Polar Cap Tech Tst - Final Results
17/07/2024 07:00
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RNS Number : 6679W Polar Capital Technology Trust PLC 17 July 2024
POLAR CAPITAL TECHNOLOGY TRUST PLC
AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2024
FINANCIAL HIGHLIGHTS
FINANCIAL SUMMARY Change %
As at As at Year Ended 2024 Year Ended 2023
30 April 2024 30 April 2023
Total net assets £3,804,533,000 £2,828,141,000 34.5% (7.3%)
Net Asset Value (NAV) per ordinary share 3,154.11p 2,239.48p 40.8% (2.8%)
Benchmark(1) 5007.08 3604.43 38.9% 2.9%
Price per ordinary share 2,920.00p 1,940.00p 50.5% (4.9%)
Discount of ordinary share price to the NAV per ordinary share(2) (7.4%) (13.4%)
Ordinary shares in issue(3) 120,621,569 126,285,544 (4.5%) (4.6%)
Ordinary shares held in treasury 16,693,431 11,029,456 51.4% 122.4%
KEY DATA For the year to 30 April 2024
Local Currency % Sterling Adjusted %
Benchmark(1)
Dow Jones Global Technology Index (TR) 38.4 38.9
Other Indices over the year (total return)
FTSE World 18.6 19.2
FTSE All-Share 7.5
S&P 500 Composite 22.7 23.3
Nikkei 225 35.6 17.8
Eurostoxx 600 11.9 9.0
As at 30 April
EXCHANGE RATES 2024 2023
US$ to £ 1.2522 1.2569
Japanese Yen to £ 197.04 171.15
Euro to £ 1.1711 1.1385
For the year to 30 April
EXPENSES 2024 2023
Ongoing charges ratio(2) 0.80% 0.81%
Ongoing charges ratio including performance fee(2) 0.80% 0.81%
Data supplied by Polar Capital LLP and HSBC Securities Services.
1 Dow Jones Global Technology Index (total return, Sterling adjusted, with the
removal of relevant withholding taxes). See annual report further details.
2 Alternative Performance Measures provided in the Annual Report.
3 The issued share capital as at close of business on 11 July 2024 (latest
practicable date) was 137,315,000 ordinary shares of which 17,657,777 were
held in treasury.
HISTORIC PERFORMANCE
As at 30 April 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Net Assets (£m) 606.6 793.0 801.3 1,252.5 1,551.6 1,935.6 2,308.6 3,408.8 3,051.0 2,828.1 3,804.5
Share price (pence) 442.0 592.0 566.0 947.0 1,148.0 1,354.0 1,774.0 2,364.0 2,040.0 1,940.0 2,920.0
NAV per share (pence) 458.4 599.2 605.5 945.4 1,159.7 1,446.4 1,715.6 2,496.4 2,305.1 2,239.5 3,154.1
Indices of Growth(1)
Share price(2) 100.0 133.9 128.1 214.3 259.7 306.3 401.4 534.8 461.5 438.9 660.6
NAV per share(2) 100.0 130.7 132.1 206.2 252.9 315.5 374.2 544.5 502.8 488.5 688.0
Dow Jones Global Technology Index (3) 100.0 129.5 129.3 198.3 232.2 281.9 333.0 487.3 483.1 496.9 690.3
The Company commenced trading on 16 December 1996 and the share price on the
first day was 96.0p per share and the NAV per share was 97.5p.
Notes:
1 Rebased to 100 at 30 April 2014
2 Total return assumes reinvestment of dividends.
3 Dow Jones World Technology Index (total return, Sterling adjusted) with the
removal of relevant withholding taxes.
All data sourced from Polar Capital LLP.
For further information please contact:
Ben Rogoff Ed Gascoigne-Pees
Polar Capital Technology Trust PLC Camarco
Tel: 020 7227 2700 Tel: 020 3757 4984
CHAIR'S STATEMENT
Introduction
On behalf of myself and the Board I am pleased to present to you the Annual
Report of the Company for the financial year ("FY24") ended 30 April 2024.
In my last full year statement to you, we reflected on the acceleration of
Artificial Intelligence ("AI"), the investment opportunities this could bring
and the wider impact on our sector. During the financial year under review, we
continued to see widespread adoption and exciting developments in generative
AI. Notwithstanding this, the market backdrop remains a challenge with
geopolitical events dominating much of the year and interest rates continuing
to rise sharply throughout the year.
Performance
The Manager's report is provided in the annual report and gives an overview of
the year past and the outlook for the near future.
I am pleased to be reporting strong absolute performance during the financial
year under review. This was largely due to the Manager's decision to rotate
towards AI as a primary investment theme and focus on the enablers and
beneficiaries in this space including semiconductor and component subsectors.
The diminution in the risks of prolonged high inflation and recession have
helped equity markets generally. The Company performed well against its peer
group with the net asset value (NAV) per share rising from 2,239.48p to
3,154.11p, an increase of 40.8%, versus an increase in the benchmark of 38.9%
in Sterling terms over the same period.
Discount Management
The Company's discount narrowed during the financial year under review, ending
the year at 7.4% compared to 13.4% at the end of FY23.
The Board continually monitors the discount at which the Company's ordinary
shares trade in relation to the
Company's underlying NAV and, whilst the Board does not have a formal discount
policy, it will continue to exercise its discretion to buy back shares at a
discount. Equally, the Board will also use discretion to issue shares at a
premium.
Utilising this discretion, we repurchased a total of 5,663,975 ordinary shares
(representing 4.1% of the issued share capital) in the year under review at an
average price of 2,442.50 pence per share and an average discount of 12.3%.
Following the year end and up to close of business 11 July 2024, the Company
has bought back a further 964,346 shares. While purchase levels have been
relatively low on an individual transaction basis, we should note that this
activity does not preclude the Manager determining that a more significant
amount than usual on any one day should be purchased. Such a decision may be
influenced by, in the Manager's view, there being a particular investment
opportunity best accessed through buying shares in the Company rather than
buying individual securities.
Board Composition
As noted in my Half Year Statement to Shareholders, Charlotta Ginman stepped
down as Audit Chair on
31 October 2023 and was succeeded by Jane Pearce as part of a smooth and
orderly transition. Charlotta remained on the Board as a non-executive
Director of the Company and will retire at the Company's Annual General
Meeting ("AGM") in September 2024 following nine years continuous service. On
behalf of the Board, I would like to thank Charlotta for her service to the
Company over the years.
Subsequent to Charlotta's retirement the Board will comprise five non
executive Directors; while the Board considers the composition to be
appropriate and covering all skills required we are in the midst of a
recruitment process. It is three years since the Board last undertook a market
search and we felt we should survey the market and seize the opportunity to
hire an additional individual who would add to the Board's existing diversity
and skill sets should such an individual be identified. We have appointed a
recruitment consultant with a perceived ability to fulfil a search criterion
focussed on exploring a broad pool of candidates and in particular, candidates
with minority ethnic and/or diverse backgrounds. Further information will be
shared when available.
There have been no other changes to the membership of the Board during the
year under review. The Directors' biographical details are available on the
Company's website and are provided in the annual report.
Directors' Fees
As is detailed further within the Remuneration Committee Report, an annual fee
review was undertaken to ensure that remuneration paid to Directors remains
attractive, competitive and in line with those of its peers to attract and
retain the best candidates. The Board usually favours modest increases year on
year (where applicable) and with effect from 1 May 2024, the Directors' base
fee increased by c.3% to £36,000 and the fee of the Chair to £65,500. The
supplement for the Audit Committee Chair was increased to £8,500 to reflect
the additional time required in connection with increased audit regulation and
overall responsibility of the Chair of the Audit Committee, whilst the
supplement for the Senior Independent Director remained unchanged at £4,200.
In aggregate, the Directors fees for FY25 will be £235,000. The maximum level
currently provided for in the Company's Articles of Association is £300,000.
In order to provide headroom and flexibility particularly should the Board
find it wants to recruit an additional member, it is proposed that the
Articles are updated, by way of special resolution at the AGM, to increase the
maximum level to £350,000 per annum.
Share Split
The price of the Company's existing ordinary shares ('Existing Ordinary
Shares') has increased in recent years and particularly during the financial
year under review with our shares now trading regularly above £30 per share.
Whilst this is positive for the Company and our Shareholders, we recognise
that a higher share price might be a barrier to investment for certain
investors including regular savers who may wish to invest smaller amounts per
transaction on a regular basis.
The Directors are therefore proposing the sub-division of each Existing
Ordinary Share into 10 new ordinary shares (the "New Ordinary Shares") (the
"Share Split"), thereby resulting in a lower market price per ordinary share.
The Share Split will not itself affect the overall value of any shareholder's
holding in the Company and the New Ordinary Shares will carry the same rights
and be subject to the same restrictions (save as to nominal value) as the
Existing Ordinary Shares. We have made arrangements to ensure that there will
be no interruption to trading in the ordinary shares on the London Stock
Exchange when the Share Split takes place.
The Share Split requires the approval of shareholders and, accordingly,
resolution 10 in the Notice of AGM seeks this approval. The Share Split is
conditional on the New Ordinary Shares being admitted to the Official List of
the Financial Conduct Authority and to trading on the London Stock Exchange's
main market for listed securities. If resolution 10 is passed, the Share Split
will become effective on admission. Further details of the proposed Share
Split are set out in the Directors' Report in the annual report and in the
Notice of AGM
Annual General Meeting
We are pleased to confirm that the Company's AGM will be held on 11 September
2024 at 2:30pm at The Royal Institution, 21 Albemarle St, London W1S 4BS. We
look forward to welcoming shareholders to the meeting, at which they will
receive a presentation from the Manager and his team and shareholders will
also have the opportunity to ask questions and meet the Board; light
refreshments will be available following the meeting.
The notice of AGM will shortly be provided to shareholders and will also be
available on the Company's website. Shareholders are encouraged to read the
detailed explanations on the formal business and the resolutions to be
proposed at the AGM contained within the Shareholder Information section of
the annual report as well as the Notice of AGM. In order to ensure that
shareholders are able to follow the proceedings of the AGM without attending
in person, the Company will also broadcast the meeting online via zoom
videoconferencing. However, please note that shareholders joining via zoom
will not be able to vote online during the AGM and are therefore encouraged to
submit their votes via proxy, as early as possible. All formal resolutions
will be voted on by way of a poll.
We are conscious of the importance of shareholder engagement and would like to
encourage shareholders to engage with the Board and the Investment Manager. As
such, the Board invites shareholders to submit questions in writing to which
we will respond, as far as possible, ahead of the AGM date. Please send your
questions to cosec@polarcapital.co.uk with the subject heading PCTT AGM.
Environmental, Social and Governance (ESG)
The Investment Manager incorporates ESG considerations into its investment
process and the Board continues to engage closely with the Manager to monitor
its progress and receives regular updates on the developments on the corporate
side of Polar Capital's business. As at 30 April 2024, based on MSCI ESG
ratings, the portfolio and the benchmark were both A rated.
Please refer to the ESG Report in the annual report which incorporates both
the investment and corporate approaches.
Outlook
The outlook for the technology sector is exciting as Artificial Intelligence
(AI) capabilities develop at a rapid pace. The parallel computing
infrastructure to support this growth has dominated sector and market returns
- as the Manager argues is typical during the 'buildout' phase of a new
general-purpose technology (GPT). This has brought concentration challenges in
the near term but should provide immense future opportunities as AI is applied
to every industry.
The Manager has continued to invest in the team to take advantage of the AI
opportunity, adding two additional investment analysts during the year.
Shareholders will have the opportunity to hear from the technology investment
team members at the AGM.
FINANCIAL AND PERFORMANCE REVIEW FOR THE YEAR ENDED 30 APRIL 2023
The NAV per share increased to 3,154.11p as at 30 April 2024 from 2,239.48p at
the start of the year, which represents a 40.8% increase, and the Company
finished the year with total net assets of £3,804.5m. The Investment
Manager's Report sets out in detail the performance of the Company for the
financial year. The chart contained in the annual report shows in greater
detail the movement in total net assets for the year.
Total Return
The Company generates returns from both capital growth (capital return) and
dividend income received (revenue return). The total return from the portfolio
for the year was a gain of £1,115.4m (2023: £105.2m loss), of which there
was a £1,124.6m gain (2023: £98.3m loss) from capital and a £9.2m loss
(2023: £6.9m loss) on our income account which offsets all expenses against
dividend income. Full details of the total return can be found in the
Statement of Comprehensive Income in the annual report. As a matter of policy,
all expenses are allocated to income with the exception of the performance fee
which is allocated to capital. The Company's allocation of expenses is
described in Note 2(d) in the annual report and the allocation methodology is
considered on an annual basis. No change to the policy is recommended (2023:
no change). The earnings per share were 904.21p (2023: losses of 81.28p per
share). These were made up of 911.68p from capital return and a loss of 7.47p
from revenue return.
Capital Return
The investment portfolio was valued at £3,713.8m (2023: £2,640.2m) at the
year end 30 April 2024. The investment portfolio delivered a total of realised
and unrealised gains of £1,147.9m (2023: £106.8m loss) for the year ended 30
April 2024. The Company's valuation approach is described in Note 2 (f) in the
annual report. The derivative losses of £22.0m (2023: £0.03m gains) have
arisen as a result of the call and put options which are used to facilitate
efficient portfolio management. Full details of the derivatives are set out in
the Investment Managers Report.
Revenue Return
The total investment income of £15.5m (2023: £16.2m) represents dividend
income derived from listed investments. During the year under review, the
Company received other operating income of £6.4m (2023: £3.8m) which was
derived from bank interest and Money Market Fund ("MMF") interest. It should
be noted, however, that the MMF is held primarily as a cash diversification
factor rather than an income generating investment. As stated above, as a
matter of policy, all expenses (excluding the performance fee) are charged to
revenue and as a result, expenses normally exceed the income received in any
given year. As has been the case for many years, the revenue reserve therefore
remains negative. The Company historically has not paid dividends given the
nature of its focus on longer-term capital growth. The Directors do not
recommend the payment of a dividend for the financial year under review. The
Board reviews this stance on a periodic basis.
Total Expenses and Finance Costs
The total expenses for the year under review amounted to £27.3m (2023:
£23.1m).These are made up of investment management fees of £25.9m (2023:
£21.9m) and administrative expenses of £1.4m (2023: £1.2m). In addition,
the Company had finance costs of £1.9m (2023: £1.6m). The Company's
operating expenses comprise predominantly variable costs, such as management,
depositary and custody fees which increase and decrease based on the net asset
value. Other expenses remained at a similar level to the last year. The
Company keeps under close review the costs and expenses associated with the
running of the Company to ensure that they continue to provide value for
money. There was no performance fee accrued at the year ended 30 April 2024
(2023: £nil).
Ongoing Charges
Ongoing Charges Ratio (OCR) is a measure of the ongoing operating costs of the
Company. It is calculated in line with the AIC recommended methodology,
represents the total expenses of the Company, excluding finance costs, and is
expressed as a percentage of the average daily net asset value during the
year. The OCR demonstrates to Shareholders the annual percentage reduction in
NAV as a result of recurring operational expenses, that is, the expected cost
of managing the portfolio. Whilst based on historical information, the OCR
provides an indication of the likely level of costs that will be incurred in
managing the Company in the future. The OCR for the year to 30 April 2024 was
0.80%, a slight reduction from the previous year of 0.81%. The OCR including
the performance fee for the year to 30 April 2024 was the same as no
performance fee was accrued at the year end. See Alternative Performance
Measures in the annual report
Cash and Cash Equivalents
As in the prior years, the Company's absolute level of cash remained
relatively high, closing the year at £102.6m (2023: £239.1m), this equates
to less than 3% of the Company's NAV as at 30 April 2024. As noted above, as
part of the Company's cash diversification strategy, the Company has taken a
cautious approach and has chosen to invest 50% of its USD cash balance into a
USD Treasury Money Market Fund. As at 30 April 2024, the Company held the
BlackRock Institutional Cash Series - US Treasury Fund with a value at year
end of £33.0m (2023: £90.4m).
Portfolio Turnover
Portfolio turnover (purchases and sales divided by two) totalled £2,836.5m
equating to 85.5% for the year to 30 April 2024 (2023: 77%) of average net
assets over the year. Details of the investment strategy and portfolio are
given in the Investment Manager's Review.
Gearing
The Company can use gearing for investment purposes as stated in the annual
report. As at the year end, the Company had fully drawn the two, two-year
fixed rate term loans (JPY 3.8bn and USD$36m) with ING Bank N.V. Both loans
fall due for repayment on 30 September 2024. The repayment of both loans,
totalling approximately £48.0m (2023: £50.8m), would equate to less than 2%
of the Company's NAV as at 30 April 2024. Consideration of the future level of
borrowings required by the portfolio manager is currently under review.
Foreign Exchange
The majority of the Company's assets and revenue are denominated in currencies
other than Sterling and are impacted by foreign exchange movements. As at the
year ended 30 April 2024, the other currency losses of £1.3m (2023; gains of
£8.4m) represents the exchange losses on currency balances of £4.1m (2023:
gains of £7.2m) and net gains on translation of loan balances of £2.8m
(2023: gains of £1.2m). The Company's total return and net assets can be
affected by the currency translation and movements in foreign exchange. Note
27 (a) (ii) in the annual report, analyses the currency risk and the
management of such risks.
Catherine Cripps
Chair
16 July 2024
INVESTMENT MANAGER'S REPORT
Market Review
Equity markets delivered strong returns during the Trust's fiscal year as
inflation trended back towards target, unemployment remained low and economic
growth surprised to the upside. The MSCI All Country World Net Total Return
Index in Sterling returned +18.1% during the fiscal year, while the S&P
500 and the DJ Euro Stoxx 600 indices returned +23.3% and +9.0% respectively.
The 'goldilocks' combination of disinflation and strong economic growth was
entirely at odds with investor pessimism and bearish positioning at the start
of the fiscal year, which reflected a torrid 2022, adverse financial
conditions, above-average valuations and the allure of significantly higher
risk-free rates. Investors poured $1.3trn into money market funds during 2023,
10x more than flowed into equity funds.
The fiscal year began amid the fallout from the collapse of Silicon Valley
Bank and Credit Suisse. Decisive policymaker actions prevented contagion and
reminded investors that in extremis the so-called 'Fed put' (an assumption
that if necessary the Fed will step in to support financial markets) was alive
and well. Global markets rebounded from lows in March to almost recover their
December 2021 highs by the end of July 2023, supported by resilient consumer
spending and strong labour markets, even as central banks hiked rates
aggressively. Inflation trended down ('core PCE' declined from 5.2% in 2022 to
4.1% in 2023 and is forecast to reach 2.6% in 2024) without triggering a
recession or even an increase in the unemployment rate, which remained below
pre-pandemic levels in many countries.
Strong equity market returns depended on the (surprising) fact that aggressive
rate hikes did not derail the economy. Instead, US real GDP growth of 2.5% in
2023 (and expectations for 2.7% in 2024) significantly exceeded expectations
at the start of 2023 (1.4% and 1.0% for 2023 and 2024 respectively). This
'goldilocks' scenario was tested during the fiscal year, however, as US bond
yields touched 5% in October 2023 on a narrowly-averted US government
shutdown, increased US Treasury issuance, a ratings agency downgrade and
emerging 'higher for longer' interest rate commentary from central bankers.
The rise in yields proved short-lived and they retraced to c3.9% by the end of
the calendar year, spurring a cross-asset rally. Favourable seasonal trends
were buoyed by investors' growing hopes of a soft landing (where inflation
comes down without a significant increase in unemployment). Markets took
dovish commentary from Fed policymakers and supportive inflation data as a
signal that the Fed had completed its hiking cycle and began to price the
first rate cut in March, with expectations for six or seven 25-basis-point
interest rate cuts by the end of 2024.
The New Year (and final third of the Trust's fiscal year) presented challenges
as US 10-year Treasury yields rebounded to c.4.6% in April as labour markets
and economic data remained firm, and inflation readings came in a little
hotter than expected. This pushed out market expectations of the timing of the
first Fed cut from March to November and put upward pressure on real yields
(government bond yields adjusted for inflation), which moved from 1.7% coming
into the year to c.2.2% by the end of April.
Despite still being incomplete, the rise and fall of inflation has been
remarkable, demonstrating that credible central banks can contain inflation by
controlling inflation expectations, rather than just slowing down the economy.
The Fed also enjoyed notable tailwinds including productivity gains, benign
weather and a tepid Chinese recovery. We have previously argued (in our
1945-1947 inflation parallel) that many Covid-related imbalances would
probably have resolved themselves eventually, but the historic path taken by
the Fed reflected the uniqueness of the post-pandemic episode. Larry Summers,
a former Treasury Secretary, described the Fed's actions in the two years
after 2021 as a "less than 1% probability set of actions relative to what the
market expected".
An inescapable feature of equity markets during the fiscal year was the
dominance of a select group of mega-cap technology stocks, the so-called
'Magnificent Seven' - latterly the 'Fab Four' (or Five) - which returned +60%
combined in USD terms, according to Bloomberg. These returns emerged following
a disastrous calendar 2022 when the group declined -45%, and FY24 returns were
driven almost entirely by positive estimate revisions. Their dominance of
equity returns (and indeed profit pools) has been felt more widely across the
market as large cap stocks (Russell 1000) outperformed small cap (Russell
2000) by 10ppts during the fiscal year, 32ppts over the past 3 years and
50ppts over the past 5 years.
Technology Review
The technology sector led global equity markets higher during the Trust's
fiscal year as the Dow Jones Global Technology Index returned +38.9% against
the MSCI All Country World Net Total Return Index's +18.1%. Technology
outperformance was driven by a number of factors: better than expected growth,
positive earnings revisions, improved margins, and the increasing likelihood
of an economic 'soft landing'. However, the most important technology theme
during the year was the proliferation, evolution, and investment implications
of Generative AI (GenAI). Our previous fiscal year saw the launch of ChatGPT
in November 2022, followed by Microsoft's $10bn investment in OpenAI in
January 2023. However, GenAI became impossible for investors to ignore in May
2023, when NVIDIA delivered remarkable Q1 results accompanied by the largest
guidance beat ($11bn vs. $7.15bn) in the history of the semiconductor
industry.
At the stock level, companies exposed to AI computing (where demand for
servers, chips and related components increased significantly) delivered
positive returns during the fiscal year, led by NVIDIA which gained a
staggering +213%. This helped the Philadelphia Semiconductor Index (SOX)
return +58.7% over the same period, led by AI-related chip makers and
semiconductor capital equipment companies, as cloud providers invested
aggressively in the new technology.
Strength in AI-related data centre spending 'crowded out' non-AI spending in
areas such as CPU and cloud servers, reinforcing the divergence between AI and
non-AI returns. Non-AI semiconductor fundamentals were mixed: communications
infrastructure spending remained weak, PC and smartphone inventory cycles
appeared to bottom, while automotive and industrial end markets softened
significantly before potentially bottoming towards fiscal year end. Apple had
a challenging year amid China market share loss concerns while the distinct
lack of a positive AI narrative weighed on Apple's multiple.
The software sector delivered reasonable absolute returns as the Bloomberg
Americas Software Index returned +23.8%, but significantly lagged the
technology sector on a relative basis. This was due to a lack of positive
revenue growth revisions (revenue growth in the software sector overall has
been decelerating since mid-2021) and the deterioration of the narrative
around AI's impact on existing application software vendors. Enterprise IT
budgets remained fairly tight and continued to consolidate around the largest
vendors as a more ROI-focused 'best of suite' approach overtook the 'best of
breed' buying behaviour more generous technology budgets enabled during covid.
Microsoft was the clearest beneficiary of this trend, topping almost every CIO
'spending intentions' survey.
Infrastructure software companies generally struggled as the fiscal year
progressed, despite the fact that public cloud aggregate revenue growth (to
which their growth is often tethered) reaccelerated to +21% in Q4 2023 and
+24% in 1Q 2024, as customer 'optimisation' activities attenuated. AI was
called out as a meaningful contributor at Microsoft and Amazon, but this has
yet to translate into improved performance in cloud consumption stocks.
Cybersecurity stocks fared better, reflecting robust budgets, spend
consolidation and the likelihood of AI-enabled cyberattacks requiring new
tools. Ransomware attacks reaccelerated to +70% yoy in 2023 as hackers begin
to use GenAI tools to help them create malware faster than ever before. The
average cost of a breach reached $4.5m in 2023, a 3-year CAGR of +15%, and
United Health's $1.6bn ransomware attack was the first >$1bn breach.
The NASDAQ Internet Index returned +37.2% following a challenging FY23 (+1%),
during which consumer- focused internet companies were hurt by post-pandemic
normalisation trends and concerns about an imminent recession. The recession
in the US never arrived and the largest e-commerce and advertising platforms
(such as Amazon, Google and Meta) dominated returns in FY24. These companies
consolidated market share gains and delivered strong results as the online
consumer remained resilient. Newfound expense discipline helped deliver
significant upside to earnings estimates for the megacap internet companies.
Furthermore, a higher cost of capital decimated smaller peers - a dynamic
which helped other 'vertical leaders' such as Uber Technologies and DoorDash.
The AI narrative around the largest internet platforms oscillated during the
fiscal year. Concerns around longer-term disruption weighed against near-term
revenue benefits from better AI-driven ad targetting, product enhancements and
strategic advantages from their data assets, scale, distribution, compute and
technical expertise. Smaller players struggled, especially those with weaker
balance sheets or aggressive online Chinese competition, such as Match.com and
Etsy.
Long-duration assets and second-liners struggled for footing against a
backdrop of high yields, mixed fundamentals and limited exposure to AI. This
resulted in unusual performance divergence among technology funds and trusts,
with those striving to discover the 'next' Microsoft, Meta and NVIDIA largely
missing out on returns generated by the existing ones. As important as early
AI enablers and beneficiaries, the absence of these stocks from portfolios
meant many failed to capture AI- driven returns during the year. The IPO
market tentatively reopened during the fiscal year, as the high profile ARM
IPO raised c$5.2bn. There was a smattering of other noteworthy technology IPOs
(Instacart; Klaviyo; Kokusai Electric), but capital markets activity remained
fairly subdued overall.
Large-cap technology stocks once again significantly outperformed their small
and mid-cap peers as the Russell 1000 Technology Index and Russell 2000
Technology Index delivered returns of +43.5% and +29.8% respectively. Returns
were led by the largest technology companies, which in part explains why the
S&P 500 Information Technology Sector saw its valuation premium to the
S&P 500 Index expand to 1.36x from 1.21x at the start of the calendar
year, against a 10-year average of 1.1x. However, this valuation expansion was
not experienced beyond the US; the Dow Jones Global ex-US Technology sector
(W2TEC) which has no mega-cap constituents, significantly underperformed
(+1.8%).
Portfolio Performance
The Trust outperformed its benchmark with the net asset value per share rising
+40.8% during the fiscal year versus an increase of 38.9% for the Dow Jones
Global Technology Index. The Trust's share price advanced by 50.5%, reflecting
the additional impact of the discount narrowing from 13.4% to 7.4% during the
period. We continue to monitor the discount and the Trust bought back 5.66m
shares during the fiscal year, at an average discount of 12.3% to NAV.
While the zeitgeist of 2023 was captured by a select group of mega-cap stocks,
returns during the Trust's fiscal year were less uniformly positive for the
so-called Magnificent 7. Instead, returns were dominated by the proliferation,
evolution and investment implications of generative AI (GenAI) following
NVIDIA's remarkable quarter and record guidance delivered in May.
The Trust benefited from our decision to rotate decisively towards AI as a
primary investment theme, as outlined in our interim report. This was largely
focused on the semiconductor and component subsectors, including
memory-related assets, advanced packaging, testing and EDA software. In
addition, we made a series of investments in smaller Asian component and
materials companies that we expect to play a more significant role in AI
computing than they did during the Cloud era. While the Trust was broadly
neutral NVIDIA (which returned a staggering +213%), it benefited from a slew
of other AI-related assets, including chipmakers AMD (+78%), ARM (+98%) and
Micron (+76%), datacentre spending beneficiaries Arista Networks (+61%),
Fabrinet (+83%) and Pure Storage (+122%), as well as semiconductor capital
equipment makers Disco (+158%) and KLA (+79%).
While software sector fortunes were more mixed, select Trust holdings such as
ServiceNow (+52%) and HubSpot (+44%) benefited from spend consolidation and a
supportive AI narrative. The same dynamic drove returns in the cybersecurity
subsector as tool consolidation and the need for scaled data assets to defend
against more sophisticated AI-powered attacks supported spending. The Trust
benefited from strong performance in a number of its cybersecurity holdings
including CrowdStrike (+145%), Cloudflare (+87%), CyberArk (+93%), Palo Alto
Networks (+60%) and Zscaler (+93%).
In the internet subsector, the Trust enjoyed strong returns from its exposure
to dominant franchises in ecommerce and streaming that delivered strong
revenue growth and improved profitability amid a more benign competitive
landscape. These included Amazon (+67%), DoorDash (+112%), Netflix (+68%),
Shopify (+47%), Spotify (+111%) and Uber (+114%).
The Trust also benefitted from the decision to reduce and/or exit companies we
believed would prove limited beneficiaries or eventual losers from AI. The
most significant of these was Apple (+1%) that meaningfully underperformed
during the year due to smartphone market headwinds and a limited AI narrative.
Our underweight Apple position was responsible for 336bps of positive
contribution to the Trust's relative performance during the year. Performance
also benefited from not holding Intel (-1%), which had execution issues in its
business model transition, non-AI related semiconductor companies that
experienced inventory digestion as well as an underweight exposure to
EV-related assets. We extended this underweight EV position during the year
following the sales of On Semiconductor (-2%) and Infineon (-4%) amid
deteriorating automotive datapoints.
In terms of negatives, liquidity proved the largest headwind to performance as
cash (4.5% average) cost 249bps and Nasdaq puts an additional 76bps. While
meaningful, our cash and put positions are designed to ameliorate our
portfolio beta (which is considerably higher than our benchmark) in the event
of a market setback. They also inform portfolio construction, emboldening us
to hold larger positions in higher beta stocks than we might otherwise.
Relative performance was also negatively impacted by further large-cap
outperformance with the Russell 1000 Technology Index (large cap) and Russell
2000 Technology Index (small cap) returning +43% and +30% respectively. On a
three and five-year basis, the gap has extended in favour of large caps to 62%
and 138% respectively. During the fiscal year, this was largely transmitted
via underweight positions in Meta (+80%) and Alphabet (+52%), which comprised
more than 10% of our portfolio but dragged on relative performance given they
made up 13% of the benchmark.
While AI drove the Trust's performance during the year, there were also some
negative offsets including an underweight position in chipmaker Broadcom
(+109%), which dragged on our relative performance by 120bps. In addition,
there were some smaller AI positions to which we arrived late and/or failed to
capture the upside from, including Gold Circuit, Unimicron and Rambus. Earlier
hopes that infrastructure software would benefit from AI-related application
development also proved premature with a lack of revenue reacceleration or AI
participation weighing on holdings such as MongoDB (-19%), Snowflake (+5%) and
Teradata (-4%).
Trust performance was also negatively impacted by exposure to more
rate-sensitive areas such as fintech and alternative energy. Within fintech,
our holdings in Mastercard (+19%) and Visa (+17%) both generated strong
positive returns but fell well short of our benchmark. Smaller fintech
companies fared meaningfully less well, although our exits of Adyen (-24%) and
Flywire (-29%) helped reduce this impact. Our modest exposure to alternative
energy proved an additional drag, again ameliorated by several stock sales
including Enphase Energy (-33%) and First Solar (-3%). Smaller Trust holdings
in factory automation and robotics-related companies such as Harmonic Drive
Systems (-16%), Keyence (+0%) and Cognex (-12%) were negatively impacted by
China weakness. Our decision to modestly add back to some longer-duration
stocks such as Roblox (+0%) and Tesla (+12%) towards the end of 2023 also
proved premature as yields rebounded in early 2024, leading to sustained
underperformance from this group.
Market Outlook
If the market surprise of 2022 was how high inflation remained for so long,
2023's revelation was how little impact the fastest monetary tightening cycle
in a generation had on the real economy. Various explanations include: a delay
in the 'transmission' of higher rates given the high proportion of mortgages
and corporate debt which had been fixed at very low rates during the
'zero-rates' era; the benefit of interest income on 'excess consumer deposits'
in supporting consumer spending; corporate unwillingness to let go of the
workers they had fought hard (and paid up) to attract and retain. In contrast
with prior years, our base case for 2024 is broadly in line with consensus on
many of the key near-term debates (inflation, rates, valuations) and our
belief is that where we do differ, the range of outcomes is narrower. Some of
the other 'known' risks are more binary in nature (e.g. US presidential
elections).
In its April 2024 update, the IMF projected 3.2% global growth in 2024, 30bps
higher than its October 2023 forecast, and 3.2% in 2025. This outlook is
described as "surprisingly resilient, despite significant central bank
interest rate hikes to restore price stability". The persistence of US growth
is striking, now expected to accelerate modestly from 2.5% in 2023 to 2.7% in
2024, against expectations for a deceleration to 2.1% for both years in the
IMF's January 2024 update. Despite strong economic growth, the disinflation
process remains broadly on track and "monetary policy should ensure that
inflation touches down smoothly": global headline inflation is expected to
fall from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025.
Our base case remains that central banks have won the battle on inflation.
Much of the earlier excess inflation proved to be supply-side driven including
covid disruptions (e.g. container freight rates increased 5x between 2020 and
late 2021) and exogenous commodities price shocks from Russia's invasion of
Ukraine. Demand imbalances have also played a part, including government
stimulus and demand swings for goods versus services. Common causes have seen
common solutions: disinflation dynamics have been reasonably homogeneous
across countries. Goods disinflation has been widely observed while services
has proven stickier, around c3-5% in developed economies.
For its part, the Fed kept long-term inflation expectations 'well-anchored'
and prioritised credibility above all else; the '5yr5yr' - a market-implied
expected average inflation rate over a five-year period that begins five years
from today - remained in a 2-2.5% range despite headline CPI inflation in the
high single-digits. This proved sufficient to deliver a 'soft landing' most
thought impossible, judging by the c75% of economists who expected a recession
coming into 2023, and the Fed futures curve which anticipated the Fed would
have to cut rates by the second half of 2023. We expect the Fed to manage the
balance between keeping rates restrictive enough to ensure inflation returns
to target and cutting early enough to prevent a recessionary outcome.
The path of inflation is the key determinant of Fed policy, and it will
(rightly) remain 'data dependent', but
policymakers are clearly cognizant of the need to manage de facto tightening
from higher 'real' rates as inflation trends lower and policy rates sit
unchanged. Indeed, real rates are already around c2%, versus an average 3%
level at which the Fed has historically started cutting, and other central
banks including Sweden's Riksbank, the ECB and the BoE have either begun
cutting or signalled they will soon. The 'maximum employment' aspect of the
Fed's 'dual mandate' will also likely receive more attention, and arguably
Chair Powell introduced a form of 'labour market put' at the January FOMC
press conference: "If we saw an unexpected weakening in… the labor market,
that would certainly weigh on cutting sooner. Absolutely."
Equities tend to rally after the Fed begins a cutting cycle, although the
returns are (unsurprisingly) better in non- recessionary scenarios. Deutsche
Bank found that the S&P 500 has returned +7% in the 12 months following
the first rate cut in recessionary scenarios, and +18% in non- recessionary
scenarios. Longer-term, Goldman Sachs found a c50% positive return over 2
years absent a recession and negative mid-teens returns when a recession
occurred. Interestingly, the overall level of the market coming into the rate
cutting cycle has made little difference historically. Since 1980, there have
been 20 times when the Fed has cut rates when the S&P 500 was within 2% of
all-time highs, and the market has been higher a year later on all 20
occasions.
Investors should also be comforted by central banks' increasing ability and
confidence in using their balance sheets to deal with sector or asset-class
specific issues. Indeed, one of the great challenges last year was
understanding how an aggressive Fed tightening cycle did not cause a spike in
unemployment or a recession. In addition to the reasons suggested above,
liquidity provided by years of Quantitative Easing plus covid-era balance
sheet expansion (from 18% of GDP in 2019 to 28%) mollified the impact of
monetary tightening from rate cuts. In addition, central banks have been very
willing to use their balance sheets to support the economy and the debt and
labour markets (and, by extension, risk assets), as seen with the Fed's Bank
Term Funding Program (BTFP) and the Bank of England's successful intervention
during the LDI crisis. We expect balance sheet operations to remain a
permanent part of the landscape.
Valuations appear extended, but not unreasonable. Equity market valuations
have rebounded since June and October 2023 lows (c15.5x) and the S&P now
trades on 21x 2024 consensus earnings and 18.5x 2025, based on +11% and +9.5%
EPS growth. Historically, equity valuations have expanded following the end of
Fed hiking cycles, but multiple expansion is typically accompanied by a
decline in bond yields. Economic growth appears positive but moderating (total
revenue growth tracks nominal GDP growth normally), which suggests upside to
revenues (absent AI-related areas) might be limited. S&P profit margins
are back to pre-GFC highs and elevated versus history, having troughed in Q4
2022. Several incremental headwinds to further margin expansion suggest profit
growth could be more similar to revenue growth in 2024, although analysts are
still assuming significant operating leverage with S&P 500 expected
earnings growth (+11%) ahead of revenue growth of 4.9%. However, we are
optimistic longer-term that AI could drive sufficient labour productivity for
knowledge workers to make a material difference to the c$53trn global wage
bill (c54% of GDP). Our valuation base case is that significant further
multiple expansion is unlikely from this point, and equity returns should
better track EPS growth absent a recession or bull case scenario.
Market Risks
The most significant risk to the market outlook is the prospect of a recession
or 'hard landing'. Past economic downturns have seen S&P 500 EPS decline
by 11% peak-to-trough and the index level fall by -24%, although prices and
valuations typically bottom faster than earnings. The median forecasted
probability of a US recession in the next 12 months fell steadily from 65% to
30% during the fiscal year. However, there remains a possibility that the
'long and variable lags' of the fastest monetary tightening cycle in a
generation will ultimately push the economy into recession. Cracks in
commercial real estate have caused concern, but the office market accounts for
just 2-3% of banks' loan portfolios while office investment is only 0.35% of
GDP.
We believe the odds of a US recession are still relatively low, despite
warnings from several traditional leading indicators such as the yield curve
(still inverted) and the Conference Board's Leading Indicator, which has never
experienced such a large 6- month decline without a recession. On the monetary
side, the money supply has never contracted this fast without some sort of
negative outcome - even in our favoured parallel the post-WW2 'recovery loop',
there was a brief recession in 1948-49 as the economy transitioned from a
wartime to a peacetime footing. Central bankers may have more data (and some
other tools) to help the economy adjust, but if there is an asset quality
problem rather than a liquidity problem, there is only so much they can do.
The most bearish market view is any challenge to the idea that the Fed
actually has managed to get inflation sustainably under control, and the
threat from a 'second wave' of inflation could necessitate further tightening.
There was a second (and third) wave of high inflation in the 1970s related to
geopolitical developments (Vietnam war, energy crisis, deficit spending). This
would hurt equity performance: markets were flat between 1967-1980 and credit
outperformed significantly as yields averaged >7%.
A longer-term issue which could contribute to a higher neutral interest rate
and lower equity multiples is the growth in public debt, which has reached
record levels as a percentage of GDP in many countries. Historically (e.g.
1919, 1946, 1995), peak government debt-to-GDP has been resolved by a
combination of lower fiscal deficits (or surpluses) and an acceleration in
GDP. This has not (yet) occurred; since the 2020 peak, GDP growth has been
strong, but the federal deficit in FY23 was c$2trn (7% of GDP), doubling from
$1.0trn in FY22.To date, this increased deficit has been of limited concern to
the bond market but our working assumption is that it 'cares' about deficits
in a non-linear way, and perhaps 5% on the 10-year US treasury might mark a
potential 'break point'. However, we also acknowledge that being the reserve
currency of the world may allow for ongoing structural US deficit financing
with limited penalties.
Beyond a recession, we are most concerned about geopolitical risk, a topic we
covered in depth last year. This risk is heightened in what is an
election-heavy year, where countries accounting for >60% of global GDP are
holding elections - US, India, and UK among them - but also because there is
an emerging narrative about the reversal of the post 1980s 'peace dividend'
which has supported global growth, trade, stability, and asset values. The
emerging 'multipolar' world could reverse this feedback loop as trade and
supply chains decouple, higher inflation and higher deficits become embedded -
the '1970s scenario'. China represents its own category of geopolitical and
economic risk. A bearish view might consider the 'success' of China's initial
lockdown as its zenith as a global power before the inherent limitations of an
investment-led growth model and/or totalitarian leadership were laid bare.
China's nominal GDP growth has decelerated to the lowest level since the 1970s
which helps explain the weakness in Chinese equity and property markets. This
could reflect a new normal for China after three decades of double-digit
nominal GDP growth.
In terms of US-Sino relations, there are several paths that a deterioration
might take in 2024. These include further outbound investment restrictions,
export controls, and even the revocation of 'Most Favoured Nation' status,
something of which Trump is in favour. China may also be at risk of exporting
deflation to the rest of the world but the economic impact to the US should be
contained (exports to China make up 0.6% of US GDP), and a direct effect of a
1% shock to Chinese growth on US GDP is estimated at less than 0.01%.
A far greater risk comes from the potential for an escalation in tensions
surrounding Taiwan as President Xi described unification as "a historical
inevitability" in his 2024 New Year's address. A second Trump presidency would
bring an added element of uncertainty and higher likelihood of a
miscalculation. A recent 'war game' simulation estimated the potential impact
on the global economy of a war in the Taiwan Strait at c$10trn or c10% of
global GDP, significantly larger than the GFC or the pandemic. As it relates
to PCT, Taiwan accounts for 60% of global semi shipments and >90% of
leading-edge semi manufacturing capacity. For context, OPEC has about 40% of
global oil capacity. It might take 5 years + to rebuild Taiwan's semiconductor
capacity and would undoubtedly set the evolution of AI back materially.
Increasing market concentration has been a feature of the post-GFC market,
with the largest 10% of stocks' accounting for a portion of the overall stock
market (c.75%) not seen since the Wall Street Crash of 1929.
This is not just a technology sector phenomenon as large caps are outpacing
small caps nearly everywhere, even on a sector-neutral basis. The rejuvenation
of small caps has been long called for by active managers (including us), but
the case for broadening is not straightforward.
A more supportive rate environment should help small cap outperformance as we
saw in Q4 2023, when yields dropped sharply back to c3.8% and small and
mid-caps led the market higher. As we saw then, the upside from a small cap
rally can be explosive as Russell 2000 bull markets have produced average
gains of 131%, with 7 of 11 bull markets producing triple-digit gains.
However, the earnings picture is complicated as large-cap market dominance has
reflected higher EPS estimates, in contrast with small-caps where earnings
have trended lower since the start of 2022. Absent an earnings recovery, it is
hard to argue for structurally higher small-cap multiples.
The risk profile of small caps is also less appealing: the Russell 2000 has a
record percentage of unprofitable companies with significantly more debt to
refinance in the next few years, in stark contrast with strong balance sheets
at larger corporates. Finally, the dominance of large caps may simply reflect
the changing nature of the economy as larger companies have enjoyed increasing
returns to scale, formerly having been subject to diminishing returns. This
reflects a number of structural changes including the increasing relative
importance of network effects, globalisation and potentially large cap
companies' ability to develop and exploit proprietary software. In fact,
returns on capital for large companies were generally lower than for smaller
companies in the 1980s and 1990s, but since 2000 they have become
significantly higher for larger companies. The gap may also reflect different
attitudes to investment. For example, total capex and R&D spending for the
Magnificent Seven this year is expected to total c$350bn and the Magnificent 7
reinvests c60% of their operating cash flow back into capex and R&D, or
about 3x rate of the other 'S&P 493'. Our view is that while a broadening
of the market is certainly possible and would be welcome, change of leadership
often require a break in the cycle.
There is risk to equity markets from competition from other asset classes.
Yields on equities, high grade bonds, T-bills and REITs recently converged for
the first time in 20 years. As such, there is far greater competition for
capital with investors able to collect the same earnings yield as the S&P
500 at varying risk/return profiles. If rates trend lower as expected, we
should expect some rotation into US equities, although equity ownership as a
percentage of total assets is already at record highs.
Our broader conclusion remains unchanged from our interim report: whether
there is a recession or not and what equity markets do over the next six to 12
months perhaps misses the point. Astounding new innovations such as AI augur
well for a longer-term innovation-led growth and prosperity cycle. Markets
appear fully valued if we think the timeline to AI's economic impact is 5+
years away, but much more reasonable if that timeline is sooner. The
shortening timeline to Artificial General Intelligence (AGI) - the ability to
understand, learn, and apply knowledge across a broad range of tasks and
domains at a level comparable to human intelligence- presents a further upside
scenario.
Technology Outlook
Earnings outlook
Having stabilised in 2023 with growth of 3.5% y/y, worldwide IT spending is
expected to reach $5.1trn this calendar year representing an increase of 8%
y/y, in current dollar terms. This represents a notable acceleration and an
upward revision from the +6.8% forecast in January. While Gartner believe it
will take until 2025 to translate into enterprise budgets, it is clear that AI
has already become a corporate imperative with c45% of CIOs planning to adopt
AI within 12-24 months. Strength expected in datacentre spending (+10% y/y)
suggests that the digital groundwork for AI is being built ahead of enterprise
adoption, led by hyperscalers. Likewise, an expected rebound in devices,
following two very weak consecutive prior years, is predicated on AI-related
product cycles.
For 2024, the technology sector is expected to deliver revenue growth of 9.3%,
while earnings are expected to increase by 18% which would represent the best
year for earnings since 2021. These forecasts are well in excess of
anticipated S&P 500 market growth, where revenues and earnings are pegged
at 4.9% and 11% respectively. The technology sector's outperformance is
expected to continue in 2025 with early forecasts for 10.8% / 13.8%
comfortably ahead of market expectations (5.8% / 9.5%). While macroeconomic
conditions may create crosscurrents, we believe technology fortunes this year
will be determined by the path of AI progress.
Valuation
The forward P/E of the technology sector has expanded during the past year. A
year ago, valuations had recovered to c24x forward P/E, having ended 2022 at
c.19x. Since then, valuations have increased further as technology earnings
and stock performance (especially Mag-7) 'crowded out' the broader market. At
time of writing, technology stocks trade at 26.5x, well ahead of five (23.9x)
and ten-year (20.3x) averages. This reflects the arrival of AI as an
investment theme and a much improved inflationary backdrop. The premium
enjoyed by the sector expanded during the past year with excitement around AI
resulting in the sector making post-bubble highs (1.4x the market multiple),
levels last seen briefly during the pandemic period. At time of writing, this
premium has fallen back to c.1.3x - at the high end of the post-bubble range.
While this suggests less valuation upside in the near- term, we believe that
AI represents a unique moment for the technology sector such that the
post-bubble range (between 0.9-1.3x) may no longer be valid.
Magnificent 7
However, the valuation question is greatly influenced by a select group of
mega-cap stocks that - as well as driving returns last year - also dominate
technology indices. As such, this year we present some high-level thoughts on
the so-called 'Mag-7' given the implication for future returns, prospects of a
broadening market and, of course, our own positioning.
While 2023 proved a remarkable year for the group, returns are highly
sensitive to the starting point; since the beginning of 2021, Mag-7 - at time
of writing - has only outperformed the S&P 500 by 10%. At time of writing,
the group sports a premium valuation; a forward P/E of 29.6x as compared with
20.9x for the overall index and 18.6x for the remaining 493 S&P 500 (SPX)
companies. However, Mag-7 accounts for c.29% of SPX market cap and is expected
to generate c.22% of SPX net income. One might argue a little extended, but
very clearly far from bubble territory. Moreover, the group is expected to
deliver three year compound annual revenue growth of 12% versus 3%, higher
margins (22% vs. 10%) and a greater re-investment ratio (61% vs. 18%) than the
SPX493. This superior profile has shown little sign of abating as in Q1 2024,
expected S&P 500 earnings growth of +6% y/y is expected to come from
Magnificent 7 earnings growth tracking to +48% y/y while the remaining
'S&P 493' are forecast to deliver -2% y/y. These metrics reflect the
group's uniqueness, with each member dominating large markets, enjoying scale
advantages or natural monopoly status while investing heavily in new
opportunities to avoid the so-called innovator's dilemma. Most also have
strong AI stories in our opinion, and all are what we consider non-fungible
companies and stocks. As such, we expect to retain sizeable positions in the
largest stocks in the benchmark over the coming year, assessing each on its
own merits and not defaulting to a market broadening narrative, even if we
(and other active managers) strongly desire it.
Next generation / longer-duration stocks
Next-generation valuations have also expanded as we predicted in last year's
Annual Report when we suggested it was 'highly likely' that we had already
seen the lows. Since then, an improved inflation outlook and moderating cloud
optimisation headwinds have seen software valuations recover to c.7.0x forward
EV/sales, having bottomed at around 5.1x (and peaking at 16x in 2021).
According to KeyBanc, this leaves them ahead of five and ten-year pre-covid
averages of 6.1x and 7.2x respectively. Higher growth stocks have experienced
a greater valuation recovery with companies growing revenues above 20% today
trading at 10.9x forward EV/sales; down 62% from highs but well ahead of
pre-COVID five-and ten-year averages of 7.8x and 7.0x respectively. In
contrast, unprofitable growth stocks have recently made new valuation lows,
trading at less than 3.0x forward EV/sales.
Survival of the fittest
The partial recovery in software valuations (and related lack of market
interest in unprofitable growth stocks) reflects a slower growth environment
ameliorated by higher industry margins. This year, the median software growth
rate is forecast at 14-15% as compared to 17% in 2023, and 26-27% in 2022.
However, the adoption of the so-called PE playbook, as highlighted last year,
has become the norm for most software companies and has been rewarded by the
market. Unlike prior downcycles, the recalibration was rapid, reflecting
unique post-pandemic challenges - bloated and disconnected workforces, waning
product and corporate relevance, the end of 'free money' and, more recently,
the birth of genAI. The focus on more profitable growth has seen the median
software company's free cashflow margin expand by a remarkable 1500bps from
c.5% in 2019 to c.19-20% in 2024E. This recalibration has seen the best
companies become better versions of themselves. For instance, while
CrowdStrike stock has more than recaptured 2021 highs, over the past c.3 years
it has grown revenues from $1.1bn to $2.9bn while expanding operating margins
(OMs) from 10% to 19%. ServiceNow - recently at all-time highs - has grown
revenues from $5.5bn to $8.5bn while expanding OMs from 25% to 29%. In
addition, both companies should be able to use AI to deliver further margin
improvement as well as monetise the technology via AI-enhanced product lines.
Against this backdrop, unprofitable companies are not merely anachronistic -
they represent a pool of companies unwilling or (more likely) unable to
deliver margin expansion. They are former pandemic / WFH winners, derivative
plays on now unloved themes, SPACs, or companies that might have changed the
world in 2040 had zero interest rates prevailed. They are the broken toys used
by equity investors to play themes that didn't last or never happened. Some
may yet reinvent themselves, but history suggests most will disappear, to be
combined, reconstructed, or dismantled by private equity. As such, we continue
to tread tentatively in longer-duration stocks, doing our best to avoid the
siren call of 'cheaper valuations'.
More M&A activity likely
Following a dismal 2023 for M&A, this year has got off to an encouraging
start. After a notable absence of strategic M&A, 2024 has already seen HP
announce the $14bn acquisition of Juniper Networks, while Synopsys and Ansys
are set to combine in a $35bn stock and cash transaction. More recently, IBM
scooped up Hashicorp for $6.5bn, representing c.8.5x EV/CY25 revenues and a
42% one-day premium, while in the UK, there was recently a bidding war between
Viavi and Keysight for Spirent. In addition, private equity is likely to
remain active with c.$2.5trn in 'dry powder' having acquired Alteryx, New
Relic and most recently, Darktrace. We expect AI to play a part in greater
M&A too, as point solution companies continue to struggle versus platforms
with LLMs likely to prove highly disruptive to pre-GenAI vintages.
Nonetheless, a recovery in M&A activity should provide some downside
support to current valuation multiples.
Cloud / AI Update
Cloud reacceleration
After decelerating for ten quarters, public cloud revenue growth finally
reaccelerated in Q4'23 reflecting the combination of waning optimization
activity and ramping AI workloads. In Q1'24, aggregate cloud revenue growth
reaccelerated 3ppts sequentially to +24% y/y - remarkable given a greater than
$210bn industry revenue run-rate. We are hopeful that the post-COVID
optimization process is largely complete, a view supported by CIO surveys that
suggest cloud spending should more closely track consumption from here. More
importantly, AI workloads are beginning to 'move the needle' with AI called
out as a meaningful contributor at Microsoft (7pts of Azure revenue growth in
its most recent quarter) and Amazon ("multibillion-dollar revenue run rate" in
AWS). We expect these tailwinds to grow stronger as the public cloud remains a
key conduit for accessing AI. Foundation models with ever greater parameter
counts require larger clusters of connected AI servers, while the compute
requirements of AI applications are said to double every 3.5 months; both
needs fit well with cloud flexibility and scalability.
A new architecture for AI
The hyperscalers also have the 'deep pockets' required to invest in AI
infrastructure, which due to extreme performance required by AI training is
heralding a significant shift in IT architecture from serial to parallel
compute. We consider the architectural break far more significant than the
transition to cloud from on-premise compute. This is apparent from an AI
server bill of materials (BOM) said to be 25x greater than a general purpose
cloud server. A useful parallel for this might be comparing a Toyota Prius
with Formula 1; both are cars, but one is designed for general purpose and
efficiency (cloud), the other for extreme performance (AI).
Unprecedented growth
The nascent 'AI war' that began a year ago (when Microsoft looked to leverage
its OpenAI relationship to challenge Google's search business) has given way
to something far more significant, accompanied by an unusual urgency that
feels reminiscent of the 1990s. Having increased by c.5% during 2023,
datacentre capex will materially accelerate this year with all of the US
hyperscalers raising future spending intentions in both Q4'23 and Q1'24. At
time of writing, hyperscaler capex is expected to exceed $170bn in 2024,
representing growth of 44% y/y. This is sharply higher than earlier
expectations of +26% after Q4 results, and +18% at the beginning of the
calendar year. According to Gartner, AI servers will account for nearly 60% of
hyperscaler total server spending in 2024.
To date, the greatest beneficiary of AI infrastructure spending has been
Nvidia as its GPU chips sit at the epicentre of the new AI architecture. In
its most recent quarter, the company registered datacentre revenues of
$18.4bn, a remarkable 409% y/y increase. Growth at this scale is extremely
unusual in technology history, leading many to suggest that AI spending is a
'bubble'. We strongly disagree and consider instead that we are early in the
accelerated buildout of a general purpose technology.
Building the AI rails
Sizing the AI infrastructure opportunity is difficult to say the least - in
last year's paper we had the temerity to suggest that AI capex "might exceed
$100bn". Since then, Jensen Huang, CEO of Nvidia, has sized the AI market at
$1Trn while Dr Lisa Su, CEO of rival AMD, has suggested the market for AI
chips will reach $400bn by 2027, which including other component, system and
networking costs implies an $800bn opportunity. At face value this suggests
that AI spending could increase at a 70% CAGR through 2027 by which time it
would reach c.0.8% of global GDP.
This would be extraordinary, but not unprecedented given that between
1830-1839, US railroad investment increased from 0.2% of GDP to just above
0.9% by 1839, corresponding to a 31% CAGR in nominal terms. After a digestion
period, railroad investment reaccelerated, averaging 1.7% of GDP between 1850
and 1859. This astonishing period included a blow-off (bubble) phase after
1850, with investment peaking at 2.6% of GDP in 1854. At the height of the
equivalent UK railroad boom, investment averaged 7% of GDP for three years.
More recently, the dotcom period witnessed telecom companies spend $1trn (in
today's money) building out the Internet during the five years following the
Telecommunications Act of 1996. While both historic parallels are useful
reminders that infrastructure builds often end badly, current AI spending
appears to us to be in its infancy.
The Biggest Opportunity
Underpinning AI spending is the scale of the AI opportunity, reflecting its
would-be general purpose technology (GPT) status. Because it addresses
knowledge work, economist Erik Brynjolfsson has described AI as "the ultimate
GPT - the most general of GPTs". Accenture estimates that as much as 40% of
all working hours will be supported or augmented by language-based AI while
McKinsey believe that generative AI could automate 30-50% of tasks in about
60% of occupations, adding the equivalent of between $2.6-4.4trn in economic
output annually by 2030.
These longer-term opportunities are buttressed by early AI monetisation. Less
than four years after launching a 'capped profit' arm in 2019, OpenAI is said
to have reached a $2bn revenue run-rate with more than 92% of the Fortune 500
as customers. Meta has also demonstrated its ability to monetise GenAI by
improving advertiser ROI and reducing the cost of customer acquisition.
Enterprise adoption of copilots (AI-powered companion software) and premium
AI-enabled products has also
been encouraging. These tools enable knowledge workers to be more productive;
Github Copilot (launched by Microsoft in collaboration with OpenAI in 2022) is
helping software developers code up to 55% faster by writing 46% of the code.
Lexis+ AI - a legal GenAI assistant from RELX - allows users to "draft
clauses, legal documents.. and summarise case law.. (and) the reasoning behind
the case". Law enforcement technology provider Axon recently announced 'Draft
One', AI-powered software capable of auto drafting police reports based on
body-camera footage, saving officers an hour per day on paperwork; in
Colorado, police experienced an 82% decline in time spent writing reports.
Payment provider Klarna also announced it had replaced 700 full-time contact
centre employees with AI agents saving the company $40m per annum. These are
early glimpses into AI innovation and disruption, less than two years after
the launch of ChatGPT.
Happening now
Rapid adoption and monetisation of nascent AI tools points to a faster than
expected diffusion rate. History shows that the delay between invention and
widespread use of new technologies has fallen significantly over time, while
analysis of earlier GPTs by the Brookings Institute suggests that
implementation lag halves with each successive GPT: 80 years for steam, 40
years for electricity, and 20 years for ICT. We expect AI to take less than 10
years to diffuse widely as it 'stands on the shoulders of giants' -
technologies such as cloud, internet, leading edge semiconductors and billions
of smartphones. Key AI breakthroughs did not happen overnight; the Cloud is
nearly 20 years old. NVIDIA has been designing GPUs since 1999. Billions of
smartphones and other connected devices have created vast datasets for
training AI models and a near-ubiquitous channel for its distribution.
The idea of rapid AI diffusion is visible in real-world developments that
include growing recognition among policymakers of the importance of AI and the
need to address it through legislation with the number of AI-related bills
passed into law increasing from just one in 2016 to 37 by 2022. The Hollywood
writers' strike in May 2023 was another notable development as 11,500 film and
television writers began industrial action amid concerns around the AI's role
in scriptwriting, fearing that AI-generated scripts could undermine writers'
work and compensation. While some investors may be concerned about the risk of
slower AI diffusion, the actions of those most exposed to the technology and
legislators charged with controlling it suggest otherwise.
A model of improvement
Diffusion, monetisation, and corresponding capex are highly dependent on
continued AI model progress. We believe the advent of the transformer model in
2017 represented a key breakthrough which is why we describe it as the
'Bessemer moment for AI'. As with steel in 1856, this breakthrough has
resulted in discontinuous technology progress; the parameter count of OpenAI's
GPT-4 (2023) is rumoured to be one million times larger than the DeepMind
model that beat Lee Sedol at Go just seven years ago. Higher parameter counts
have significantly increased the learning capacity of AI models, enabling them
to handle a broader range of general-purpose tasks.
Recent model progress includes multimodality (able to analyse images and
audio) and far larger token context windows (the amount of information that
can be processed in any prompt). In February, OpenAI announced Sora, a
remarkable AI 'text-to-video model' able to generate video based on
descriptive prompts with "an emergent grasp of cinematic grammar". The furious
pace of model improvement recently saw Google's Gemini Ultra become the first
model to exceed the 'human expert performance' threshold on MMLU, an AI
benchmark which measures knowledge across 57 subjects. Improved performance is
also helping ameliorate earlier technology challenges with newer LLMs such as
GPT-4 experiencing lower hallucination rates (incorrect model outputs). The
expected launch of OpenAIs GPT-5 over the summer as well as the launch of
Meta's 425bn-parameter Llama 3 and Amazon's 2trn parameter Olympus will serve
as important waypoints to assess continued AI model progress.
Our confidence in continued AI progress is underpinned by scaling laws which
have so far predicted improvements in model performance based on increasing
model size, the amount of training data and computing power applied. This is a
complex topic to tackle here, but to us it is highly reminiscent of Moore's
Law, which famously stated that the number of transistors on a microchip would
double approximately every two years. Humans struggle to model non-linear
change, but Moore's Law held true for many decades, predicting the exponential
progress of semiconductors that followed. We believe that for as long as they
hold, scaling laws predict a continued non-linear pace of AI model improvement
and ever-greater investment required to stay on the curve. In a recent
interview, Mark Zuckerberg defended Meta's decision to significantly increase
AI spending with reference to scaling laws:, "I think it's likely enough that
we'll keep going. I think it's worth investing the $10bns or $100bn+ in
building the infrastructure.
General intelligence
Zuckerberg's excitement (and capex plans) reflects an apparently shortening
timeline to artificial general intelligence (AGI), a point where AI might
achieve the cognitive abilities of humans across a wide range of tasks. This
would have seemed remarkable -crazy even - just a few years ago, but within
the AI community, AGI is widely considered attainable in the near future.
Founder of DeepMind Demis Hassabis has said AGI could be less than a decade
away, while Shane Legg, Google's chief AGI scientist, believes there is a 50%
chance of general intelligence by 2028. Sam Altman also believes it could be
reached within the next four or five years. A shortening timeline to AGI might
make sense of a series of peculiar recent AI developments including the late
2023 debacle at OpenAI when Altman himself was fired and rehired in a matter
of days, as well as decision by Geoffrey Hinton ('The Godfather of AI') to
leave Google in May 2023 so he "could talk about the dangers of AI". It might
also explain why Altman has mooted the idea of raising $7trn - twice the size
of UK GDP - to 'reshape the semiconductor industry'. After all, if we are
indeed close to achieving AGI, the world is going to need a lot of chips.
Welcome to the AI-era
We expect AI to profoundly change the world. At a prosaic level, AI should
deliver a significant productivity boost, as was the case with prior GPTs.
Current expectations for US productivity to average c.1.4% this decade look
mismodelled; GS believe that AI could increase US productivity by 1.5%
annually over the next decade, while Erik Brynjolfsson expects US productivity
to average "at least 3%".
Risk to jobs
If so, the coming decade could be "the best ever" although we acknowledge that
concerns about AI risk to jobs is understandable given its scope and pace of
AI improvement. However, history demonstrates that humans have adapted well to
prior technology disruption; in 1850, agriculture explained two-thirds of US
jobs before mechanisation steadily reduced this to just 4% by 1970. Despite
this, and subsequent technology innovations, median G7 unemployment has
"oscillated based on economic cycles, rather than any technological waves"
since 1750.
While knowledge work is in the crosshairs of this new GPT, we expect the first
wave of AI to complement rather than substitute human work, as is the usual
pattern of technology change. Even when AI adoption becomes more disruptive
all is far from lost, as the agricultural experience demonstrates. While focus
will inevitably fall on jobs 'lost to AI' there should be many more made
possible by the union of human + machine.
Unfortunately, we cannot know what new opportunities will be made possible by
AI. However, we do know that earlier tools and GPTs created opportunities that
were previously unthinkable. For instance, the sewing machine changed the
relationship between humans and clothing. Previously, clothes were
prohibitively expensive; Singer's sewing machine (1855) transformed this by
increasing stitches per minute 22-fold, reducing the time it took to produce a
shirt from 14 ½ hours to c.1 Today, apparel is a $2trn industry.
Likewise, the telegraph - the precursor of all modern communication systems -
"freed communication from transportation". By changing the relationship
between information and distance, the telegraph (1837) challenged price
arbitrage, changed the way wars were waged, created the 'information industry'
(news agencies such as Reuters and AP) and gave life to the first 'fintech'
application - wire transfer - introduced by Western Union in 1871.
Hopefully these two lesser known case studies help explain why we know AI will
create massive new markets, and challenge existing relationship that exist
today. However, we cannot yet know what form these will take, just as Morse -
who tried to sell his telegraph system to the US government for $100,000 - did
not fully understand its commercial potential.
Idea Generation
We know that earlier technology tools and GPTs have changed relationships. Our
early bet is that AI changes the relationship between people and ideas.
Transportation technologies (horse, canals, railroads, containers, aviation
etc) tamed distance by transforming the movement of physical goods (freight,
people). Communication technologies (telegraph, telephone, internet etc) tamed
distance by changing the velocity of information. We suspect AI will transform
the speed of knowledge creation after years of declining research
productivity. The ability to inject limitless AI into research should
meaningfully accelerate scientific progress, and unlock new ideas, just as the
telegraph acted as "an agency for the alteration of ideas".
Technology Risks
Given its centrality to sector fortunes, the key risk posed to technology
stocks relate to AI. A complex and fluid topic, the most important of these is
that the AI monetisation timeline disappoints, perhaps because early
productivity gains prove limited. Greater availability of AI chips might also
lead to a less intense demand environment, leading to concerns about industry
growth. Other potential AI- related risks include greater antitrust scrutiny
and other legal challenges relating to data use. We remain sanguine that
regulation designed to slow AI proliferation will prove manageable as
countries talk a better story than they implement given the strategic
importance of AI. We also note that better provision of guardrails could
actually accelerate AI diffusion, just as improved safety following the
regulation of the aviation industry acted as a tailwind for consumer adoption.
We should also remind investors that should AI become a GPT that there are
likely to be far more losers than winners from today's cohort of companies
within and beyond the technology sector. However, the most significant AI risk
relates to model improvement failing to keep up with scaling laws which would
negatively impact hyperscaler capex plans and our (AGI-related) bull case.
Beyond AI, there are many macroeconomic risks that are covered elsewhere in
this report. As previously highlighted, the most important of these relate to
inflation (failing to return to pre-pandemic levels) and recession (brought on
by higher interest rates or sharply higher energy prices). As such, the timing
and magnitude of interest rate cuts is likely to remain a key focal point for
investors. In addition, there is likely downside risk to technology spending
should CEO confidence meaningfully deteriorate. Similarly earnings estimates
will remain subject to macroeconomic turbulence with less scope for cost
cutting now technology margins have recovered to 25.6% in Q1'24, up from 22.4%
a year ago. While we hope this would be disproportionately felt by non-AI
segments, it might also result in weaker consumption trends and a
disappointing recovery trajectory for cloud spending.
Valuation remains a key risk too, particularly following the absolute and
relative re-rating in technology stocks. Heightened sensitivity to earnings
disappointments during Q1 earnings season is symptomatic of elevated
valuations and investor expectations. While we believe the re-rating is
appropriate given the arrival of AI as a key investment theme, higher
risk-free rates and/or diminished prospects of interest rate cuts could
challenge this view. We are also dismissive of the notion that AI stocks are
in a bubble, akin to the dotcom period in the late 1990s. While there are
features of today's market that rhyme with that earlier period, we do not
believe investors are really considering trillion dollar market opportunities,
scaling laws and an accelerated path to AGI. Factors that would challenge this
view include much higher valuations (tech traded above 2x the market multiple
in 2000), a 'hot' IPO market dominated by immature AI companies and the
application of new valuation metrics necessary to justify elevated valuations.
None of these conditions exist today.
As in prior years, regulation beyond AI remains a key risk too, with
potentially adverse outcomes in outstanding antitrust cases against Alphabet
and Amazon likely to impact other natural monopolies within our sector. In
Europe, large 'gatekeeper' technology platforms will be forced to comply with
the Digital Markets Act (DMA) designed to foster greater competition, with
fines of up to 10% of global revenues for non-compliance. However, we believe
worst- case outcomes will continue to be averted, in part because many of
these companies represent the vanguard in the emerging AI battleground with
China. Instead, deteriorating US-Sino relations may represent a more
significant risk, given that Taiwan represents a critical geopolitical fault
line and could potentially impact a significant portion of our portfolio.
Concentration risk
In addition, it would be remiss of us not to again remind shareholders about
the concentration risk both within the Trust and the market-cap weighted index
around which we construct the portfolio. After another year of large-cap
outperformance, this risk remains elevated. At year end, our three largest
holdings - NVIDIA, Microsoft, and Alphabet - represent c. 27% and c.35% of our
NAV and benchmark respectively while our top five holdings (which additionally
includes Apple and Meta) represent c37% and c53% of our NAV and benchmark
respectively. We continue to believe that this concentration risk is justified
because they are unique, non-fungible assets that capture the zeitgeist of
this technology cycle and appear well positioned for AI given their
significant scale advantages.
That said, we remain unafraid of the idea of moving to materially underweight
positions in the largest index constituents should we become concerned about
their growth or return prospects, or should we find more attractive
risk-reward profiles elsewhere in the market. This past year, we have
meaningfully reduced our Apple position to c820bps underweight at the end of
the fiscal year. However, the timing of a more concerted move away from
mega-caps remains highly uncertain, not least because in aggregate the stocks
continue to enjoy strong relative earnings revisions while valuations remain
far from ebullient.
In the meantime, we should remind shareholders that while PCT is able to hold
up to a full benchmark weight subject to a maximum limit of 15%, we are
unlikely to hold positions much above 10%. When we do so, it is likely to be
via smaller equity positions held in combination with a slither of call
options designed to ameliorate upside risk in exchange for a modest premium.
In the end, we struggle with the notion that we are reducing risk by making
the portfolio ever more concentrated. Instead, we continue to believe that a
diversified portfolio of AI-exposed growth stocks capable of outperformance,
but also constructed to withstand investment setbacks, should deliver superior
returns over the medium term, particularly on a risk-adjusted basis.
Conclusion
We hope this (long) outlook section adequately conveys our excitement about
Generative AI. We truly believe the AI story is just beginning. Where others
may predict steady diffusion, we expect AI adoption to follow the pattern of
electrification which was "sweeping and widespread". For now, we (and the
Trust portfolio) are heavily focused on the companies helping build the AI
'rails': chips, systems, storage, networking. We believe these are the most
direct beneficiaries of an infrastructure build-out that is only a few
quarters old. After decades of understandable investor focus on software
enabled by the cloud, AI has turned the spotlight back to hardware; the c.25x
higher bill of materials of an AI server epitomises an architectural shift
away from general purpose cloud in favour of high-performance compute. In
addition to large holdings in NVIDIA, AMD and Broadcom, we have added a series
of Asian suppliers (PCBs, systems, testers and more) that we expect to benefit
from higher ASPs and growing AI share of their revenue mix. We are also
intrigued by edge AI opportunities in traditional technology segments such as
PC and smartphone - markets we typically eschew as growth investors. While we
will tread carefully in these otherwise mature areas, AI has the potential to
steepen innovation curves, shorten replacement cycles and render massive PC
and smartphone installed bases obsolete. Combined with Cloud and several
infrastructure software companies, these AI enablers explain around two-thirds
of the Trust portfolio today.
In time, there should be other software winners too; for now we have
gravitated towards the largest incumbents, particularly those with large,
unique, and critical datasets such as Microsoft, SAP, and ServiceNow that are
able to monetise their domain expertise via copilots or premium-priced
products. Longer-term, we remain unsure about how the deterministic, packaged
software industry of today will coexist with the probabilistic nature of AI
models. How will software innovation and codified 'best practice' contend with
recursive AI able to adapt, learn and iterate?
While this question is longer-term and more theoretical in nature, there is
already genuine investor debate about whether Adobe (not held) - a truly
remarkable software company - is a 'winner' or 'loser' from AI less than two
years after the launch of ChatGPT. This speaks to the pace of model
improvement, as well as the reach and disruptive capabilities of AI. We expect
this debate and the shadow cast by AI to extend within software and other
technology subsectors as AI becomes ever more capable. This is why we
introduced a so- called 'AI lens' to our investment process last year; not
only to help us identify potential AI winners, but to ensure that we have
properly considered and debated the risks posed by the nascent General Purpose
Technology (GPT).
Our approach may appear premature and at odds with the current consensus view
that AI will take a reasonably long time to diffuse. History also suggests we
might be early given that incumbents can benefit from the early adoption stage
of a new GPT as it creates incremental opportunities to leverage existing (if
soon to be obsolete) investments, particularly while the new technology is
inferior, expensive, or limited in scope. However, if we are right about rapid
AI diffusion and model improvement (our base case), investors may have less
time than they think to avoid the potential losers from AI. Our experience
investing during the internet, cloud and smartphone cycles reminds us it is
considerably easier to spot early losers from disruptive new technologies than
it is to identify the early winners.
The combination of accelerated infrastructure build-out and concomitant model
improvement, together with potential for more rapid disruption elsewhere
explains why we have pivoted the portfolio towards AI during the past year.
While this may result in somewhat greater daily volatility, our enthusiasm for
AI will continue to be matched by a pragmatic (and highly liquid) approach to
portfolio construction given heightened levels of uncertainty and opportunity
associated with AI disruption and a new computing stack.
Following a number of thematic 'false-starts' in recent years, we understand
why some investors might default to bubble at times like this. However, we
believe AI represents the next general purpose technology. If so,
relationships between computers and humans, humans and ideas, are likely to be
upended. One of the biggest impediments to the development of AI has been
Polanyi's paradox, that "we know more than we can tell"; tasks which humans
can intuitively understand how to perform but cannot verbalise or formally
encode. Generative AI may have solved this riddle by finding the unknown
relationships across vast bodies of data. In the near future, AI may tell us
more than we can know today. At times like this, it may be tempting to seek
shelter from the uncertainty that discontinuous technological change brings.
Instead, we attempt to embrace the unknown, taking comfort from the fact that
many of the smartest people who ever lived were unable to know in advance- as
Samuel Morse exclaimed in 1844 in his first telegram -'what hath God wrought'
Ben Rogoff & Ali Unwin
16 July 2024*
*Data and statistics referenced within the Investment Manager's report may
have changed between the financial year end and the date of publication.
The Investment Managers' Core Themes and ESG Report from a corporate and
investment perspective are included in the Annual Report and Accounts.
PORTFOLIO REVIEW
Breakdown of Investments by Region As at As at
30 April 2024 30 April 2023
US & Canada 72.6 72.8
Asia Pacific (ex-Japan) 10.0 10.4
Europe (inc - UK) 6.6 3.9
Japan 5.1 4.4
Middle East & Africa 3.0 1.2
Other Net Assets 2.4 6.6
Latin America 0.3 0.7
Market Capitalisation of Underlying Investments As at As at
30 April 2024 30 April 2023
>$10bn 89.3% 92.1%
$1bn-$10bn 10.0% 7.5%
<$1bn 0.7% 0.4%
All data sourced from Polar Capital LLP.
CLASSIFICATION OF INVESTMENTS*
as at 30 April 2024
North Europe Asia Pacific (inc. Middle East) Total Total Benchmark Weightings as at 30 April 2024
America (inc. Latin America) % % % 30 April 30 April %
2024 2023
% %
Semiconductors & Semiconductor Equipment 23.0 4.5 7.7 35.2 24.0 31.5
Software 19.4 0.7 2.7 22.8 24.1 27.3
Interactive Media & Services 12.6 0.1 0.7 13.4 11.7 16.3
Technology Hardware, Storage & Peripherals 6.0 - 2.2 8.2 13.4 16.8
Electronic Equipment, Instruments & Components 1.2 - 2.6 3.8 1.4 0.4
IT Services 2.8 - 0.2 3.0 4.0 4.6
Entertainment 1.1 1.1 0.3 2.5 1.0 0.3
Broadline Retail 2.2 - - 2.2 3.3 -
Communications Equipment 1.6 - - 1.6 1.4 2.1
Aerospace & Defence 0.8 - - 0.8 0.2 -
Automobiles 0.8 - - 0.8 1.1 -
Machinery - - 0.8 0.8 0.9 -
Hotels, Restaurants & Leisure 0.4 0.1 - 0.5 1.2 0.2
Media 0.5 - - 0.5 - -
Building Products - - 0.4 0.4 - -
Healthcare Equipment & Supplies 0.2 - 0.2 0.4 1.0 -
Ground Transportation 0.3 - - 0.3 0.9 -
Financial Services - - 0.2 0.2 3.3 -
Chemicals - - 0.1 0.1 - -
Life Sciences Tools & Services - 0.1 - 0.1 - -
Healthcare Technology - - - - 0.4 -
Electrical Equipment - - - - 0.1 -
Total investments (£3,713,758,000) 72.9 6.6 18.1 97.6 93.4
Other net assets (excluding loans) 2.8 0.2 0.7 3.7 8.4
Loans (0.8) - (0.5) (1.3) (1.8)
Grand total (net assets of £3,804,533,000) 74.9 6.8 18.3 100.0 -
At 30 April 2023 (net assets of £2,828,141,000,000) 78.9 4.8 16.3 - 100.0
* The classifications are derived from the Benchmark as far as possible. The
categorisation of each investment is shown in the portfolio available on the
Company's website. Where a dash is shown for the Benchmark it means that the
sector is not represented in the Benchmark. Not all sectors of the Benchmark
are shown, only those in which the Company has an investment at the financial
year end.
FULL PORTFOLIO as at 30 April 2024
Value of holding % of net assets
Ranking 30 30 30 April 2024 30 April 2023
April April
2024 2023
2024 2023 Stock Sector Region £'000 £'000 % %
1 (4) Nvidia Semiconductors & Semiconductor Equipment North America 395,876 130,855 10.4 4.6
2 (1) Microsoft Software North America 335,337 302,791 8.8 10.7
3 (3) Alphabet Interactive Media & Services North America 278,153 174,388 7.3 6.2
4 (7) Meta Platforms Interactive Media & Services North America 188,666 82,047 5.0 2.9
5 (2) Apple Technology Hardware, Storage & Peripherals North America 163,959 284,199 4.3 10.0
6 (8) Taiwan Semiconductor Semiconductors & Semiconductor Equipment Asia Pacific 139,427 61,421 3.7 2.2
7 (5) Advanced Micro Devices Semiconductors & Semiconductor Equipment North America 134,752 94,299 3.5 3.3
8 (-) Broadcom Semiconductors & Semiconductor Equipment North America 96,108 - 2.5 -
9 (10) ASML Semiconductors & Semiconductor Equipment Europe 86,304 49,941 2.3 1.8
10 (-) Micron Technology Semiconductors & Semiconductor Equipment North America 85,513 - 2.2 -
Top 10 investments 1,904,095 50.0
11 (14) CrowdStrike Software North America 74,376 36,041 2.0 1.3
12 (11) Amazon.com Broadline Retail North America 73,038 46,756 1.9 1.7
13 (13) Arista Networks Communications Equipment North America 62,166 38,201 1.6 1.4
14 (25) Cloudflare IT Services North America 60,421 29,973 1.6 1.0
15 (59) Pure Storage Technology Hardware, Storage & Peripherals North America 57,835 10,694 1.5 0.4
16 (31) CyberArk Software Software Asia Pacific 56,882 24,330 1.5 0.9
17 (29) Disco Corporation Semiconductors & Semiconductor Equipment Asia Pacific 55,005 26,960 1.4 1.0
18 (16) KLA-Tencor Semiconductors & Semiconductor Equipment North America 47,574 35,072 1.3 1.2
19 (9) ServiceNow Software North America 43,916 51,884 1.2 1.8
20 (6) Samsung Electronics Technology Hardware, Storage & Peripherals Asia Pacific 40,845 83,894 1.1 3.0
Top 20 investments 2,476,153 65.1
21 (-) Spotify Technology Entertainment Europe 40,702 - 1.1 -
22 (-) Synopsys Software North America 39,552 - 1.0 -
23 (23) Qualcomm Semiconductors & Semiconductor Equipment North America 39,171 32,525 1.0 1.1
24 (41) Confluent Software North America 32,585 18,140 0.9 0.6
25 (64) ASM International Semiconductors & Semiconductor Equipment Europe 31,519 9,614 0.9 0.3
26 (74) Axon Enterprise Aerospace & Defence North America 31,277 5,357 0.8 0.2
27 (-) Datadog Software North America 30,917 - 0.8 -
28 (50) Tesla Automobiles North America 30,877 13,358 0.8 0.5
29 (27) Salesforce.com Software North America 30,681 27,910 0.8 1.0
30 (-) Unimicron Technology Electronic Equipment, Instruments & Components Asia Pacific 30,078 - 0.8 -
Top 30 investments 2,813,512 74.0
31 (-) Cadence Design System Software North America 28,912 - 0.7 -
32 (-) Netflix Entertainment North America 28,412 - 0.7 -
33 (-) Quanta Computer Technology Hardware, Storage & Peripherals Asia Pacific 27,418 - 0.7 -
34 (12) HubSpot Software North America 26,899 45,203 0.7 1.6
35 (66) Elastic Software North America 26,879 9,134 0.7 0.3
36 (-) SAP Software Europe 26,651 - 0.7 -
37 (-) Advantest Semiconductors & Semiconductor Equipment Asia Pacific 26,645 - 0.7 -
38 (15) Tencent Interactive Media & Services Asia Pacific 26,331 35,666 0.7 1.3
39 (-) Applied Material Semiconductors & Semiconductor Equipment North America 25,924 - 0.7 -
40 (-) JFrog Software Asia Pacific 25,751 - 0.7 -
Top 40 investments 3,083,334 81.0
41 (47) eMemory Technology Semiconductors & Semiconductor Equipment Asia Pacific 25,127 14,524 0.7 0.5
42 (35) MongoDB IT Services North America 24,703 22,107 0.6 0.8
43 (-) Amphenol Electronic Equipment, Instruments & Components North America 23,267 - 0.6 -
44 (26) Shopify IT Services North America 21,874 29,497 0.6 1.0
45 (53) Harmonic Drive Systems Machinery Asia Pacific 20,982 12,777 0.6 0.5
46 (-) Coherent Electronic Equipment, Instruments & Components North America 20,575 - 0.6 -
47 (70) Teradyne Semiconductors & Semiconductor Equipment North America 20,228 7,012 0.5 0.2
48 (-) Monday.com Software Asia Pacific 19,936 - 0.5 -
49 (-) The Trade Desk Media North America 19,913 - 0.5 -
50 (57) E Ink Electronic Equipment, Instruments & Components Asia Pacific 19,435 12,028 0.5 0.4
Top 50 investments 3,299,374 86.7
51 (-) DoorDash Hotels, Restaurants & Leisure North America 19,289 - 0.4 -
52 (49) Marvell Technology Semiconductors & Semiconductor Equipment North America 16,984 13,879 0.4 0.5
53 (-) Nitto Boseki Building Products Asia Pacific 16,690 - 0.4 -
54 (33) Tokyo Electron Semiconductors & Semiconductor Equipment Asia Pacific 16,318 23,016 0.4 0.8
55 (-) ARM ADR Semiconductors & Semiconductor Equipment Europe 14,683 - 0.4 -
56 (-) King Slide Works Technology Hardware, Storage & Peripherals Asia Pacific 14,362 - 0.4 -
57 (-) Gold Circuit Electronics Electronic Equipment, Instruments & Components Asia Pacific 14,100 - 0.4 -
58 (-) BE Semiconductor Industries Semiconductors & Semiconductor Equipment Europe 13,834 - 0.4 -
59 (-) Elite Material Electronic Equipment, Instruments & Components Asia Pacific 13,469 - 0.4 -
60 (60) Intuit Software North America 13,442 10,538 0.4 0.4
Top 60 investments 3,452,545 90.7
61 (42) Roblox Entertainment North America 13,212 17,444 0.4 0.6
62 (46) Pinterest Interactive Media & Services North America 12,816 15,134 0.3 0.5
63 (-) Fabrinet Electronic Equipment, Instruments & Components Asia Pacific 12,655 - 0.3 -
64 (-) CommVault Systems Software North America 12,120 - 0.3 -
65 (24) Monolithic Power Systems Semiconductors & Semiconductor Equipment North America 11,850 32,453 0.3 1.1
66 (-) SÜSS MicroTec Semiconductors & Semiconductor Equipment Europe 11,590 - 0.3 -
67 (82) Braze Software North America 11,516 3,668 0.3 0.1
68 (-) Kokusai Electric Semiconductors & Semiconductor Equipment Asia Pacific 10,810 - 0.3 -
69 (36) MercadoLibre Broadline Retail North America 10,587 20,965 0.3 0.8
70 (-) Nintendo Entertainment Asia Pacific 10,149 - 0.3 -
Top 70 investments 3,569,850 93.8
71 (30) Uber Technologies Ground Transportation North America 9,230 25,788 0.3 0.9
72 (75) GMO Payment Gateway Financial Services Asia Pacific 8,623 5,224 0.2 0.2
73 (-) Dell Technologies Technology Hardware, Storage & Peripherals North America 8,545 - 0.2 -
74 (48) Hoya Healthcare Equipment & Supplies Asia Pacific 8,276 14,264 0.2 0.5
75 (71) Fuji Machine Manufacturing Machinery Asia Pacific 8,066 5,680 0.2 0.2
76 (-) STMicroelectronics Semiconductors & Semiconductor Equipment Europe 7,787 - 0.2 -
77 (-) Nutanix Software North America 7,726 - 0.2 -
78 (58) Kinaxis Software North America 7,651 11,909 0.2 0.4
79 (37) Lattice Semiconductor Semiconductors & Semiconductor Equipment North America 7,316 20,572 0.2 0.7
80 (-) ASMPT Semiconductors & Semiconductor Equipment Asia Pacific 7,231 - 0.2 -
Top 80 investments 3,650,301 95.9
81 (-) Nova Semiconductors & Semiconductor Equipment Asia Pacific 7,111 - 0.2 -
82 (51) Intuitive Surgical Healthcare Equipment & Supplies North America 6,821 13,230 0.2 0.5
83 (21) Workday Software North America 6,661 33,429 0.1 1.2
84 (-) Varonis Systems Software North America 5,461 - 0.1 -
85 (-) MEC Chemicals Asia Pacific 4,692 - 0.1 -
86 (-) Wix.com IT Services Asia Pacific 4,391 - 0.1 -
87 (-) Ferrotec Semiconductors & Semiconductor Equipment Asia Pacific 4,241 - 0.1 -
88 (-) Deliveroo Hotels, Restaurants & Leisure Europe 4,197 - 0.1 -
89 (18) Palo Alto Networks Software North America 4,101 34,847 0.1 1.2
90 (-) Hamamatsu Photonics Electronic Equipment, Instruments & Components Asia Pacific 3,461 - 0.1 -
Top 90 investments 3,701,438 97.1
91 (-) Klaviyo Software North America 2,841 - 0.1 -
92 (76) Zuken IT Services Asia Pacific 2,748 5,187 0.1 0.2
93 (-) VTEX Interactive Media & Services Europe 2,532 - 0.1 -
94 (84) Seeing Machines Electronic Equipment, Instruments & Components Asia Pacific 2,186 3,265 0.1 0.1
95 (-) Oxford Nanopore Technologies Life Sciences Tools & Services Europe 2,012 - 0.1 -
96 (87) Cermetek Microelectronics Electronic Equipment, Instruments & Components North America 1 1 - -
Total equities 3,713,758 97.6
Other net assets 90,775 2.4
Total net assets 3,804,533 100.0
Note: Asia Pacific includes Middle East and North America includes Latin
America.
STRATEGIC REPORT
This report has been provided in accordance with The Companies Act 2006
(Strategic Report and Directors' Report) Regulations 2013. The aim of this
report is to provide information to shareholders on the Company's strategy and
the potential for such to succeed, including a fair review of the Company's
performance during the year ended 30 April 2024, the position of the Company
at the year end and a description of the principal risks and uncertainties,
including both economic and business risk factors underlying any such
forward-looking information.
Business Model and Regulatory Requirements
The Company's business model follows that of an externally managed investment
trust providing shareholders with access to an actively managed portfolio of
technology shares selected on a worldwide basis.
The Company is designated as an Alternative Investment Fund ('AIF') under the
Alternative Investment Fund Management Directive ('AIFMD') and, as required by
the Directive, has contracted with Polar Capital LLP to act as the Alternative
Investment Fund Manager ('AIFM') and Investment Manager (or 'Manager') and
HSBC Bank Plc to act as the Depositary.
Both the AIFM and the Depositary have responsibilities under AIFMD for
ensuring that the assets of the Company are managed in accordance with the
Investment Policy and are held in safe custody. The Board remains responsible
for setting the investment strategy and operational guidelines as well as
meeting the requirements of the FCA's Listing Rules and the Companies Act
2006.
The AIFMD requires certain information to be made available to investors in
AIFs before they invest and requires that material changes to this information
be disclosed in the Annual Report of each AIF. Investor Disclosure Documents,
which set out information on the Company's investment strategy and policies,
leverage, risk, liquidity, administration, management, fees, conflicts of
interest and other shareholder information are available on the Company's
website.
There have been no material changes to the information requiring disclosure.
Any information requiring immediate disclosure pursuant to the AIFMD will be
disclosed to the London Stock Exchange. Statements from the Depositary and the
AIFM can be found on the Company's website.
Investment Objective and Policy
While observing the Dow Jones Global Technology Index (total return, Sterling
adjusted, with the removal of relevant withholding taxes) as the Benchmark
against which NAV performance is measured, shareholders should be aware that
the portfolio is actively managed and is not designed to track any particular
benchmark index or market. The performance of the portfolio can vary from the
Benchmark performance, at times considerably.
Over recent decades the technology industry has been one of the most vibrant,
dynamic and rapidly growing segments of the global economy. Technology
companies offer the potential for substantially faster earnings growth than
the broader market.
Investments are selected for their potential shareholder returns, not on the
basis of technology for its own sake. The Investment Manager believes in
rigorous fundamental analysis and focuses on:
• management quality;
• the identification of new growth markets;
• the globalisation of major technology trends;
and
• exploiting international valuation anomalies and
sector volatility.
Changes to Investment Policy
Any material change to the Investment Policy will require the approval of the
shareholders by way of an ordinary resolution at a general meeting. The
Company will promptly issue an announcement to inform shareholders and the
public of any change to its Investment Policy. No changes to the Investment
Policy are presently anticipated.
Investment Strategy Guidelines and Board Limits
The Board has established guidelines for the Investment Manager in pursuing
the Investment Policy. The Board uses these guidelines to monitor the
portfolio's exposure to different geographical markets, sub-sectors within
technology and the spread of investments across different market
capitalisations.
These guidelines are kept under review as cyclical changes in markets and new
technologies will bring certain
sub-sectors or companies of a particular size or market capitalisation into or
out of favour.
Asset Allocation
Technology may be defined as the application of scientific knowledge for
practical purposes and technology companies are defined accordingly. While
this offers a very broad and dynamic investing universe and covers many
different companies, the portfolio of the Company (the 'Portfolio') is focused
on companies which use technology or which develop and supply technological
solutions as a core part of their business models. This includes areas as
diverse as information, media, communications, environmental, healthcare,
finance, e-commerce and renewable energy, as well as the more obvious
applications such as computing and associated industries.
The Board has agreed a set of parameters which seek to ensure that investment
risk is spread and diversified. The Board believes that this provides the
necessary flexibility for the Investment Manager to pursue the Investment
Objective, given the dynamic and rapid changes in the field of technology,
while maintaining a spread of investments.
Market Parameters
With current and foreseeable investment conditions, the Portfolio will be
invested in accordance with the Investment Objective and Policy across
worldwide markets, generally within the following ranges:
• North America up to 85%.
• Europe up to 40%.
• Japan and Asia up to 55%.
• Rest of the world up to 10%.
The Board has set specific upper exposure limits for certain countries where
they believe there may be an elevated risk.
The Company will at all times invest and manage its assets in a manner that is
consistent with spreading investment risk and invests in a Portfolio comprised
primarily of international quoted equities which is diversified across both
regions and sectors.
Investment Limits
In applying the Policy, the Company will satisfy the following investment
restrictions:
• The Company's interest in any one company will not
exceed 10% of the gross assets of the Company, save where the Benchmark
weighting of any investee company in the Company's portfolio exceeds this
level, in which case the Company will be permitted to increase its exposure to
such investee company up to the Benchmark 'neutral' weighting of that company
or, if lower, 15% of the Company's gross assets.
• The Company will have a maximum exposure to
companies listed in emerging markets (as defined by the MSCI Emerging Markets
Index) of 25% of its gross assets.
• The Company may invest in unquoted companies from
time to time, subject to prior Board approval. Investments in unquoted
companies in aggregate will not exceed 10% of the gross assets of the Company.
Such limits are measured at the time of acquisition of the relevant investment
and whenever the Company increases the relevant holding.
In addition to the restrictions set out above, the Company is subject to
Chapter 15 of the FCA's Listing Rules which apply to closed ended investment
companies with a premium listing on the Official List of the London Stock
Exchange.
In order to comply with the current Listing Rules, the Company will not invest
more than 10% of its total assets at the time of acquisition in other listed
closed ended investment funds, whether managed by the Investment Manager or
not. This restriction does not apply to investments in closed ended investment
funds which themselves have published investment policies to invest no more
than 15% of their total assets in other listed closed ended investment funds.
However, the Company will not in any case invest more than 15% of its total
assets in other closed ended investment funds.
Cash, Borrowings (Gearing) and Derivatives
The Company may borrow money to invest in the Portfolio over both the long and
short-term. Any commitment to borrow funds is agreed by the Board and the
AIFM.
The Investment Manager may also use from time-to-time derivative instruments,
as approved by the Board, such as financial futures, options,
contracts-for-difference and currency hedges. These are used for the purpose
of efficient portfolio management. Any such use of derivatives will be made in
accordance with the Company's policies on spreading investment risk as set out
in this investment policy and any leverage resulting from the use of such
derivatives will be subject to the restrictions on borrowings.
Cash
The Company may hold cash or cash equivalents if the Investment Manager feels
that these will, at a particular time or over a period, enhance the
performance of the Portfolio. The Board has agreed that management of cash may
be achieved through the purchase of appropriate government bonds, money market
funds or bank deposits depending on the Investment Manager's view of the
investment opportunities and the benefits of diversification.
Gearing and Derivatives
The Company's Articles of Association permit borrowings up to the amount of
its paid-up share capital plus capital and revenue reserves. The Company may
use gearing in the form of bank loans which are used on a tactical basis by
the Investment Manager, when considered appropriate. The Board monitors the
level of gearing available to the Portfolio Manager and agrees, in conjunction
with the AIFM, all bank facilities in accordance with the Investment Policy.
The Board approves and controls all bank facilities and any net borrowings
over 20% of the Company's net assets at the time of draw down will only be
made after approval by the Board.
During the year, the Company had two loan facilities with ING Bank NV: one for
36m US Dollars at a fixed rate of 5.43% pa and one for 3.8bn Japanese Yen at a
fixed rate of 1.13% pa, both of which were drawn down in September 2022. These
loans fall due for repayment in September 2024. The loan facilities will be
reviewed and may be replaced on expiry.
Details of the loans are set out in Note 17 to the Financial Statements.
The Investment Manager's use of derivatives is monitored by the Board in
accordance with the Company's investment policy and any leverage from the use
of such derivatives will be subject to the restriction on gearing.
Future Developments
The Board remains positive on the longer-term outlook for technology and the
Company will continue to pursue its Investment Objective. The outlook for
future performance is dependent to a significant degree on the world's
financial markets and their reactions to economic events and other
geopolitical forces. In accordance with the Articles of Association, the Board
will propose the next five-yearly continuation vote of the Company at the
Annual General Meeting to be held in September 2025. The Chair's Statement and
the Investment Manager's Report comment on the outlook.
Dividends
The Company's revenue varies from year to year and the Board considers the
dividend position each year in order to maintain the Company's status as an
investment trust. The revenue reserve remains in deficit and historically the
Company has not paid dividends given its focus on capital growth. The
Directors do not recommend, for the year under review, the payment of a
dividend (2023: no dividend recommendation).
Service Providers
Polar Capital LLP has been appointed to act as the Investment Manager and AIFM
as well as to provide or procure company secretarial services, marketing and
website services which it arranges through Huguenot Limited, and
administrative services, including accounting, portfolio valuation and trade
settlement which it has arranged to deliver through HSBC Securities Services
('HSS' or "the Administrator").
The Company also contracts directly, on terms agreed periodically, with a
number of third parties for the provision of specialist services. The cost of
the services outlined below are paid for directly by the Company and are
separate from the Investment Management Fee payable to Polar Capital:
• Stifel Nicolaus Europe Limited as Corporate
Broker;
• Equiniti Limited as Share Registrars;
• HSBC Securities Services as Custodian and
Depositary;
• RD:IR for Investor Relations and Shareholder
Analysis;
• Camarco as PR advisors; and
• Perivan Limited as designers and printers for
shareholder communications.
Investment Management Company and Management of the Portfolio
As the Company is an investment vehicle for shareholders, the Directors have
sought to ensure that the business of the Company is managed by a leading
specialist investment management team and that the investment strategy remains
attractive to shareholders. The Directors believe that a strong working
relationship with the investment management team will help to achieve the
optimum return for shareholders. As such, the Board and the Investment Manager
operate in a supportive, co-operative and open environment.
The Investment Manager is Polar Capital LLP ('Polar Capital'), which is
authorised and regulated by the Financial Conduct Authority, to act as
Investment Manager and AIFM of the Company with sole responsibility for the
discretionary management of the Company's assets (including uninvested cash)
and sole responsibility to take decisions as to the purchase and sale of
individual investments. The Investment Manager also has responsibility for
asset allocation within the limits of the investment policy and guidelines
established and regularly reviewed by the Board, all subject to the overall
control and supervision of the Board.
Polar Capital provides a team of technology specialists led by Ben Rogoff.
Each team member focuses on specific areas while Ben Rogoff, with Alastair
Unwin as Deputy, has overall responsibility for the portfolio. Polar Capital
also has other specialist and geographically focused investment teams which
may contribute to idea generation. The technology investment team's
biographies can be found in the annual report. The Investment Manager has
other investment resources which support the investment team and has
experience in administering and managing other investment companies.
Fee Arrangements
Under the terms of the Investment Management Agreement, the Company pays to
the Investment Manager a base fee, and if certain performance criteria are
met, a performance fee is payable by the Company.
Management fee
With effect from 1 May 2022, the base management fee paid by the Company
monthly in arrears to the Manager is calculated on the daily Net Asset Value
('NAV') as follows:
• Tier 1: 0.80 per cent. for such of the NAV up to
and including £2bn;
• Tier 2: 0.70 per cent. for such of the NAV between
£2bn and £3.5bn; and
• Tier 3: 0.60 per cent. for such of the NAV above
£3.5bn.
Any investment in funds managed by Polar Capital are wholly excluded from the
base management fee calculation. Management fees of £25,919,000 (2023:
£21,918,000) have been paid for the year to 30 April 2024 of which
£2,386,000 (2023: £1,827,000) was outstanding at the year end.
Under the terms of the IMA, the Board may undertake a three-yearly review of
the fee arrangements, the next of which would normally commence in 2024, with
the anticipation that any changes proposed and subsequently agreed will take
effect from the start of the following financial year. The Board is however at
liberty to review the fees at any time should they deem it appropriate and in
the best interests of Shareholders to do so.
Further details on the performance fee methodology and calculation are
provided within the Shareholder Information section of the annual report.
Longer-Term Viability
In accordance with the AIC Code of Corporate Governance, the Company is
required to make a forward-looking longer- term viability statement. The Board
has considered and addressed the ability of the Company to continue to operate
over a period significantly beyond the twelve-month period required for the
going concern statement. The Board has considered the industry and market in
which the Company operates and believes that despite the market volatility and
geopolitical events experienced during the financial year under review, there
continues to be a strong appetite for technology investment. The Board
continues to use five years as a reasonable term over which the viability of
the Company should be viewed; Shareholders have the opportunity to vote on the
continuation of the Company every five years, therefore the outlook for the
next five-year period incorporates the continuation vote which will be put to
shareholders at the AGM in 2025.
The process and matters considered in establishing the longer-term viability
are detailed within the Audit Committee Report in the annual report. In
establishing the positive outlook for the Company over the next five years to
30 April 2029, the Board has taken into account:
The ability of the Company to meet its liabilities as they fall due The assessment took account of the Company's current financial position, its
cash flows and its liquidity position, the principal risks as set out in the
Strategic Report and the Committee's assessment of any material uncertainties
and events that might cast significant doubt upon the Company's ability to
continue as a going concern. The assessment was then subject to a sensitivity
analysis over a five-year period, which stress tested a number of the key
assumptions underlying the forecasts both individually and in aggregate for
normal, favourable and stressed conditions and considered whether financing
facilities will be renewed.
The portfolio comprises a spread of investments by size of company, traded on
major international stock exchanges.
99.6% of the current portfolio could be liquidated within seven trading days
and there is no expectation that the nature of the investments held within the
portfolio will be materially different in future.
The expenses of the Company are predictable and modest in comparison with the
assets and there are no capital commitments foreseen which would alter that
position. The ongoing charges of the Company for the year ended 30 April 2024
(excluding performance fees) were 0.80% (2023: 0.81%).
Repayment of the bank facilities, drawn down at the year end, and due in
September 2024, would equate to approximately 47% of the cash or cash
equivalents available to the Company at 30 April 2024, without having to
liquidate the portfolio of investments.
The Company has no employees and consequently does not have redundancy or
other employment related liabilities or responsibilities.
The Company will propose a resolution on the continuation of the Company at Under the AIC SORP, where Shareholders have the opportunity to vote in favour
the AGM in September 2025 or against a company continuing in existence, it will normally be the case
that shareholders will have to vote in favour of a liquidation before it can
occur. It is reasonable to believe that if positive long-term performance is
achieved over the period until the next continuation vote shareholders will
vote in favour of continuation.
Factors impacting the forthcoming years The Investment Manager's Report and the Strategic Report provide a
comprehensive review of factors which may impact the Company in forthcoming
years. In making its assessment, the Board considered these factors alongside
the Principal Risks and Uncertainties, and their corresponding mitigation and
controls, in the Annual Report and Accounts.
Regulatory changes Despite the increased level of regulation and the unpredictability of future
requirements it is considered that regulation will not increase to a level
that makes the running of the Company uneconomical or untenable in comparison
to other competitive products.
Closed-ended Investment Funds Despite recent high discounts across the sector, it is believed that the
business model of being a closed ended investment fund will continue to be
wanted by investors and the Investment Objective will continue to be desired
and achievable.
Further, the Board recognises that there has been significant progress made in
the technology sector and immense change in what is deemed to be a technology
company which broadens the universe for potential investment. Technology
remains a specialist sector for which there continues to be a need for
independent specialist sector investment expertise. The Board therefore have a
reasonable expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the five years to 30 April
2029.
GOING CONCERN
The Board has also considered the ability of the Company to adopt the Going
Concern basis for the preparation of the Financial Statements.
Consideration included the Company's current financial position, its liquidity
position and its assessment. In addition, the Company's cash flows were
stressed tested for base case and reasonable worse case scenarios. Further
detail on the assessment for going concern is provided in the Report of the
Audit Committee and in Note 2(a) of the Financial Statements.
KEY PERFORMANCE INDICATORS
The Board appraises the performance of the Company and the Investment Manager
as the key supplier of services to the Company against Key Performance
Indicators ('KPIs'). The objectives of the KPIs comprise both specific
financial and shareholder related measures and these KPIs have not differed
from the prior year.
KPI Control process Outcome
The provision of investment returns to shareholders measured by long-term NAV The Board reviews the performance of the portfolio in detail and hears the At 30 April 2024 the total net assets of the Company amounted to
growth and relative performance against the Benchmark. views of the Investment Manager at each meeting. £3,804,533,000 (2023: £2,828,141,000). The Company's NAV over the year to 30
April 2024, outperformed the Benchmark by 1.9%. The NAV per share rose by
40.8% from 2,239.48p to 3,154.11p while the Benchmark increased 38.9% in
Sterling terms over the same period. As at 30 April 2024 the portfolio
The Board is aware of the vulnerability of a sector specialist investment The Board discusses the market factors giving rise to any discount or premium, comprised 96 (2023: 87) investments.
trust to a change in investor sentiment to that sector. the long or short-term nature of those factors and the overall benefit to
Shareholders of any actions. The market liquidity is also considered when
authorising the issue or buy back of shares when appropriate market conditions
prevail. Investment performance is explained in the Chair's Statement and the
Investment Manager's Report. The performance of the Company over the
longer-term is shown by the ten year historic performance chart in the Annual
Report and Accounts.
Monitoring and reacting to issues created by the discount or premium of the The Board receives regular information on the composition of the share The discount/premium of the ordinary share price to NAV per ordinary share
ordinary share price to the NAV per ordinary share with the aim of reduced register including trading (diluted when appropriate) has been as follows:
discount volatility for Shareholders.
patterns and discount/premium levels of the Company's ordinary shares. Financial year to 30 April 2024:
• Minimum discount over year: 7.41%
A daily NAV per share, diluted when appropriate, calculated in accordance with • Maximum discount over year: 15.87%
the AIC guidelines, is issued to the London
• Average discount over year: 12.38%
Stock Exchange.
In the year ended 30 April 2024, the Company bought back 5,663,975 ordinary
shares (representing 4.1% of the issued share capital) at an average discount
of 12.3%. Subsequent to the year end and to close of business 11 July 2024,
The Company does not have an absolute target discount level at which it buys the Company bought back a further 964,346 shares.
back shares but has historically bought back significant amounts of the
outstanding share capital when deemed appropriate and will continue to do so.
This approach does not preclude a more active approach as discounts widen and
the Investment Manager may consider that a single purchase or a series of Over the previous five financial years ended 30 April 2024:
purchases of shares in current or greater volumes, which would enhance the
Company's NAV per share, would be an attractive investment of the Company's · Maximum premium over period: 6.06%
cash resources, given the positive long-term prospects for the Company's
portfolio. As always, the Board keeps the level of discount under careful · Maximum discount over period: 17.28%
review and has been buying back shares actively at levels set out in the
adjacent column. · Average discount over period: 8.22%
Over the previous five financial years ended 30 April 2024 the Company has
issued 3,490,000 Ordinary shares as a result of market demand.
To qualify and continue to meet the requirements for Sections 1158 and 1159 of The Board receives regular financial information which discloses the current This has been achieved for every year since launch in 1996.
the Corporation Tax Act 2010 ('investment trust status'). and projected financial position of the Company against each of the tests set
out in Sections 1158 and 1159.
HMRC has approved the investment trust status subject to the Company
continuing to meet the relevant eligibility conditions and ongoing
requirements.
The Directors believe that the tests have been met in the financial year ended
30 April 2024 and will continue to be met.
Efficient operation of the Company with appropriate investment management The Board considers annually the services provided by the Investment Manager, The Board has received and considered satisfactory the internal controls
resources and services from third party suppliers within a stable and both investment and administrative, and reviews on a cycle the provision and report of the Investment Manager and other key suppliers including contingency
risk-controlled environment. costs of services provided by third parties. arrangements to facilitate the ongoing operations of the Company in the event
of withdrawal or failure of services.
The annual operating expenses are reviewed and any non-recurring project
related expenditure is approved separately by the Board. The ongoing charges of the Company for the year ended 30 April 2024 excluding
the performance fee were 0.80% of net assets (2023: 0.81%). There was no
performance fee payable for the year ended 30 April 2024 (2023: nil) and
therefore the ongoing charges including the performance fee were 0.80% (2023:
0.81%) of net assets.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board is responsible for the management of risks faced by the Company and,
through delegation to the Audit Committee, has established procedures to
manage risk, oversee the internal control framework and determine the nature
and extent of the principal risks the Company is willing to take in order to
achieve its long-term strategic objectives.
The established risk management process the Company follows, identifies and
assesses various risks, their likelihood, and possible severity of impact,
considering both internal and external controls and factors that could provide
mitigation. A post mitigation risk impact score is then determined for each
principal risk.
At each Audit Committee, identified principal risks are reviewed and
reassessed against the backdrop of the ever-changing world the Company is
operating in. The Audit Committee carries out, at least annually, a robust
assessment of overall risks and uncertainties faced by the Company with the
assistance of the Investment Manager. During the year under review, the Audit
Committee undertook a full review of the content and format of the Company's
Risk Map including the mitigating factors and controls associated with each
risk. As part of this process, the Committee also introduced a risk appetite
rating for each risk to clearly define the types of risk the Board and Manager
are willing to take to achieve the Company's objective of maximising
shareholder returns whilst operating within a strong governance and control
framework.
The Committee also identifies any emerging risks during its review process and
continues to closely monitor these risks as they develop, implementing
mitigating actions as necessary. Emerging risks during the financial year
under review included the geopolitical landscape, consolidation of wealth
managers and the rise of post truth politics, the latter having the potential
to ensnare Big Tech in the ensuing political fallout. In addition, further
consideration was given to the deterioration of relations between China and
Taiwan, using a detailed horizon analysis to assess the medium and longer term
impacts on the Company's portfolio.
The Principal Risks post mitigation are detailed on the following pages along
with a high-level summary of their management through mitigation and status
arrows to indicate any change in assessment over the past financial year.
Management of risks through Mitigation & Controls
PORTFOLIO RISK Trend year on year
Failure to achieve investment objective on an absolute or relative basis
Regular reporting and monitoring of the Company's investment performance
against peer group, benchmark and detailed annual review of investment
strategy with Investment Manager.
Clear communication with Shareholders on the investment strategy through
annual, half year reports and monthly factsheets. The Investment Manager also
visits large shareholders and has regular interaction with clients.
Portfolio management errors including breach of investment policy
Investment limits and restrictions are encoded into dealing and operations
systems of the Manager to ensure there is early warning of any potential issue
of compliance or regulatory matters. HSBC Depositary oversees all trades and
monitoring against investment limits.
OPERATIONAL RISK
Failure in services provided by Investment Manager (Polar Capital LLP)
Compliance, trading and risk oversight by fully resourced and expert Polar
Capital compliance, operations and risk functions.
Accounting / Financial and/or Custody Errors
Management accounts are produced and reviewed monthly, statutory reporting and
daily NAV calculations are produced by the external Administrator and verified
by the Investment Manager. Accounting records are tested, and valuations
verified independently as part of the year-end financial reporting process.
Failure of Depositary, Custodian, Sub-Custodian or Deposit taker
Due diligence and service reviews are undertaken with third-party service
providers including the Custodian and Depositary with any exceptions
highlighted to the Board.
Unforeseeable
natural disaster or other unpredictable event ("Black Swan").
The Company has a disaster recovery plan in place along with a Black Swan
Committee comprised of any two directors, who are able to provide a response
to such events as necessary.
IT Failure, Fraud and Cyber Risk
Annual review of internal control reports from suppliers including cyber
protocols and disaster recovery procedures.
Following the year under review, the Board agreed to elevate the
post-mitigation score associated with this risk in light of the increased
potential for fraud and cyber attacks. The pre-mitigation remains unchanged.
REGULATORY RISKS
Breach of Statutes and Regulation
Polar Capital Compliance & Operations ensure a strong compliance
environment and report to Board on an annual basis.
There is an independent risk function at Polar Capital. AIFMD limits are
hardcoded into Bloomberg and monitored by the Operations and Compliance teams.
The Depositary also monitors AIFMD limits and reports exceptions to the Board.
In addition, the Fund Accounting Manager reports to the Board on a monthly
basis through the Investment Limits schedule.
The Board receives regulatory reports for discussion and, if required,
considers the need for any remedial action. In addition, as an investment
company, the Company is required to comply with a framework of tax laws,
regulation and company law.
The Board monitors regulatory change with the assistance of the Investment
Manager, Company Secretary and external professional suppliers and implements
necessary changes should they be required.
Failure to effectively communicate significant events to the shareholder and
investor base
Polar Capital Sales Team and the Corporate Broker provide periodic reports to
the Board on communications with shareholders and feedback received.
Experienced sales and client services team maintain the Company's website and
ensure it contains documents holding relevant information and presentations
from the Manager.
Annual, half year reports and monthly factsheets are prepared by experienced
company secretaries or specialist advisors. Statutory/regulatory documentation
is compiled and checked by legal advisors, auditors or brokers (when
necessary) and the Board undertakes a review prior to publication. Once
published, the Chair offers annual meetings with shareholders.
ECONOMIC AND MARKET RISK
Global geopolitical risk affecting changes in policy regarding taxes/assets,
tariffs, trade
agreements (NAFTA, China, Mexico), immigration and political tensions
The impact on the portfolio from geopolitical changes is monitored through
existing control systems such as the monthly investment limits schedule.
The Investment Manager regularly reports to the Board on geographic
influences, the macro economic outlook and matters of interest in relation to
the portfolio and utilises horizon scanning where appropriate
Uncertainty in regulatory environment (including inflation, recession and
interest rates)
Potential regulatory change as a result of the changing political environment
is closely monitored by the board with the help of the company secretary.
The Investment Manager's Operations team monitors FX and interest rate
exposure of portfolio. Note 27 in the Annual Report and Accounts describes the
impact of changes in foreign exchange rates.
KEY STAFF RISK
Loss of Portfolio Manager or other key professionals by the Investment Manager
through
resignation, redundancy or change of control
The strength and depth of investment team provides comfort that there is not
over-reliance on one person with alternative senior technology portfolio
managers available to act if needed. For each key business process roles,
responsibilities and reporting lines are clear and unambiguous.
Key personnel are incentivised by equity participation in the investment
management company. Ali Unwin was appointed as Deputy Fund Manager and is
responsible for managing the portfolio of the Company alongside Ben Rogoff,
Lead Manager since 1 May 2006.
The Board has insufficient resource and breadth of experience to oversee its
operations
Respected industry recruiters are used to source suitably experienced
candidates for non-executive directorships with detailed succession planning
and skills analysis driving the recruitment process at Board level. A Board,
Committee and Individual evaluation process is carried out annually and
justification for re-election of Directors is provided in Annual Report to
Shareholders.
Increase
Decrease
Unchanged
SECTION 172 OF THE COMPANIES ACT 2006
The statutory duties of the Directors are detailed in s171-177 of the
Companies Act 2006. The Board recognises that under s172, Directors have a
duty to promote the success of the Company for the benefit of its shareholders
as a whole and in doing so have regard to the consequences of any decision in
the long term, as well as having regard to the Company's wider stakeholders
amongst other considerations. The fulfilment of this duty not only helps the
Company achieve its Investment Objective but ensures decisions are made in a
responsible and sustainable way for shareholders.
To ensure that the Directors are aware of, and understand, their duties, they
are provided with an induction, including details of all relevant regulatory
and legal duties as a director when they first join the Board, and continue to
receive regular and ongoing updates on relevant good practice, legislative and
regulatory developments. They also have continued access to the advice and
services of the Company Secretary and, where deemed necessary, the Directors
may seek independent professional advice. The Schedule of Matters Reserved for
the Board, as well as the Terms of Reference of its committees are reviewed
annually and further describe Directors' responsibilities and obligations and
include any statutory and regulatory duties.
The Board seeks to understand the needs and priorities of the Company's
shareholders and stakeholders and these are taken into account during all of
its discussions and as part of its decision-making process. As an externally
managed investment company, the Company does not have any employees or
customers, however the key stakeholders and a summary of the Board's
consideration and actions where possible in relation to each group of
stakeholders are described in the table below.
SHAREHOLDERS
Engagement
The Directors have considered shareholder engagement when making the strategic
decisions during the year that affect shareholders, the confirmation of the
continued appointment of the Investment Manager and the recommendation that
shareholders vote in favour of the resolutions to be proposed at the AGM. The
Directors have also engaged with and taken account of shareholders' interests
during the year.
The Portfolio Manager has held numerous face to face meetings and interacted
with a number of shareholders and institutions in addition to presenting at a
number of conferences during the year. Where appropriate, directors are
invited to attend these conferences to meet with shareholders and prospective
investors; in addition, the annual Investor Relations dinner was again held in
October 2023. Positive feedback was received from all attendees of the dinner
who welcomed the opportunity to interact with the Board and Manager.
The Chair will write to the Company's largest shareholders following the
publication of the Annual Report and Financial Statements offering the
opportunity to meet to discuss any matters of interest or concern.
The Company's next AGM will be held at 2:30pm on Wednesday 11 September 2024
at The Royal Institution, 21 Albemarle Street, London, W1S 4BS. The Board
recognises that the AGM is an important event for shareholders and the Company
and is keen to ensure that shareholders are able to exercise their right to
attend, vote and participate. Shareholders will also be able to watch the
proceedings of the AGM live via Zoom Conference. Details of how to access the
online link are provided in the Notice of AGM. Once again, we will be inviting
feedback from shareholders and will take this into account when planning the
2025 meeting.
The Board believes that shareholder engagement remains important and is keen
that the AGM be a participative event for all shareholders who attend.
Shareholders are encouraged to send any questions ahead of the AGM to the
Board via the Company Secretary at cosec@polarcapital.co.uk stating the
subject matter as PCTT-AGM. The investment manager will give an in-person
presentation and the Chair of the Board and all members of the Board will be
in attendance and will be available to respond to questions and concerns from
shareholders.
Should any significant votes be cast against a resolution, the Board will
engage with shareholders. Should this situation occur, the Board will explain
in its announcement of the results of the AGM the actions it intends to take
to consult shareholders in order to understand the reasons behind the votes
against. Following the consultation, an update will be published no later than
six months after the AGM and the next Annual Report will detail the impact the
shareholder feedback has had on any decisions the Board has taken and any
actions or resolutions proposed.
Relations with Shareholders
The Board and the Manager consider maintaining good communications and
engaging with shareholders through meetings and presentations a key priority.
The Board regularly considers the share register of the Company and receives
regular reports from the Manager and the Corporate Broker on shareholder
meetings attended and any concerns that have been raised in those meetings.
The Board also reviews correspondence from shareholders and may attend
investor presentations.
The Chair has met with shareholders during the year and responded to comments
raised both at the AGM and via email.
Shareholders are able to raise any concerns directly with the Chair or the
Board without intervention of the Manager or Company Secretary, they may do
this either in person at the AGM or at other events, or in writing either via
the registered office of the Company or to the Chair's specific email address
Chair.pctt@polarcapital.co.uk (mailto:Chair.pctt@polarcapital.co.uk) .
Shareholders are kept informed by the publication of annual and half year
reports, monthly fact sheets, access to commentary from the Investment Manager
via the Company's website and attendance at events in which the Investment
Manager presents.
The Company, through the sales and marketing efforts of the Investment
Manager, encourages retail investment platforms to engage with underlying
shareholders in relation to Company communications and enable those
shareholders to cast their votes on shareholder resolutions; the Company
however has no responsibility over such platforms. The Board therefore
encourage shareholders invested via the platforms to regularly visit the
Company's website or to make contact with the Company directly to obtain
copies of shareholder communications.
The Company has also made arrangements with its registrar for shareholders,
who own their shares directly rather than through a nominee or share scheme,
to view their account online at www.shareview.co.uk. Other services are also
available via this service.
Outcomes and strategic decisions during the year
AGM
This year the Board will hold a physical AGM. However, in order to provide
those shareholders who are unable to attend the AGM physically with an
opportunity to view the AGM, the Board will make a zoom link available to
enable shareholders to watch the proceedings of the AGM live via Zoom
Conference. Details of how to access the online link are provided in the
Notice of AGM.
Buybacks
Further to shareholder authority being granted, the Company has the facility
to conduct share buy backs when, in normal market conditions, it is in the
best interests of shareholders to do so. The Company bought back a total of
5,663,975 shares during the year under review. Subsequent to the year end and
to close of business 11 July 2024, the Company bought back a further 946,346
shares.
Gearing
The Company is aware of the positive effect that leverage can have in
increasing the return to shareholders when utilised. The Company has term
loans with ING Bank NV, which expire in September 2024. Consideration of the
future level of borrowings required by the portfolio manager is currently
under review.
Continuation Vote
The Company has within its corporate structure the requirement to hold a
continuation vote every five years; ahead of each vote the Board, Investment
Manager and Corporate Broker seek the feedback of shareholders including any
concerns, and an indication of whether they were likely to vote in favour of
the Company's continuation. The last continuation vote was held in September
2020, for which 100% of the votes cast were in favour, and the next
continuation vote will be held at the AGM in September 2025.
Share Split
As reported in the Chair's statement, the market price of the Company's
existing ordinary shares has increased in recent years. Whilst this is
positive for the Company and its Shareholders, the Board recognises that a
higher share price could be a barrier to investment for certain investors
including regular savers who may wish to invest smaller amounts per
transaction on a regular basis. In order to ensure the Company remains
accessible to all, the Directors are proposing a 10 for 1 share split at the
AGM taking place in September 2024. Detailed explanations of the resolutions
to be proposed at the AGM are contained within the Shareholder Information of
the Annual Report and Accounts and within the Notice of AGM.
Directors Remuneration
The remuneration of Directors is reviewed regularly and was increased with
effect from 1 May 2023 and again from 1 May 2024, to reflect the rise in
inflation and bring the fees of the Directors more in line with the wider
market. Further details are provided in the Report of the Remuneration
Committee in the annual report.
THE INVESTMENT MANAGER
Engagement
Through the Board meeting cycle, regular updates and the work of the
Management Engagement Committee reviewing the services of the Investment
Manager twice yearly, the Board is able to safeguard shareholder interests by:
· Ensuring adherence to the Investment Management Policy and
reviewing the agreed management and performance fees;
· Ensuring excessive risk is not undertaken in the pursuit of
investment performance;
· Reviewing the Investment Manager's decision making and
consistency in investment process;
· Ensuring compliance with statutory legal requirements,
regulations and other advisory guidance such as consumer duty and aspects of
operational resilience; and
· Considering the succession plans for the Technology Team in
ensuring the continued provision of portfolio management services.
Maintaining a close and constructive working relationship with the Manager is
crucial as the Board and the Investment Manager both aim to continue to
achieve consistent, long-term returns in line with the Investment Objective.
The culture which the Board maintains to ensure this involves encouraging open
discussion with the Investment Manager; recognising that the interests of
shareholders and the Investment Manager are aligned, providing constructive
challenge and making Directors' experience available to support the Investment
Manager. This culture is aligned with the collegiate and meritocratic culture
which Polar Capital has developed and maintains.
Outcomes and strategic decisions during the year
ESG
The Board continued to engage with the Investment manager to understand how
ESG has been integrated into the overall house style, the technology team
investment approach and decision making as well as the methodology behind
this. The Board also receives information on how ESG affects Polar Capital as
a business and the technology team in particular.
Consumer Duty
The Board has worked with the Investment Manager to ensure the obligations of
the new Consumer Duty regulations are appropriately applied to the Company.
All communications including the website, fact sheets and other published
documentation, have been reviewed to ensure they are appropriate for all end
users.
Management
The Management Engagement Committee has recommended the continued appointment
of the Investment Manager on the terms agreed within the Investment Management
Agreement.
INVESTEE COMPANIES
Stewardship
The Board has instructed the Investment Manager to take into account the
published corporate governance policies of the companies in which it invests.
The Board has also considered the Investment Manager's Stewardship Code and
Proxy Voting Policy. The voting policy is for the Investment Manager to vote
at all general meetings of companies in favour of resolutions proposed by the
management where it believes that the proposals are in the interests of
shareholders. However, in exceptional cases, where it believes that a
resolution could be detrimental to the interests of shareholders or the
financial performance of the Company, appropriate notification will be given
and abstentions or a vote against will be lodged.
The Investment Manager reports to the Board, when requested, on the
application of the Stewardship Code and Voting Policy. The Investment
Manager's Stewardship Code and Voting Policy can be found on the Investment
Manager's website in the Corporate Governance section (www.polarcapital.co.uk
(http://www.polarcapital.co.uk) ).
The Technology Investment Team also use the services of ISS to assist with
their own evaluation of companies' proposals or reporting ahead of casting
votes on behalf of the Company at their general meetings. In the event that an
investee company has share blocking in place, the default position is to
refrain from voting to ensure the ability to trade these stocks if required.
During the year ended 30 April 2024, votes were cast at 98% of investee
company general meetings held. At 52% of those meetings a vote was either cast
against management recommendation, withheld or abstained from. Further
information on how the Investment Manager considers ESG in its engagement with
investee companies can be found in the ESG Report.
Outcomes and strategic decisions during the year
During the year the Board discussed the impact of ESG and other market factors
and how the Investment Manager factors these into its strategy, investment and
decision-making process. The Board receives information on the ratings of
investee companies and is able to use this as tool to inform discussions with
the Manager during Board meetings.
SERVICE PROVIDERS
Engagement
The Directors have frequent engagement with the Company's other key service
providers through the annual cycle of reporting, site visits and due diligence
meetings. This engagement is completed with the aim of having effective
oversight of delegated services, seeking to improve the processes for the
benefit of the Company and to understand the needs and views of the Company's
service providers, as stakeholders in the Company. Further information on the
Board's engagement with service providers is included in the Corporate
Governance Statement and the Report of the Audit Committee. During the year
under review, due diligence meetings have been undertaken by the Investment
Manager and where possible, service providers have joined meetings to present
their reports directly to the Board or the Audit Committee as appropriate.
Outcomes and strategic decisions during the year
The reviews of the Company's service providers have been positive and the
Directors believe their continued appointment is in the best interests of the
shareholders and the Company as a whole. The accounting and administration
services of HSBC Securities Services (HSS) are contracted through Polar
Capital and provided to the Company under the terms of the IMA. The Board,
through due diligence undertaken by the Company Secretary and the Polar
Capital Compliance team, is satisfied that the service received continues to
be of a high standard.
PROXY ADVISORS
Engagement
The support of proxy adviser agencies is important to the Directors, as the
Company seeks to retain a reputation for high standards of corporate
governance, which the Directors believe contributes to the long-term
sustainable success of the Company. The Directors consider the recommendations
of these various proxy voting agencies when contemplating decisions that will
affect shareholders and also when reporting to shareholders through the Half
Year and Annual Reports.
Recognising the principles of stewardship, as promoted by the UK Stewardship
Code, the Board welcomes engagement with all of its investors. The Board
recognises that the views, questions from, and recommendations of many
institutional investors and proxy adviser agencies provide a
valuable feedback mechanism and play a part in highlighting evolving
shareholders' expectations and concerns.
Outcomes and strategic decisions during this year
Where possible the Chair and other representatives of the Company have engaged
with the stewardship teams of some larger investors to understand and address
their expectations in terms of board governance, recruitment and diversity.
Prior to the Company's AGMs, the Company engages with agencies including PIRC
and ISS to fact check their advisory reports and clarify any areas or topics
contained within the report. This ensures that whilst the proxy advisory
reports provided to shareholders are objective and independent, the Company's
actions and intentions are represented as clearly as possible to assist with
shareholders' decision making when considering the resolutions proposed at the
AGM.
THE AIC
Engagement
The Company is a member of the AIC and has supported lobbying activities.
Representatives of the Manager sit on a variety of forums run by the AIC which
aids development and understanding of new policies and procedures. The
Directors may cast votes in the AIC Board Elections each year and regularly
attend AIC events.
Approved by the Board on 16 July 2024
By order of the Board
Jumoke Kupoluyi, ACG
Polar Capital Secretarial Services Limited
Company Secretary
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK-adopted international accounting standards
and applicable law.
Under company law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of its profit or loss for that period. In preparing
these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them
consistently;
· make judgements and estimates that are reasonable, relevant and
reliable;
· state whether they have been prepared in accordance with
UK-adopted international accounting standards;
· assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
· use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND
FINANCIAL STATEMENTS
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the company; and
· the Strategic Report includes a fair review of the development
and performance of the business and the position of the issuer, together with
a description of the principal risks and uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
Catherine Cripps
Chair
16 July 2024
Status of announcement
The figures and financial information contained in this announcement are
extracted from the Audited Annual Report for the year ended 30 April 2024 and
do not constitute statutory accounts for the year. The Annual Report and
Financial Statements include the Report of the Independent Auditors which is
unqualified and does not contain a statement under either section 498(2) or
Section 498(3) of the Companies Act 2006.
The Annual Report and Financial Statements for the year ended 30 April 2024
have not yet been delivered to the Registrar of Companies. The figures and
financial information for the year ended 30 April 2023 are extracted from the
published Annual Report and Financial Statements for the year ended 30 April
2023 and do not constitute the statutory accounts for that year. The Annual
Report and Financial Statements for the year ended 30 April 2023 have been
delivered to the Registrar of Companies and included the Report of the
Independent Auditors which was unqualified and did not contain a statement
under either section 498(2) or Section 498(3) of the Companies Act 2006.
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 April 2024
Notes Year ended 30 April 2024 Year ended 30 April 2023
Revenue return Capital return Total return Revenue return Capital return Total return
£'000 £'000 £'000 £'000 £'000 £'000
Investment income 3 15,471 - 15,471 16,160 42 16,202
Other operating income 4 6,438 - 6,438 3,820 - 3,820
Gains/(losses) on investments held at fair value 5 - 1,147,978 1,147,978 - (106,807) (106,807)
(Losses)/gains on derivatives 6 - (22,030) (22,030) - 34 34
Other currency (losses)/gains 7 - (1,292) (1,292) - 8,409 8,409
Total income 21,909 1,124,656 1,146,565 19,980 (98,322) (78,342)
Expenses
Investment management fee 8 (25,919) - (25,919) (21,918) - (21,918)
Other administrative expenses 9 (1,393) - (1,393) (1,176) - (1,176)
Total expenses (27,312) - (27,312) (23,094) - (23,094)
Gain/(loss) before finance costs and tax (5,403) 1,124,656 1,119,253 (3,114) (98,322) (101,436)
Finance costs 10 (1,874) - (1,874) (1,598) - (1,598)
Profit/loss) before tax (7,277) 1,124,656 1,117,379 (4,712) (98,322) (103,034)
Tax 11 (1,942) - (1,942) (2,148) - (2,148)
Net profit/( loss) for the year and total comprehensive income/(expense) (9,219) 1,124,656 1,115,437 (6,860) (98,322) (105,182)
Earnings/(losses) per share (basic and diluted) (pence) 12 (7.47) 911.68 904.21 (5.30) (75.98) (81.28)
The total column of this statement represents the Company's Statement of
Comprehensive Income, prepared in accordance with UK-adopted International
Accounting Standards.
The revenue return and capital return columns are supplementary to this and
are prepared under guidance published by the AIC.
All items in the above statement derive from continuing operations.
The Company does not have any other comprehensive income.
The notes below form part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 April 2024
Share capital Capital redemption reserve Share premium Special non- distributable reserve Capital reserves Revenue reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000 £'000
Total equity at 30 April 2022 34,329 12,802 223,374 7,536 2,899,743 (126,799) 3,050,985
Total comprehensive (expense):
Loss for the year to 30 April 2023 - - - - (98,322) (6,860) (105,182)
Transactions with owners, recorded directly to equity:
Ordinary shares repurchased into treasury 15 - - - - (117,662) - (117,662)
Total equity at 30 April 2023 34,329 12,802 223,374 7,536 2,683,759 (133,659) 2,828,141
Total comprehensive income/(expense):
Profit/(loss) for the year to 30 April 2024 - - - - 1,124,656 (9,219) 1,115,437
Transactions with owners, recorded directly to equity:
Ordinary shares repurchased into treasury 15 - - - - (139,045) - (139,045)
Total equity at 30 April 2024 34,329 12,802 223,374 7,536 3,669,370 (142,878) 3,804,533
The notes below form part of these Financial Statements.
BALANCE SHEET
as at 30 April 2024
Notes 30 April 2024 30 April 2023
£'000 £'000
Non current assets
Investments held at fair value through profit or loss 13 3,713,758 2,640,177
Current assets
Receivables 37,607 20,605
Overseas tax recoverable 346 379
Cash and cash equivalents 14 103,033 239,096
Derivative financial instruments 13 9,557 2,571
150,543 262,651
Total assets 3,864,301 2,902,828
Current liabilities
Payables (11,295) (23,842)
Bank loans (48,036) -
Bank overdraft 13 (437) -
(59,768) (23,842)
Non current liabilities
Bank loans - (50,845)
Net assets 3,804,533 2,828,141
Equity attributable to equity Shareholders
Share capital 15 34,329 34,329
Capital redemption reserve 12,802 12,802
Share premium 223,374 223,374
Special non-distributable reserve 7,536 7,536
Capital reserves 3,669,370 2,683,759
Revenue reserve (142,878) (133,659)
Total equity 3,804,533 2,828,141
Net asset value per ordinary share (pence) 3,154.11 2,239.48
The Financial Statements, were approved and authorised for issue by the Board
of Directors on xx July 2024 and signed on its behalf by:
Catherine Cripps
Chair
The notes below form part of these Financial Statements.
Registered number 3224867
CASH FLOW STATEMENT
for the year ended 30 April 2024
2024 2023
Notes £'000 £'000
Cash flows from operating activities
Profit/(loss) before tax 1,117,379 (103,034)
Adjustments
(Gains)/losses on investments held at fair value through profit or loss 5 (1,147,978) 106,807
Losses/(gains) on derivative financial instruments 6 22,030 (34)
Proceeds of disposal on investments 2,857,451 2,311,861
Purchases of investments (2,811,714) (2,266,936)
Proceeds on disposal of derivative financial instruments 13 21,743 46,536
Purchases of derivative financial instruments 13 (50,759) (42,594)
Increase in receivables (742) (472)
Increase/(decrease) in payables 641 (4,580)
Finance Costs 1,874 1,598
Overseas tax (1,909) (2,241)
Foreign exchange losses/(gains) 7 1,292 (8,409)
Net cash generated from operating activities 9,308 38,502
Cash flows from financing activities
Finance costs paid (1,871) (1,539)
Ordinary shares repurchased into treasury (139,836) (116,449)
Net cash used in financing activities (141,707) (117,988)
Net decrease in cash and cash equivalents (132,399) (79,486)
Cash and cash equivalents at the beginning of the year 239,096 311,363
Effect of movement in foreign exchange rates on cash held 7 (4,101) 7,219
Cash and cash equivalents at the end of the year 14 102,596 239,096
2024 2023
Notes £'000 £'000
Reconciliation of cash and cash equivalents
to the Balance Sheet is as follows:
Cash held at bank and derivative clearing houses 14 69,581 148,682
BlackRock's Institutional Cash Series plc 14 33,015 90,414
(US Treasury Fund), money market fund
Cash and cash equivalents at the end of the year 14 102,596 239,096
The notes below form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 April 2024
1. GENERAL INFORMATION
Polar Capital Technology Trust plc is a public limited company registered in
England and Wales whose shares are traded on the London Stock Exchange.
The principal activity of the Company is that of an investment trust company
within the meaning of Section 1158/1159 of the Corporation Tax Act 2010 and
its investment approach is detailed in the Strategic Report.
The Company financial statements have been prepared and approved by the
Directors in accordance with international accounting standards in accordance
with UK-adopted international accounting standards ("UK-adopted IAS").
The Company's presentational currency is Pounds Sterling. All figures are
rounded to the nearest thousand pounds (£'000) except as otherwise stated.
2. ACCOUNTING POLICIES
The principal accounting policies, which have been applied consistently for
all years presented are set out below:
(A) BASIS OF PREPARATION
The Financial Statements have been prepared on a going concern basis under the
historical cost convention, as modified by the inclusion of investments and
derivative financial instruments at fair value through profit or loss.
Where presentational guidance set out in the Statement of Recommended Practice
(SORP) for investment trusts issued by the Association of Investment Companies
(AIC) in July 2022 is consistent with the requirements of UK-adopted IAS, the
Directors have sought to prepare the Financial Statements on a basis compliant
with the recommendations of the SORP.
The financial position of the Company as at 30 April 2024 is shown in the
balance sheet above. As at 30 April 2024 the Company's total assets exceeded
its total liabilities by a multiple of over 64. The assets of the Company
consist mainly of securities that are held in accordance with the Company's
Investment Policy, as set out in the Annual Report and these securities are
readily realisable. The Company has two, two-year fixed rate term loans with
ING Bank N.V. both of which fall due for repayment on 30 September 2024. The
Directors have considered a detailed assessment of the Company's ability to
meet its liabilities as they fall due. The assessment took account of the
Company's current financial position, its cash flows and its liquidity
position. In addition, the Company's cash flows were stressed tested for base
case and reasonable worse case scenarios such as higher inflation and interest
rate increases. In light of the results of these tests, the Company's cash
balances, and the liquidity position, the Directors consider that the Company
has adequate financial resources to enable it to continue in operational
existence for at least 12 months. Accordingly, the Directors believe that it
is appropriate to continue to adopt the going concern basis in preparing the
Company's Financial Statements.
(B) PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME
AIC, supplementary information which analyses the Statement of Comprehensive
Income between items of a revenue and capital nature has been presented
alongside the Statement of Comprehensive Income. The results presented in the
revenue return column is the measure the Directors believe appropriate in
assessing the Company's compliance with certain requirements set out in
section 1158 of the Corporation Taxes Act 2010.
(C) INCOME
Dividends receivable from equity shares are taken to the revenue return column
of the Statement of Comprehensive Income on an ex-dividend basis.
Special dividends are recognised on an ex-dividend basis and may be considered
to be either revenue or capital items.
The facts and circumstances are considered on a case by case basis before a
conclusion on appropriate allocation is reached.
Where the Company has received dividends in the form of additional shares
rather than in cash, the amount of the cash dividend foregone is recognised in
the revenue return column of the Statement of Comprehensive Income. Any excess
in value of shares received over the amount of the cash dividend foregone is
recognised in the capital return column of the Statement of Comprehensive
Income.
Unfranked income includes the taxes deducted at source.
Bank interest, money market fund interest and other income receivable are
accounted for on an accruals basis and is recognised in the period in which it
was earned.
Interest outstanding at the year end is calculated on a time apportioned basis
using the market rates of interest.
(D) EXPENSES AND FINANCE COSTS
All expenses, including finance costs, are accounted for on an accruals basis.
All indirect expenses have been presented as revenue items per the
non-allocation method except as follows:
- any performance fees payable are allocated wholly to capital,
reflecting the fact that, although they are calculated on a total return
basis, they are expected to be attributable largely, if not wholly, to capital
performance.
- transaction costs incurred on the acquisition or disposal of
investments are expensed either as part of the unrealised gain/loss on
investments (for acquisition costs) or as a deduction from the proceeds of
sale (for disposal costs).
Finance costs are calculated using the effective interest rate method and are
accounted for on an accruals basis.
(E) TAXATION
The tax expense represents the sum of the overseas withholding tax deducted
from investment income, tax currently payable and deferred tax.
The tax currently payable is based on the taxable profit for the year. Taxable
profit differs from net profit as reported in the Statement of Comprehensive
Income because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible. The Company's liability for current tax is calculated using tax
rates that have been enacted or substantively enacted at the balance sheet
date.
In line with the recommendations of the SORP, the allocation method used to
calculate tax relief on expenses presented against capital returns in the
supplementary information in the Statement of Comprehensive Income is the
'marginal basis'. Under this basis, if taxable income is capable of being
offset entirely by expenses presented in the revenue return column of the
Statement of Comprehensive Income, then no tax relief is transferred to the
capital return column.
Deferred tax is the tax expected to be payable or recoverable on temporary
differences between the carrying amounts of assets and liabilities in the
Financial Statements and the corresponding tax bases used in the computation
of taxable profit, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Investment trusts which have approval as such under section 1158 of the
Corporation Tax Act 2010 are not liable for taxation on capital gains.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised based on tax
rates that have been enacted or substantively enacted at the balance sheet
date.
Deferred tax is charged or credited in the Statement of Comprehensive Income,
except when it relates to items charged or credited directly to equity, in
which case the deferred tax is also dealt with in equity.
(F) INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
When a purchase or sale is made under contract, the terms of which require
delivery within the timeframe of the relevant market, the investments
concerned are recognised or derecognised on the trade date and are initially
measured at fair value.
On initial recognition the Company has designated all of its investments as
held at fair value through profit or loss as defined by UK-adopted IAS.
All investments are measured at subsequent reporting dates at fair value,
which is either the bid price or the last traded price, depending on the
convention of the exchange on which the investment is quoted. Investments in
unit trusts or OEICs are valued at the closing price, the bid price or the
single price as appropriate, as released by the relevant investment manager.
FRS 13 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Fair values for unquoted investments, or for investments for which there is
only an inactive market, are established by using various valuation
techniques. These may include recent arms length market transactions, the
current fair value of another instrument that is substantially the same,
discounted cash flow analysis and option pricing models. Where there is a
valuation technique commonly used by market participants to price the
instrument and that technique has been demonstrated to provide reliable
estimates of prices obtained in actual market transactions, that technique is
utilised. Where no reliable fair value can be estimated for such instruments,
they are carried at cost, subject to any provision for impairment.
Changes in fair value of all investments held at fair value and realised gains
and losses on disposal are recognised in the capital return column of the
Statement of Comprehensive Income.
(G) RECEIVABLES
Receivables are initially recognised at fair value and subsequently measured
at amortised cost. Receivables do not carry any interest and are short-term in
nature and are accordingly stated at their nominal value (amortised cost) as
reduced by appropriate allowances for estimated irrecoverable amounts.
(H) CASH AND CASH EQUIVALENTS
Cash comprises cash on hand and demand deposits. Cash equivalents are
short-term maturity of three months or less, highly liquid investments that
are readily convertible to known amounts of cash.
The Company's investment in BlackRock's Institutional Cash Series plc - US
Treasury Fund of £33,015,000 (2023: ££90,414,000) is managed as part of the
Company's cash and cash equivalents as defined under IAS 7.
In the Balance Sheet bank overdrafts are shown within current liabilities.
(I) PAYABLES
Payables are initially recognised at fair value and subsequently measured at
amortised cost. Payables are not interest- bearing and are stated at their
nominal value (amortised cost).
(J) BANK LOANS
Interest bearing bank loans are initially recognised at cost, being the
proceeds received net of direct issue costs, and subsequently at amortised
cost. The amounts falling due for repayment within one year are included under
current liabilities in the Balance Sheet.
(K) DERIVATIVE FINANCIAL INSTRUMENTS
The Company's activities expose it primarily to the financial risks of changes
in market prices, foreign currency exchange rates and interest rates.
Derivative transactions which the Company may enter into comprise forward
exchange contracts, the purpose of which is to manage the currency risks
arising from the Company's investing activities, quoted options on shares held
within the portfolio, or on indices appropriate to sections of the portfolio,
the purpose of which is to provide additional capital return.
The use of financial derivatives is governed by the Company's policies as
approved by the Board, which has set written principles for the use of
financial derivatives.
A derivative instrument is considered to be used for hedging purposes when it
alters the market risk profile of an existing underlying exposure of the
Company. The use of financial derivatives by the Company does not qualify for
hedge accounting under UK-adopted IAS. As a result, changes in the fair value
of derivative instruments are recognised in the Statement of Comprehensive
Income as they arise. If capital in nature, associated change in value is
presented in the capital return column of the Statement of Comprehensive
Income.
(L) RATES OF EXCHANGE
Transactions in foreign currencies are translated into Sterling at the rate of
exchange ruling on the date of each
transaction. Monetary assets, monetary liabilities and equity investments in
foreign currencies at the balance sheet date are translated into Sterling at
the rates of exchange ruling on that date. Realised profits or losses on
exchange, together with differences arising on the translation of foreign
currency assets or liabilities, are taken to the capital return column of the
Statement of Comprehensive Income.
Foreign exchange gains and losses arising on investments held at fair value
are included within changes in fair value.
(M) SHARE CAPITAL
Represents the nominal value of authorised and allocated, called-up and fully
paid shares issued.
(N) CAPITAL RESERVES
Capital reserves - gains/losses on disposal includes:
- gains/losses on disposal of investments
- exchange differences on currency balances and on settlement of
loan balances
- cost of own shares bought back
- other capital charges and credits charged to this account in
accordance with the accounting policies above
Capital reserve - revaluation on investments held includes:
- increases and decreases in the valuation of investments and
loans held at the year end.
All of the above are accounted for in the Statement of Comprehensive Income
except the cost of own shares bought back or issued which are accounted for in
the Statement of Changes in Equity.
(O) REPURCHASE OF ORDINARY SHARES (INCLUDING THOSE HELD IN
TREASURY)
Where applicable, the costs of repurchasing ordinary shares including related
stamp duty and transaction costs are taken directly to equity and reported
through the Statement of Changes in Equity as a charge on the capital reserve.
Share repurchase transactions are accounted for on a trade date basis.
The nominal value of ordinary share capital repurchased and cancelled is
transferred out of called up share capital and into the capital redemption
reserve.
Where shares are repurchased and held in treasury, the transfer to capital
redemption reserve is made if and when such shares are subsequently cancelled.
(P) SHARE ISSUE COSTS
Costs incurred directly in relation to the issue of new shares together with
additional share listing costs have been deducted from the share premium
reserve.
(Q) SEGMENTAL REPORTING
Under IFRS 8, 'Operating Segments', operating segments are considered to be
the components of an entity about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The chief
operating decision maker has been identified as the Manager (with oversight
from the Board).
The Board is of the opinion that the Company is engaged in a single segment of
business, namely by investing in a diversified portfolio of technology
companies from around the world in accordance with the Company's Investment
Objective, and consequently no segmental analysis is provided.
In line with IFRS 8, additional disclosure by geographical segment has been
provided in Note 26.
Further analyses of expenses, investment gains or losses, profit and other
assets and liabilities by country have not been given as either it is not
possible to prepare such information in a meaningful way or the results are
not considered to be significant.
(R) KEY ESTIMATES, JUDGMENTS AND ASSUMPTIONS
Estimates and assumptions used in preparing the Financial Statements are
reviewed on an ongoing basis and are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances. The results of these estimates and assumptions form the basis
of making judgements about carrying values of assets and liabilities that are
not readily apparent from other sources.
The majority of the Company's investments are in US Dollars, the level of
which varies from time to time. The Board considers the functional and
reporting currency to be Sterling. In arriving at this conclusion the Board
considered that Sterling is most relevant to the majority of the Company's
Shareholders and creditors and the currency in which the majority of the
Company's operating expenses are paid and the Company's shares are denominated
in Sterling.
The only estimates and assumptions that may cause material adjustment to the
carrying value of assets and liabilities relate to the valuation of unquoted
investments and investments for which there is an inactive market. These are
valued in accordance with the techniques set out in Note 2(f). At the year
end, there was no unquoted investments (2023: same).
(S) NEW AND REVISED ACCOUNTING
STANDARDS
There were no new UK-adopted IAS or amendments to UK-adopted IAS applicable to
the current year which had any significant impact on the Company's Financial
Statements.
i) The following new or amended standards became effective for the current
annual reporting period and
the adoption of the standards and interpretations have not had a material
impact on the Financial Statements
of the Company.
Standards & Interpretations Effective for periods commencing on or after
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Requirement amended to disclose material accounting policies instead of 1 January 2023
Statement 2) significant accounting policies and provided guidance in making materiality
judgements to accounting policy disclosure.
Definition of Accounting Estimates (amendments to IAS 8) Introduced the definition of accounting estimates and included other 1 January 2023
amendments to IAS 8 to help entities distinguish changes in accounting
estimates from changes in accounting policy.
International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12) A mandatory temporary exception to the accounting for deferred taxes arising 1 January 2023
from the jurisdictional implementation of the Pillar Two model rules; and
disclosure requirements for affected entities to help users of the financial
statements better understand an entity's exposure to Pillar Two income taxes
arising from that legislation, particularly before its effective date.
ii) At the date of authorisation of the Company's Financial Statements, the
following relevant standards that potentially impact the Company are in issue
but are not yet effective and have not been applied in the Financial
Statements.
Standards & Interpretations Effective for periods commencing on or after
Amendments to IAS 1 Presentation of Financial Statements The amendments clarify that only covenants with which an entity must comply on 1 January 2024
or before the reporting date will affect a liability's classification as
- Non-current liabilities with Covenants current or non-current and the disclosure requirement in the financial
statements for the risk that non-current liabilities with covenant could
- Deferral of Effective Date Amendment (published 15 July 2020) become repayable within twelve months.
Classification of Liabilities as Current or Non-Current (Amendments to IAS 1)
(publicised 23 January 2020)
Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) The amendments address the disclosure requirements to enhance the transparency 1 January 2024
of supplier finance arrangements and their effects on a company's liabilities,
cash flows and exposure to liquidity risk.
The Directors expect that the adoption of the standards listed above will have
either no impact or that any impact will not be material on the Financial
Statements of the Company in future periods.
3. INVESTMENT INCOME Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Revenue:
Overseas Dividend income 15,471 16,160
15,471 16,160
Capital:
Special dividends allocated to capital - 42
All investment income is derived from listed investments.
There was no special dividends classified as revenue or Capital in accordance
with note 2 (c) (2023: £350,000 Income and £42,000 Capital).
4. OTHER OPERATING INCOME Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Bank interest 2,529 1,478
Money market fund interest 3,909 2,342
6,438 3,820
5. GAINS/(LOSSES) ON INVESTMENTS HELD AT FAIR VALUE Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Net gains/(losses) on disposal of investments at historic cost 476,684 (130,861)
Transfer on disposal of investments (151,853) (59,647)
Gains/(losses) on disposal of investments based on carrying value at previous 324,831 (190,508)
balance sheet date
Valuation gains on investments held during the year 823,147 83,701
1,147,978 (106,807)
6. (LOSSES)/GAINS ON DERIVATIVES Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
(Losses)/gains on disposal of derivatives held (21,716) 5,019
Losses on revaluation of derivatives held (314) (4,985)
(22,030) 34
The derivative financial instruments represent the call and put options, which
are used for the purpose of efficient portfolio management. Refer to Note 13
below for further
details.
7. OTHER CURRENCY (LOSSES)/GAINS Year ended Year ended
30 April 2024 30 April 2023
£'000 £'000
Exchange (losses)/gains on currency balances (4,101) 7,219
Exchange losses on settlement of loan balances - (507)
Exchange gains on translation of loan balances 2,809 1,697
(1,292) 8,409
8. INVESTMENT MANAGEMENT AND PERFORMANCE FEE
Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Investment management fee payable to Polar Capital (charged wholly to 25,919 21,918
revenue)
Performance fee paid to Polar Capital (charged wholly to capital) - -
There was no performance fee payable in respect of the year nor outstanding at
the year end (2023: same).
The basis for calculating the investment management and performance fees are
set out in the Strategic Report above and details of all amounts payable to
the Manager are given in Note 16 below.
9. OTHER ADMINISTRATIVE EXPENSES
Year ended Year ended 30 April 2023
30 April 2024 £'000
£'000
Directors' fees and expenses(1) 253 247
National insurance contributions 27 26
Depositary fee(2) 227 192
Registrar fee 57 54
Custody and other bank charges(3) 359 267
UKLA and LSE listing fees(4) 208 204
Legal & professional fees and other financial services 3 16
AIC fees 21 21
Auditors' remuneration - for audit of the financial Statements 80 63
Directors' and officers' liability insurance 56 38
AGM expenses 6 6
Corporate brokers' fee(5) - -
Shareholder communications(6) 63 38
Other expenses(7) 33 4
1,393 1,176
1. Full disclosure is given in the Directors' Remuneration
Report in the Annual Report.
2. Depositary fee is based on the value of the net assets. The
daily average net asset value rose by 21% compared to the previous year.
3. Custody fees are based on the value of the assets and
geographical activity and determined on the pre-approved rate card with HSBC.
4. Fees are based on the market capitalisation of the Company
which has risen over the last invoice period.
5. 2023/2024 annual fee was offset by the commission credit on
shares repurchases.
6. Includes Bespoke promotional marketing cost.
7. Includes Non-executive Directors' search fee.
10. FINANCE COSTS Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Interest on loans and overdrafts 1,874 1,514
Loan arrangement and facility fees - 84
1,874 1,598
11. TAXATION Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
(a) Analysis of tax charge for the year:
Overseas tax 1,942 2,148
Total tax for the year (see Note 11b) 1,942 2,148
(b) Factors affecting tax charge for the year:
The charge for the year can be reconciled to the gains/(losses) per the
Statement of Comprehensive Income as follows:
Gain/(loss) before tax 1,117,379 (103,034)
Tax at the UK corporation tax rate of 25% (2023: 19.5%) 279,345 (20,092)
Tax effect of non-taxable dividends (3,868) (3,159)
Tax effect of (gains)/losses on investments that are not taxable (281,164) 19,181
Unrelieved current year expenses and deficits 5,687 4,070
Overseas tax suffered 1,942 2,148
Total tax for the year (see Note 11a) 1,942 2,148
(c) Factors that may affect future tax charges:
There is an unrecognised deferred tax asset comprising:
Unrelieved management expenses 72,685 66,998
Non-trading loan relationship deficits 1,807 1,807
74,492 68,805
The deferred tax asset is based on a corporation tax rate of 25% (2023:
25%).
The Company has an unrecognised deferred tax asset of £72,685,000 (2023:
£66,998,000) arising from surplus
management expenses of £290,740,000 (2023: £267,992,000) and unrecognised
deferred tax asset of £1,807,000 (2023: £1,807,000) arising from non-trade
loan relationship deficits of £7,227,000 (2023: £7,227,000) based on a
corporation tax rate of 25% (2023: 25%). Given the composition of the
Company's portfolio, it is not likely that these assets will be utilised in
the foreseeable future and therefore no deferred tax asset has been recognised
in the accounts.
Due to the Company's tax status as an investment trust and the intention to
continue meeting the conditions required to maintain approval of such status
in the foreseeable future, the Company has not provided tax on any capital
gains arising on the revaluation or disposal of investments held by the
Company.
12. EARNING/(LOSS) PER ORDINARY SHARE
Year ended 30 April 2024 Year ended 30 April 2023
Revenue return Capital return Total return Revenue return Capital return Total
return
The calculation of basic earning/loss per share is based on the following
data:
Net gain/(loss) for the year (£'000) (9,219) 1,124,656 1,115,437 (6,860) (98,322) (105,182)
Weighted average ordinary shares in issue during the year 123,361,430 123,361,430 123,361,430 129,409,889 129,409,889 129,409,889
From continuing operations
Basic - earning/(loss) per ordinary share (pence) (7.47) 911.68 904.21 (5.30) (75.98) (81.28)
As at 30 April 2024 there are no potentially dilutive shares in issue and the
earnings per share therefore equate to those shown above (2023: there was no
dilution).
13. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
(i) Investments held at fair value through profit or
loss
Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Opening book cost 2,058,477 2,253,434
Opening investment holding gains 581,700 557,646
Opening fair value 2,640,177 2,811,080
Analysis of transactions made during the year
Purchases at cost 2,799,314 2,236,802
Sales proceeds received (2,873,711) (2,300,898)
Gains/(losses) on investments held at fair value 1,147,978 (106,807)
Closing fair value 3,713,758 2,640,177
Closing book cost 2,460,764 2,058,477
Closing investment holding gains 1,252,994 581,700
Closing fair value 3,713,758 2,640,177
Of which:
Listed on a recognised Stock Exchange 3,713,758 2,640,177
The Company received £2,873,711,000 (2023: £2,300,898,000) from disposal of
investments in the year. The book cost of these investments when they were
purchased was £2,397,027,000 (2023: £2,431,759,000). These investments have
been revalued over time and until they were sold any unrealised gains/losses
were included in the fair value of the investments.
Included in additions at cost are purchase costs of £1,550,000 (2022:
£1,055,000). Included in proceeds of disposals are sales costs of £1,726,000
(2022: £1,231,000). These costs primarily comprise commission.
(ii) Changes in derivative financial instruments Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Valuation at 1 May 2,571 6,479
Additions at cost 50,759 42,594
Proceeds of disposal (21,743) (46,536)
(Losses)/gains on disposal (21,716) 5,019
Valuation losses (314) (4,985)
Valuation at 30 April 9,557 2,571
The derivative financial instruments represent the call and put options, which
are used for the purpose of efficient portfolio management. As at 30 April
2024, the Company held NASDAQ 100 Stock Index put option and the market value
of these open put option position was £7,192,000 (2023: NASDAQ 100 Stock
Index put option with a market value of £1,559,000). The Company also held
Microsoft Corp call options and Apple Inc call option, the market value of
these open call option position were £403,000 and £1,962,000 respectively
(2023: Microsoft Corp call options with a market value of £1,012,000).
(iii) Classification under Fair Value Hierarchy:
The table below sets out the fair value measurements using the IFRS 13 fair
value hierarchy. Categorisation within the hierarchy has been determined on
the basis of the lowest level of input that is significant to the fair value
measurement of the relevant asset as follows:
Level 1 - valued using quoted prices in active markets for identical assets.
Level 2 - valued by reference to valuation techniques using observable inputs
other than quoted prices included within Level 1.
Level 3 - valued by reference to valuation techniques using inputs that are
not based on observable market data.
The valuation techniques used by the Company are explained in the accounting
policies above.
Year ended 30 April 2024 Year ended
£'000 30 April 2023
£'000
Equity Investments and derivative financial instruments
Level 1 3,717,533 2,641,189
Level 2 5,782 1,559
Level 3 - -
3,723,315 2,642,748
As at the year ended 30 April 2024, £5,782,000 (30 April 2023: NASDAQ 100
Stock Index put options with a market value of £1,559,000) of NASDAQ 100
Stock Index put options held by the Company have been classified as level 2
due to the absence of regular trading activity levels closer to the
measurement date. All other options held at the current and prior year end
have been classified as level 1.
There has been no transfer between Levels 1, 2 and 3 during the year ended 30
April 2024.
(iv) Unquoted investments
As at 30 April 2024, the portfolio comprised no unquoted investment (30 April
2023: same).
14. CASH AND CASH EQUIVALENTS 30 April 2024 30 April 2023
£'000 £'000
Cash at bank 69,964 148,682
Cash held at derivative clearing houses 54 -
Money market funds 33,015 90,414
Cash and cash equivalents 103,033 239,096
Bank overdraft (437) -
102,596 239,096
As at 30 April 2024, the Company held BlackRock's Institutional Cash Series
plc - US Treasury Fund with a market value of £33,015,000 (30 April 2023:
£90,414,000), which is managed as part of the Company's cash and cash
equivalents as defined under IAS 7.
15. SHARE CAPITAL
30 April 30 April
2024 2023
£'000 £'000
Allotted, Called up and Fully paid:
Ordinary shares of 25p each
Opening balance of 126,285,544 (2023: 132,356,426) 31,571 33,089
Repurchase of 5,663,975 (2023: 6,070,882) ordinary shares into treasury (1,416) (1,518)
Allotted, called up and fully paid: 120,621,569 (2023: 126,285,544) 30,155 31,571
ordinary shares
of 25p ordinary shares of 25p
ordinary shares of 25p
of 25p
16,693,431 (2023: 11,029,456) ordinary shares held in treasury 4,174 2,758
At 30 April 2024 34,329 34,329
During the year, there were no ordinary shares issued to the market (2023:
same). A total of 5,663,975 (2023: 6,070,882) ordinary shares were repurchased
into treasury at a cost of £138,355,000 (2023: £117,078,000).
Subsequent to the year end, and to close of business on 11 July 2024 (latest
practicable date), 964,346 ordinary shares were repurchased into treasury at
an average price of 3,149.86 per share.
16. TRANSACTIONS WITH THE MANAGER AND RELATED PARTY TRANSACTIONS
(A) TRANSACTIONS WITH THE MANAGER
Under the terms of an agreement dated 9 February 2001 the Company has
appointed Polar Capital LLP ("Polar Capital") to provide investment
management, accounting, secretarial and administrative services. Details of
the fee arrangement for these services are given in the Strategic Report. The
total management fees, paid under this agreement to Polar Capital in respect
of the year ended 30 April 2024 were £25,919,000 (2023: £21,918,000) of
which £2,386,000 (2023: £1,827,000) was outstanding at the year end.
There was no performance fee payable in respect of the year nor outstanding at
the year end (2023: same).
In addition, the research costs and the first £200,000 of marketing costs per
annum are borne by the Manager.
(B) RELATED PARTY TRANSACTIONS
The compensation payable to key management personnel in respect of short term
employee benefits is £253,000 (2023: £247,000) which comprises £253,000
(2023: £247,000) paid by the Company to the Directors.
Refer to Company's 2024 Annual Report for the Directors' Remuneration Report
including Directors' shareholdings and movements within the year.
17. NET ASSET VALUE PER ORDINARY SHARE
Net asset value per share
30 April 30 April
2024 2023
Undiluted:
Net assets attributable to ordinary Shareholders (£'000) 3,804,533 2,828,141
Ordinary shares in issue at end of year 120,621,569 126,285,544
Net asset value per ordinary share (pence) 3,154.11 2,239.48
As at 30 April 2024, there were no potentially dilutive shares in issue (2023:
there was no dilution)
18. POST BALANCE SHEET EVENT
Subsequent to the year end, and to close of business on 11 July 2024, 964,346
ordinary shares were repurchased and placed into Treasury at an average price
3,149.86 p per share.
There are no other significant events that have occurred after the end of the
reporting period to the date of this report which require disclosure.
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