number of stocks held. The ATT team now has around 50% of the portfolio exposed to companies expected to benefit from “the cloud”, and has slashed exposure to China and semi-conductors.

This represents a marked change in risk appetite and the re-positioned portfolio now offers, according to Allianz Global Investors' (AllianzGI’s) estimates, earnings growth for the next 12 months of 20%+, nearly twice that of the benchmark. Recognising that interest rates and discount rates are rising, manager Walter Price is mindful of valuations, and whilst the portfolio is expensive on a forward P/E of 33x, the realised PEG (or PE to Growth) ratio will be lower than the benchmark in the year ahead.

Walter and his team in San Francisco have developed a long-term track record stretching back several decades. The team took over management of ATT over ten years ago, over which period the trust has generated NAV total returns (to 30th Sept) of 593%, outperforming the benchmark by an exceptional 202%. Over one year ATT has posted a strong relative performance against both the wider market and the DJ World Technology Index, up 10.1% in the year to 28th October 2018, against the benchmark return of 4.3%. ATT has total assets of £463m.

Kepler View

There are relatively few specialist technology funds in the UK trust and OEIC universe, but ATT has outperformed the vast majority of them. We believe this is thanks to the team’s flexible stock picking approach and focus on seeking to identify areas of 'innovative disruption', and invest in what they see as the next 'mega cap' businesses. However, one can’t discount the advantage it has of being based in the midst of 'the action' in San Francisco.

Historically, ATT has traded on a wider discount than its closest listed peer, PCT. However, for a while now this situation has reversed and the trust trades on a small premium to NAV (of 2.9% at 30 Oct 18) as compared to PCT’s discount of 4.9% - in our view, reflecting the stronger performance and active stock picking employed by the AllianzGI team.

The team’s active investment process, flexibility and high-conviction approach has delivered considerable value over the last ten years, with the portfolio now tilted towards the 'high growth' beneficiaries of the continued move towards the cloud.

Bull
Bear
Active stock picking in a specialist area
High P/E relative to market could offer little protection in prolonged market drawdown
Team has delivered strong historic growth
Premium to NAV could suffer if sentiment falls
Simple, flexible mandate
The trust has a performance fee

Portfolio

Around a year after it developed a specific “Brexit” page, the FT newspaper app now has a dedicated Technology section. Either this marks the very top of the market (we think not), or it is a rather late acknowledgement from the FT that the technology sector impinges ever more in every aspect of our lives and at the same time has delivered exceptionally strong returns for investors in these companies.

Allianz Technology Trust is a very actively managed investment trust, managed by one of the most experienced technology investment teams in the world, exploiting just this theme. It has delivered excellent returns over the years, we believe thanks to Walter Price and his team’s focus on seeking to identify areas of 'innovative disruption' and invest in what they see as the next 'mega cap' businesses. These may at times be mega-cap “businesses within businesses” such as Amazon Web Services, or much smaller innovative niche businesses. Walter and the team have a large degree of flexibility to move the portfolio around, and are always looking to maximise returns for shareholders. As a result, each time we catch up with him, Walter often reports some significant changes to the portfolio, which comprises between 50 and 70 stocks. Anecdotally, the team seems to manoeuvre the positioning of the portfolio around much more than most generalist portfolio managers over similar time frames. Perhaps this is a reflection of Walter's high conviction stock picking approach, and/or the fast pace of change in the technology sector as it continues to impact almost every other sector.

One big shift that we discussed with Walter when we caught up with him recently, was that around 50% of the portfolio now constitutes companies exposed to “the cloud” – both infrastructure providers and service providers (Software as a Service, or SAAS). Indeed, this represents a continuation of a theme that we picked up on in April and with it, a significant increase in the proportion of the portfolio invested in mid caps. Companies that ATT owns in this category include Salesforce.com, ServiceNow, Paycom Software, HubSpot, Tableau Software, Okta and RealPage.

The shift towards the mid-cap space differentiates the trust from its closest peer – PCT - as well as the benchmark, which both have a much higher weighting to mega-cap stocks. This reflects the fact that, in Walter’s view, these companies are 'purer' in their exposure to the cloud, but also that in a more constrained environment for corporate earnings growth, they offer better growth characteristics. With regards to mega caps – such as Facebook which is no longer a holding in the portfolio - Walter believes that there is an increasing realisation that their costs are going to continue to rise and that political pressure will mean that margins are constrained. In Walter’s view, mid caps are back in the driving seat and are once again set to be the arena where new value creation occurs.

MARKET CAP BREAKDOWN

Source: Allianz Global Investors

Over the whole portfolio (constituting 70 names currently), earnings growth over the next 12 months is expected to be in the region of 20% while, by the team’s analysis, 80% of benchmark companies will be growing by less than 20% in 2019. Whilst the ATT expected growth rate is considerably lower than that realised over the past few years, Walter is cognisant of the fact that 2018 has seen some significant one-offs in the form of President Trump’s tax cuts and deal on repatriation of cash held abroad. With interest rates also rising, the team is very much aware that discount rates are rising, and investors are rightly questioning how much they should pay for growth. Walter continues to believe that growth will be rewarded by the market, and hence his positioning the portfolio for growth in excess of 20%. In his view, whilst the portfolio looks expensive on a forward P/E of 33x, the realised PEG (or PE to Growth) ratio will be lower than the benchmark in the year ahead. This focus on smaller, highly dynamic companies has led to a significant increase in the number of holdings – relative to recent history. The current number of 70 compares to 57 stocks a year ago (in September 2017) and 64 in March 2018 as Walter started to move back into the mid-cap sphere.

The team’s continued focus on growth has meant that the value part of the portfolio has come back considerably. In 2016 for example, Walter first moved allocation of the portfolio in value names up to c. 25%. Following a strong run in a number of turnarounds that Walter called correctly, as well as a more negative view on semi-conductors, the proportion of the portfolio in ATT’s value bucket has moved down to c.15%.

PORTFOLIO BREAKDOWN BY 'BUCKET'

Source: Allianz Global Investors

Part of the reason Walter has cut the semi-conductor exposure of the trust is the escalating trade war that the US is engaging in with China. In his view, semi-conductor manufacturing will simply never be “re-shored” to the US, and so any tariffs will represent an increased cost to the consumer. Semi-conductor exposure has been taken down from a peak of 30% to c.10%. Alongside this, exposure to Chinese companies has come down from c.10% at the start of the year to c.0.8% as at end October. As the graph below illustrates, this means that ATT is highly exposed to the US.

GEOGRAPHIC EXPOSURE AS AT 30 Sept 2018

Source: Allianz Global Investors

Other significant themes that Walter highlighted when we spoke to him recently were Robotics / Vision which together constitute around 10% of the portfolio currently. In Walter’s view, these companies will be huge beneficiaries of re-shoring driven by increased wage costs in China and other previously low-cost manufacturing areas, alongside political impetus. Another theme (around 15% of the portfolio) is the “Internet of Things”, in which Walter includes Tesla and Payment systems such as Square, Paypal and Twilio. These businesses are expected to benefit from the electrification of traditional industries. In the case of the transport sector, it is expected to transform to a services business. In the case of electronic payments, traditional banks have neglected to invest away from their core business and so electronic wallets and other payment companies are expected to take market share as innovation and convenience erode traditional bank services.

TOP TEN HOLDINGS as at 30 Sept 2018

Company
% OF NAV
Amazon.com
6.9
Alphabet – A shares
5.5
Square Inc
5.0
NetApp
4.0
Microsoft Corp
3.5
Teradyne
2.9
Okta
2.5
Apple
2.5
Paycom Software
2.4
ServiceNow
2.4
Subtotal
37.6

Source: Allianz Global Investors

Relative to PCT, the trust is significantly more concentrated (70 vs c.113 stocks). Walter and the team continue to believe that they have a competitive advantage in being located in the San Francisco Bay Area, where seven out of the top-ten largest technology companies in the US are based. They believe that being on the doorstep is a huge help in being ahead of the crowd in identifying the world’s most innovative companies.

In terms of outlook, the team believes that whilst they have more modest expectations of growth in 2019, technology companies are better equipped than many other sectors to achieve growth irrespective of the market or economic backdrop. Their focus on smaller, more innovative companies operating in a niche should, they hope, enable them to ride out what they accept is a possibly difficult year ahead.

Investment objective

The investment objective of Allianz Technology Trust s to achieve long-term capital growth through investment principally in the equity securities of listed technology companies on a worldwide basis.

Group/Investment

Allianz Technology Trust

Ticker

ATT

Management Company

Allianz Global Investors

Manager Name

Walter C. Price;Huachen Chen;Danny Su;Michael A. Seidenberg;

Association of Investment Companies (AIC) Sector

Sector Specialist: Tech Media & Telecomm

12 Mo Yield

0.0%

Dividend Distribution Frequency

None



Latest Market Capitalisation

£443,517,334

Latest Net Gearing (Cum Fair)

0%

Latest Ongoing Charge Ex Perf Fee %

0.99

Turnover Ratio %

0.0

Shares Outstanding

 33,347,168

Discount % (Cum Fair)

2.9

Daily Closing Price

1330p

Gearing

The trust does not currently have a gearing facility in place. However, ATT does have the flexibility to employ gearing. The self-imposed limits are a maximum of 20%, although it wouldn’t be expected to exceed 10% of net assets. Similarly, the proportion of the company’s net assets held in cash or liquid investments will not exceed 15% of net assets but may be increased at times to a maximum of 30%.

Returns

The technology sector has been hindered by the stock market volatility of recent weeks, in marked contrast to February 2018 when FAANG (Facebook, Apple, Amazon, Netflix and Google parent Alphabet) stocks posted much smaller declines than the rest of the market. Over one year ATT has posted a strong relative performance against both the wider market and the DJ World Technology Index, although relative performance has been hurt in the last month or so. In twelve months to 28th October 2018, ATT is up 10.1%, against the benchmark return (in GBP) of 4.3% according to Morningstar data. ATT has also achieved good outperformance of Polar Capital Technology Trust (PCT), which has achieved total NAV return over the same period of 7.9%. Walter attributes this outperformance to ATT’s mid-cap exposure.


SHORT-TERM Relative PERFORMANCE

Source: Morningstar

This strong showing over the past year is an extension of a much longer period of outperformance delivered by Walter and his team. They have a long-term track record of investing in the technology sector stretching back several decades. The team took over management of ATT over ten years ago in May 2007, over which time the trust has generated NAV total returns to 30 September 2018 of 593%, outperforming the benchmark by an exceptional 202%. Over the same period, PCT’s NAV has achieved returns of 473%, 120% behind ATT but still far ahead of the benchmark.

Over five years to 29 October 2018, the trust has delivered total returns of 146.8%, almost exactly in line with the benchmark return of 147.3%, but well ahead of the MSCI ACWI’s return of 64.3%.

FIVE Year PERFORMANCE

Source: Morningstar

The board monitors the company’s performance against the wider universe of open-ended funds, closed-ended funds and exchange-traded funds. In the last annual report, the board highlights that the performance of ATT versus the other funds within the Morningstar Global Technology Sector - Equity category is very strong over all periods. In the five years to 30 November 2017, ATT ranked first out of 58 funds and, over ten years, fourth out of 50.

Taking a pure stock picking approach, as the team do, means that strong outperformance will have to be weighed against periods of underperformance. The graph below illustrates the last few years' relative performance against wider equity markets but also the benchmark and the open-ended peer indices provided by Morningstar. 2013 was a standout year thanks to the team’s very high mid-cap weighting. This mid-cap exposure had the opposite effect during 2014 and 2016, when the trust underperformed the benchmark due to an underweight position in large cap stocks. During 2018 it would appear that mid caps have once again ridden to the rescue, helping to deliver strong outperformance of PCT and the benchmark.

The managers try to mitigate the downside by spreading risks and moving the portfolio away from more volatile mid caps or themes at times in the cycle. In our view the team’s active investment process, flexibility and high-conviction approach (not to mention the local competitive advantage) should help them continue to stay ahead of competitors going forward.

calendar Year NAV RETURNS

Source: Morningstar - 2018 data to 28 October 2018

Dividend

The trust does not pay a dividend, and we understand it is currently not the board’s intention to do so.

Management

Walter Price and Huachen Chen lead the specialist team of four portfolio managers. They have been investing in technology companies for over 35 years and Walter has worked with co-manager Chen for over 30 years. The team now has a full ten-year track record for this investment trust, having won the mandate for ATT in 2007. It has consistently applied the same approach to its investment research, looking for disruptive innovators that can generate strong returns for investors from ‘creative destruction’.

The team live and work in the San Francisco area where a great number of the world’s technology companies are located, a factor which it views as essential for quickly identifying changes in relentlessly competitive markets. In aiming to identify major trends, it believes that since the mid-1980s it has correctly identified new trends in PCs, networking, wireless communications, storage systems, the internet and cloud computing – all ahead of the crowd.

The team follows the same investment rationale that it has done for many years. It aims to identify major trends ahead of others, investing in stocks that have the potential to become tomorrow’s Microsoft, Cisco or Apple. It believes in having a relatively concentrated portfolio and a bias towards mid-caps (plus underweight large caps relative to the benchmark). The team also leans on AllianzGI’s proprietary Grassroots Research network, which enables it to commission reports and market research from journalists, analysts and other professionals, which has in the past proved useful with consumer related products.

Discount

As the graph below shows, ATT has traditionally traded at a modest discount to PCT, its closest rival, which is more than four times larger (and therefore theoretically more liquid). This picture has somewhat reversed since the start of 2018, with PCT suffering something of a de-rating and ATT now trades at a premium both in absolute terms (2.9% on 30th Oct 2018) and relative to PCT (discount of 4.7%).

We would caution that discounts for sector specialist trusts can be fairly volatile given that at times they reflect sector views rather than those on a specific trust. As such, the PCT discount may reflect a wave of retail profit-taking rather than the market reflecting the superior performance delivered by ATT. We would view a reversion to the historic pattern as an opportunity.

ATT has been issuing shares at a slight premium for the past year or so. Whilst the discount has been going the right way, the board does look to try to manage the discount volatility on the downside. It has stated that it will look to buy shares back when “the discount is wider than 7% and where there is demand in the market for them to do so”. This discount control mechanism (DCM) has helped ensure that the rating has remained relatively stable over time. It is worth noting from the graph above that in more difficult market periods the discount has widened out to a level approaching (and sometime surpassing) 10%. The ultimate long-term DCM is a continuation vote: shareholders have the opportunity to vote at the AGM at five-year intervals whether to continue the company. The next continuation vote will be in April 2021.

DISCOUNT

Source: Morningstar

Charges

The trust has a fixed investment management fee of 0.8% of its market capitalisation up to £400m, and 0.6% of market capitalisation above £400m. At the time of writing the market cap is above that threshold. The company’s OCF in the last financial year (2017) was 1%.

In addition to the management fee, AllianzGI is also paid a performance fee calculated as 12.5% of outperformance of the NAV against the benchmark. The performance fee element is capped at a maximum of 2.25% of the trust’s NAV at the year's end. Importantly, a performance fee will only be paid if its NAV is higher than that at which any previous performance fee was paid and if performance in that year is also ahead of the benchmark on a cumulative basis. In this way, the team has to make up any under-performance from previous years before any performance fee is due.

This compares favourably against PCT, which has a management fee of 1% up to £800m and 0.85% above £800m, with 0.8% on net assets over £1.7bn and a performance fee of 15%.

ESG

Important information

Allianz Technology Trust is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

Please see the important information by following this link or at the bottom of the page.

Kepler Trust Intelligence is a website owned and managed by Kepler Partners LLP. Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research.

This report has been issued by Kepler Partners LLP for communication only to eligible counterparties and professional clients as defined by the Financial Conduct Authority.  Its contents are not directed at, are not to be communicated to, may not be suitable for and must not be relied on by retail clients

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Fund History: Allianz Technology Trust

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