REG - Polar Cap Tech Tst - Final Results
20/07/2022 07:00
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RNS Number : 0453T Polar Capital Technology Trust PLC 20 July 2022
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POLAR CAPITAL TECHNOLOGY TRUST PLC
AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2022
FINANCIAL HIGHLIGHTS
FINANCIAL SUMMARY As at As at Year Ended 2022
30 April 2022 30 April 2021
Year Ended 2021
Total net assets £3,050,985,000 £3,408,763,000 (10.5%) 47.7%
Net Asset Value (NAV) per ordinary share 2305.13p 2496.44p (7.7%) 45.5%
Benchmark 3504.44 3535.05 (0.9%) 46.4%
Price per ordinary share 2040.00p 2364.00p (13.7%) 33.3%
Discount of ordinary share price to the NAV per ordinary share~ (11.5%) (5.3%)
Ordinary shares in issue* 132,356,426 136,544,764 (3.1%) 1.5%
Ordinary shares held in treasury 4,958,574 770,236 543.8% -
* The issued share capital on 15 July 2022 (latest practicable date) was
137,315,000 ordinary shares of which 6,433,670 were held in treasury.
KEY DATA For the year to 30 April 2022
Local Currency % Sterling Adjusted %
Benchmark
Dow Jones World Technology Index (10.1) (0.9)
Other Indices over the year (total return)
FTSE World (3.8) 5.8
FTSE All-Share 8.7
S&P 500 Composite 0.2 10.2
Nikkei 225 (5.0) (12.0)
Eurostoxx 600 6.1 2.3
As at 30 April
EXCHANGE RATES 2022 2021
US$ to £ 1.2555 1.3846
Japanese Yen to £ 162.66 151.34
Euro to £ 1.1901 1.1502
For the year to 30 April
EXPENSES 2022 2021
Ongoing charges ratio # - 0.84% 0.82%
Ongoing charges ratio including performance fee # - 0.84% 0.82%
Data supplied by Polar Capital LLP and HSBC Security Services.
# Ongoing charges ratio represents the total expenses of the Company,
excluding transaction costs, interest payments, tax and non-recurring expenses
expressed, as a percentage of the average daily net asset value, in accordance
with guidance issued by the Association of Investment Companies ("AIC").
~ See Alternative Performance Measures provided in the Annual Report.
HISTORIC PERFORMANCE
As at 30 April 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Net Assets (£m) 503.3 528.8 606.6 793.0 801.3 1,252.5 1,551.6 1,935.6 2,308.6 3,408.8 3,051.0
Share price (pence) 387.0 398.5 442.0 592.0 566.0 947.0 1,148.0 1,354.0 1,774.0 2,364.0 2,040.0
NAV per share (pence) 392.6 412.4 458.4 599.2 605.5 945.4 1,159.7 1,446.4 1,715.6 2,496.4 2,305.1
Indices of Growth(1)
Share price 100.0 103.0 114.2 153.0 146.3 244.7 296.6 349.9 458.4 610.9 527.1
NAV per share(2) 100.0 105.0 116.8 152.6 154.2 240.8 295.4 368.4 437.0 635.9 586.9
Dow Jones World Technology Index (3) 100.0 106.0 119.8 155.1 155.0 237.7 278.2 337.8 399.0 584.0 578.9
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 2012.
(2) The NAV per share growth is based on NAV per share as adjusted for
subscription shares.
(3) Dow Jones World Technology Index (total return, Sterling adjusted) and
from April 2013 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
STRATEGIC REPORT
CHAIR'S STATEMENT
INTRODUCTION
Shareholders may remember that in the year to April 2021, on which I reported
in July 2021, your company's NAV had risen by 45.5%. That followed a ten year
period over which the net assets of your Company had grown from £468.7m, to
£3.4bn, as technology stocks outperformed markets generally, on the back of
extraordinary corporate growth and rising valuations. Last year, I noted that
we seemed cautiously to be emerging from the pandemic, but were in something
of uncharted territory, and were seeing rising bond yields and inflationary
concerns, significant concentration of performance in the largest
capitalisation stocks and a rotation from "growth" to "value". Nevertheless, I
suggested that the long term supportive trends in the sector remained in
place, and shareholders would continue to benefit from disruption.
For the first three quarters of the last financial year, these conditions
generally persisted. Inflationary pressures continued to mount, bond yields
rose, investors continued to invest in recovery stocks rather than growth
stocks and the concentration of performance continued. The share prices of
technology stocks suffered in this environment, although corporate performance
remained strong. At the end of the financial year (the beginning of 2022) the
exuberance in technology stocks continued to unwind. Our manager describes the
details of this in the Investment Manager's Report.
Over the year, the Company's NAV fell by 7.7% and your share price fell by
13.7% as the discount widened. The NAV performance was behind the index which
fell by just under 1%. UK investors were sheltered from the decline in the
technology market by the appreciation of the US dollar against Sterling.
Although the manager did hold some cash, the index performance was driven
significantly by the very strong relative performance of Apple and Microsoft.
The detail of this is set out in the manager's report. We do run into a
concentration problem here, in that both companies amount to around 15% of the
index each and whilst they are our two largest holdings at between 10% to 11%
of our portfolio individually, these positions are still lower than index
weightings and not having had an index weight in each has had a significant
impact on relative performance. The most significant causes of our
underperformance were not having full 15% weightings in those two stocks. The
manager wrote about concentration risk at the interim stage and we would not
find it easy to justify holding such significant positions in these two
companies. We would expect that the concentration of stock performance in the
largest companies will diminish as it tends to lead to overvaluation.
Investors with long memories will remember the performance of Vodafone after
it became 15% of the UK index in 2000.
DISCOUNT MANAGEMENT
The Board actively monitors the discount at which the Company's ordinary
shares trade in relation to the Company's underlying NAV. The discount has
widened over the last year reflecting the considerable change in sentiment
towards technology stocks and market volatility generally. Whilst the Board
does not have a formal discount policy or a fixed target level for all times
and circumstances, it will continue to exercise its discretion to buy back
shares at a discount and to issue shares at a premium in order to seek to
reduce the volatility of the share price, to add a small amount to NAV per
share and to address significant imbalances in the supply and demand for
shares. We have continued to buy back stock regularly and reliably,
repurchasing a total of 4,188,338 shares in the year under review (amounting
to 3% of the issued share capital) at an average price of 2,355.35 pence per
share and an average discount of 9.6%. This produced an uplift in NAV per
share of just under 7p per share. After the year end and up to 15 Jul 2022,
the Company has bought back a further 1,475,096 shares. 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 if there is,
in their view, a particular investment opportunity best accessed through
buying shares in the Company rather than buying individual securities.
FEES
We have continued to make progress on our fee structure. In April 2019 we
announced a change in the calculation of the performance fee and a reduction
in the participation rate for that fee, which took effect from 1st May in that
year. In 2021, which was our regular three yearly review of the base
management fee, we agreed with Polar Capital a reduction as follows:
Current Base Management Fee Arrangement:
Effective 1 May 2022
0.80% £0-£2bn
0.70% £2bn-£3.5bn
0.60% over £3.5bn
Base Management Fee Arrangement to 30 April 2022
1% Up to £800m
0.85% £800m-£1.6bn
0.80% £1.6bn-£2.00bn
0.70% over £2.0bn
BOARD COMPOSITION
In my statement last year, I reported that the Nominations Committee and the
Board would continue with its succession plan during the year. Phase one was
completed in September 2021 with the appointment of Catherine Cripps and Jane
Pearce as independent non-executive Directors to the Board. It is intended
that Jane Pearce will succeed Charlotta Ginman (our current Audit Chair) who
will come to the end of her nine years' service in 2024. Both Catherine and
Jane will stand for election by Shareholders at the AGM to be held on 8
September 2022, along with those directors standing for re-election.
Phase two of the succession plan was to appoint my successor as Chair of the
Board ahead of my retirement at the Company's Annual General Meeting in 2022,
as it is the AGM after I reach 11 years' service. In accordance with the
Board's tenure policy I am able to remain on the Board for up to 12 years. I
am delighted to confirm that Catherine Cripps has been invited by the Board,
and has accepted the role of Chair (subject to election by Shareholders at the
AGM) when I retire at the forthcoming AGM. I should note that this part of the
plan was developed and implemented by the Nominations Committee excluding me,
and led by our Senior Independent Director ("SID"), Tim Cruttenden. We also
are grateful to our external board evaluator, Tim Stephenson, who reviewed and
commented on our plans. The Board believes that Catherine will bring a fresh
perspective to its proceedings and look forward to seeing the Company make
further progress under her guidance.
DIRECTOR'S FEES
As part of the Board's annual fee review to ensure that remuneration paid to
Directors remains competitive and in line with those of its peers, it was
noted by the external board evaluator and the Remuneration Committee that the
current level of fees paid to the Company's Directors was significantly below
the market rate for a large investment trust. Whilst the Board usually favours
modest increases year on year (where applicable), it was felt that fees should
be competitive and reflective of the current market in order to attract and
retain the best candidates. It was also agreed that fees should reflect the
increasing workload, time and commitment required from Directors of a FTSE 250
Company. As is detailed further within the Remuneration Committee Report, with
effect from 1 May 2022, the base Directors' fee increased by 4.8% to £33,000
and the fee of the Chair by 10% to £55,000. The supplements for the Audit
Committee Chair and the Senior Independent Director remain unchanged at
£7,000 and £4,200 respectively.
ANNUAL GENERAL MEETING
Assuming we continue to emerge from the pandemic, the AGM will be held on 8
September 2022 at Haberdashers' Hall, 18 West Smithfield, London EC1A 9HQ, a
venue you might remember from the 2019 AGM. We will again be holding the AGM
as a hybrid meeting supported by Lumi Global. A notice of AGM will be provided
to all Shareholders and made available on the Company's website, this includes
the formal business to be conducted at the AGM and further details of how
Shareholders can join the AGM virtually.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE MATTERS (ESG)
As detailed in my report last year, we continue to develop our approach to ESG
and during the year under review, we continued to engage with our manager to
better understand how ESG has been further integrated into the investment and
decision-making process. The Board also receives information on how ESG
affects Polar Capital as a business and the technology team in particular.
In addition to this, we as a Board have nominated Catherine Cripps to assume
the role of ESG lead. Catherine has been responsible for ensuring that the
Board is kept abreast of the latest developments in this area to develop how
the Company can report to stakeholders in line with such. Catherine has worked
with the manager to develop a dashboard which allows us to see how the manager
is considering ESG matters, and whether that meets our requirements. We do
think the ESG issues raised are important, interesting and complicated. We
have also held a number of conversations with our shareholders about their
views on ESG matters and how they would like us to report, given their
requirements. We have endeavoured to provide information as requested. The ESG
report in the Annual Report and Accounts describes, both the Corporate and
Investment approach to ESG matters.
OUTLOOK
After more than a decade of easier money and the extraordinary effects of
COVID-19, we are seeing considerable turmoil in our financial environment. At
this point, long term interest rates in the US and elsewhere have risen
sharply. The valuations of companies which were elevated by very low long term
interest rates, have, not to put it too finely, cratered. Many investors have
not seen inflation rates such as those we currently observe.
At this point, many tech companies are not reporting significant impacts on
their trading, but we are aware that company reports can be indicators of the
current state, rather than of future problems. We are in uncertain times, and
although between us, we've lived through previous savage market downturns and
inflationary pressures, it's not clear how our current circumstances play out.
We suspect markets could be fearful for some time. However, we do think the
basic disruptive opportunities for the companies in our portfolio persist, and
we support our Manager's view that we should stick to the fundamental
principle that investing in the potential growth in our sector will remain
profitable over time.
Finally, as I come to step down from the Board at the AGM may I thank our
shareholders, my fellow directors and all the team at Polar Capital for all
the support they have given me during my tenure as Chair.
Sarah Bates
Chair
19 July 2022
FINANCIAL AND PERFORMANCE REVIEW FOR THE YEAR ENDED 30 APRIL 2022
The NAV per share fell to 2305.13p as at 30 April 2022 from 2496.44p at the
start of the year. The Company's NAV per share total return for the period was
a loss of 7.7% and the Company finished the year with a total net assets of
£3,051.0m. 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 and Accounts 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). For the year ended 30 April 2022,
the total net loss was £258.6m (2021: £1,063.7m gains), of which there was a
£241.9m losses (2021: £1,074.2m gain) from capital and a £16.7m losses
(2021: £10.5m 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 and Accounts. We choose
as a matter of policy not to allocate our expenses between capital and income,
(any performance fee is the only expense 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. The total net losses
per share were 191.61p, compared to the previous year's earnings per share of
776.75p. The total net losses per share was made up of 179.25p from capital
return and a loss of 12.36p from revenue return.
Capital Return
The investment portfolio was valued at £2,811.1m (2021: £3,243.0m) at the
year end 30 April 2022. The investment portfolio delivered a realised loss on
disposals of £121.2m (2021: £480.4m gains) and valuation losses on
investment of £132.5m (2021: £647.3m gains) for the year ended 30 April
2022. The Company's valuation approach is described in Note 2 (f) in the
annual report. The derivative losses of £5.8m (2021: £49.1m losses)
represent the call and put options which are used to facilitate efficient
portfolio management. Full details of the derivatives are set out in the
Investment Manager's Report and Note 6 of the Annual Report and Accounts.
Revenue Return
he investment income of £15.87m (2021: £18.2m) represents dividend income
derived from listed investments. The investment income, excluding any one off
special dividends, increased by 5.2% for the year and this was driven by
changes in holdings, dividend rates, and FX rate changes as the Company's
revenue is generally denominated in currencies other than Sterling. The other
operating income of £0.031m (2021: £0.008m) was derived mainly from the
Money Market Fund (MMF) interest. The increase in interest rates in recent
months has enabled banks and MMF to resume payment of interest income. 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 remains therefore negative. The Company historically has not paid
dividends given the nature of its focus on longer- term capital growth. The
Board reviews this stance on a periodic basis.
Expenses
The total expenses for the year under review amounted to £30.6m (2021:
£26.2m) and include investment management fees of £28.3m (2021: £24.1m),
administrative expenses of £1.3m (2021: £1.1m) and finance costs of £1.0m
(2021: £1.0m). Although the net asset value reduced in absolute terms towards
the end of the financial year, on average it had increased during the year
under review when compared to the prior year, hence increases in management,
depositary and custody fees were incurred during the year. Other expenses
remained at a similar level to the last year. There was no performance fee
accrued at the year ended 30 April 2022 (2021: £nil). In January 2022
agreement was made with Polar Capital to amend the base management fee tier
levels and calculation structure with effect from the new financial year
commencing 1 May 2022. Further details can be found in the Strategic Report in
the Annual report and Accounts.
Ongoing Charges
The ongoing charges ratio, as calculated in line with the AIC recommended
methodology, represents the total expenses of the Company, excluding finance
costs, expressed as a percentage of the average daily NAV. This ratio
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 ratio
provides an indication of the likely level of costs that will be incurred in
managing the Company in the future. The ongoing charges ratio for the year to
30 April 2022 was 0.84% (2021: 0.82%). The ongoing charges ratio including the
performance fee for the year to 30 April 2022 was also 0.84% (2021: 0.82%) as
no performance fee was accrued at the year end. As noted above under expenses,
the slight increase in the OCR is mainly due to the increase in management fee
during the year which moved in line with the change in net asset value during
the year under review. See Alternative Performance Measures in the Annual
Report and Accounts.
Cash and Cash Equivalents
As noted in prior years, the Company maintains a relatively high level of
cash, closing the year with £311.4m (2021: £212.7m). 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 2022, the Company held the
BlackRock Institutional Cash Series - US Treasury Fund with a market value of
£92.0m.
Portfolio Turnover
As noted in prior years, the Company maintains a relatively high level of
cash, closing the year with £311.4m (2021: £212.7m). 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 2022, the Company held the
BlackRock Institutional Cash Series - US Treasury Fund with a market value of
£92.0m. Details of the investment strategy and portfolio are given in the
Investment Manager's Report.
Gearing
The Company can use gearing for investment purposes and 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 2022. The repayment of both
loans, totalling approximately £52.0m (2021: £51.1m), would equate to 17% of
the cash and cash equivalents readily available to the Company as at 30 April
2022. Consideration to the level of borrowings required by the Portfolio
Manager is under review and replacement facilities will be negotiated
accordingly with ING Bank N. V. or another provider in due course.
Foreign Exchange
The majority of the Company's assets and revenue are denominated in currencies
other than Sterling. As at the year ended the other currency gains of £17.5m
represents the exchange gains on currency balances of £18.4m and losses on
translation of loan balances of £0.9m. 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 risk.
Sarah Bates
Chair
19 July 2022
INVESTMENT MANAGER'S REPORT
MARKET REVIEW
An unexpected monetary volte-face by policymakers amid persistently high
inflation weighed on equity markets and valuations during the year. However,
losses were more than offset by pronounced US dollar strength which gained
more than 12% on a trade-weighted basis and more than 9% against the British
Pound (GBP). As a result, the MSCI All Country World Index over the year to 30
April 2022 gained 4.3% in sterling terms, aided by a strong first half
characterised by economic reopening, upward earnings revisions, and rampant
M&A.
The strength of the US dollar mirrored sharply higher US interest rate
expectations following the revelation in November that the Fed no longer
believed inflationary pressures were 'transitory'. Energy prices likely played
a part in driving this Fed Pivot as oil and commodity prices rose 79% and 54%
respectively during the year. Higher risk-free rates (10-year US Treasury
yields increased from 1.6% to 2.9%) resulted in a much more challenging fiscal
second half with negative headline returns failing to capture the magnitude of
the correction experienced by the average stock. While the US, as measured by
the S&P 500 Index gained 10.2% in sterling terms (and 0.2% in local
terms), drawdowns were significantly greater elsewhere including Europe
(Eurostoxx 600 +2.3%), Japan (Nikkei 225 -12.0%) and Asia ex-Japan (MSCI Asia
ex-Japan -12.9%) (all returns in sterling terms, unless otherwise stated).
Weakest performance was reserved for Chinese stocks (MSCI China -29.8%) where
a deluge of regulatory changes and market unfriendly developments took their
toll on investor sentiment and lockdowns in Shanghai towards period end
reflected the challenge posed by the omicron variant to China's zero-COVID
policy.
Small-cap indices meaningfully underperformed during the year, with the
Russell 2000 (small cap) declining 9.6% while the Russell 1000 (large-cap)
advanced by +6.2% (both in sterling terms). Breadth also continued to
deteriorate with just c.25% of NYSE stocks trading above their 200-day average
at year-end, compared to 58% a year earlier.
The first half of the year saw markets grind higher amid economic reopening,
positive earnings revisions, and record equity inflows. This was possible due
to worldwide vaccination programmes that succeeded in breaking the link
between COVID-19 infections and deaths. Economic recovery was most evident in
consumption trends and in labour market strength, the US unemployment rate
falling below 5% by September before returning to pre-COVID levels by year
end. The recovery trajectory was complicated by waning fiscal stimulus and
labour shortages, exacerbated by the combination of limited improvement in the
labour participation rate and early retirement (aka the 'Great Resignation').
However, the most significant headwind was commodity shortages and soaring
energy prices with oil surpassing $80/barrel in November for the first time
since 2014, while US producer prices rose 8.3% y/y in August, the largest
year-on-year increase on record. The combination of shortages and a surfeit of
freshly printed liquidity saw CPI increase 5% y/y in May - the fastest growth
in consumer prices since August 2008. This led to the June FOMC 'dot plot'
implying two rate hikes in 2023, up from zero in March, and, in October, the
Fed signalled that it could begin scaling back asset purchases in November.
However, equity markets were able to shrug off these negative developments
largely due to the Fed maintaining its earlier 'transitory' stance and
persistently negative real rates supporting equity multiples.
The emergence of the highly mutated Omicron variant in November was an
inauspicious start to what proved a very challenging fiscal second half. In
the same month, recently re-nominated Fed Chair Jerome Powell performed a
remarkable pivot regarding inflation, declaring "it's probably a good time to
retire that word transitory". While the milder variant of COVID likely
contributed to a "more hawkish variant of the Fed", it was November's CPI
print (+6.5% y/y) - the highest reading since 1982 - that likely forced
Powell's hand. Hawkish monetary developments dominated the balance of the
year, with the Fed first moving to double the pace of tapering in December. An
inflation shock morphed into a rates shock as the release of FOMC minutes in
January raised the spectre of rate hikes and quantitative tightening (QT)
"sooner or at a faster pace than participants had earlier anticipated".
The first US rate hike since 2018 was also delivered in March, three months
after the UK became the first G7 economy to raise interest rates since the
pandemic began. By the end of April, markets had priced in Fed Funds at 250bps
having anticipated zero rate hikes little more than a year earlier, and
10-year US Treasury yields had backed up to 2.9%, almost doubling during the
first four months of 2022. The persistence of inflationary pressures saw other
central banks adopt more hawkish positions too, forcing rates higher.
Long-duration stocks felt the full force of this monetary about-turn with the
earlier tremor in weaker, more speculative names turning into a full risk-off
episode across high growth and long duration names. This was particularly true
within small caps where growth stocks trailed value by more than 20% during
the year.
In addition to the human tragedy associated with the invasion of Ukraine, the
conflict added untimely upside pressure to inflation and downside risk to
global growth forecasts. Reflecting the elevated risk of so-called 'policy
error' (the Fed tightening against this most uncertain of backdrops) the
two-year versus 10-year Treasury yield spread briefly inverted during March,
something often seen as a precursor to a recession.
Technology Review
Calendar year 2021 proved a strong recovery year with worldwide IT spending
+9% y/y as compared to earlier estimates of +6%. Upside to 2021 forecasts saw
the technology sector deliver revenue and earnings growth of 15.7% and 28.9%
y/y respectively, well ahead of estimates this time last year of 10.1% and
17.5%. As a result, technology revenue growth ended up only narrowly behind
the market (16.5%) although earnings trailed significantly as the market
delivered 47.5% growth. This was unsurprising given more difficult comparisons
and less incremental leverage in the technology sector. Despite
better-than-expected IT spending, technology stocks trailed the broader market
during the fiscal year, the Dow Jones World Technology Index declining 1% in
sterling terms (total return) due to fading pandemic tailwinds, tough
comparisons and extreme factor rotation following the shift in Fed policy.
However, and even more extreme than in the broader market, returns were
dominated by US stocks which increased 6.6% while non- US technology stocks
(as measured by the W2TEC index) fell 22% during the year. Small caps also
significantly underperformed, the Russell 2000 (small) technology index
declining 10.1% while large-caps (as measured by the Russell 1000 technology
index) advanced 6.9%, both in sterling terms. Moreover, US relative strength
was driven by an even narrower group of megacap stocks that continued to
deliver strong growth against a less uniformly positive backdrop while also
enjoying strong ESG-related equity inflows. At year end, just 19% of NASDAQ
stocks were trading above their 200-day moving average. Higher multiple, long
duration stocks saw very significant multiple compression down from their
November highs, as the most expensive quintile of the US technology sector
fell -47% while the least expensive (value) quintile only declined -8% through
our fiscal year end.
At the sector level, strongest performance was enjoyed by the semiconductor
sector as demand remained strong amid chip shortages despite concerns about
double-ordering and the durability of the cycle. Strong capex growth (+20%
y/y) at the hyperscale public cloud companies led to continued strength in
cloud data centre capex benefitting both AMD (+15%) and Nvidia (+36%). While
most of the automotive industry struggled with the global chip shortages,
Tesla (+35%) enjoyed a stellar period delivering a record number of vehicles
and record margins in Q3 and Q4 against a supportive backdrop for electric
vehicles.
Value-oriented sectors such as networking (aided by datacentre strength) and
hardware also performed well, the latter benefitting from outstanding
performance from Apple (+32%), which proved able to deal with ongoing supply
constraints to fulfil steady consumer demand for its products. Software stocks
trailed (IGV-9%), with average returns significantly worse than headlines due
to Microsoft (+21%) as the sector suffered material multiple compression amid
higher rate expectations. This trend accelerated into calendar year 2022,
which saw software EV/NTM (Enterprise Value / Next Twelve Months) sales
multiples compress by 42% by the end of April to an average of 8x. Private
Equity buyers stepped in to take advantage of the weakness with Thoma Bravo
bidding for Sailpoint (13.4x forward sales) and Anaplan (13.9x forward sales).
Weakest performance was reserved for Internet stocks (and other 'work from
home' beneficiaries) which struggled with reopening, difficult comparisons,
changes to user tracking, supply chain travails and (towards period end)
consumer spending concerns. While the sector struggled (particularly in China,
where a series of regulatory crackdowns weighed heavily) the average stock
suffered far more than headlines suggest with NASDAQ CTQ Internet Index
returning -37%, while Alphabet delivered positive returns (+5%). Softer
ecommerce trends and the impact of waning fiscal stimulus checks put pressure
on the ecommerce and payments space, including PayPal (-63%) and Shopify
(-60%). Amazon (-21%) was not immune as strong AWS results were not enough to
offset concerns around ecommerce pull forward and the profitability of its
retail business.
Public cloud results remained very solid as the three major public cloud
operators (Amazon AWS, Microsoft Azure, Google GCP) reached a collective
annual revenue run rate of c.$140bn, up +41% y/y. Many of the bellwether WFH
and lockdown beneficiaries more than reversed out earlier gains as companies
such as Netflix, DocuSign, Peloton and Spotify broke below pre-COVID levels
despite strong growth in their revenues and user bases in the intervening
period. The most speculative areas of the market saw the largest drawdowns.
The GS Non-Profitable Tech Index returned -47% and the ARK Innovation ETF
delivered -57% during the year as investor enthusiasm for 'TAM' (Total
Addressable Market) stories abated in the context of more persistent inflation
and a higher rate outlook.
Portfolio Performance
The Trust underperformed its benchmark with the net asset value per share
falling -7.7% during the fiscal year versus a decline of -0.9% for the Dow
Jones World Technology index. The Trust's share price fell by 13.7% reflecting
the additional impact of the discount widening from 5.3% to 11.5% during the
period. We continue to monitor the discount and the Trust bought back 4.19m
shares during the period.
The year was dominated by the reversal of fortunes in high growth /
long-duration stocks that were challenged by the combination of reopening
headwinds and supply chain travails as well as sustained valuation compression
amid soaring energy prices, rampant inflation, higher risk-free rates, and
increased risk of recession. As such, adverse stock selection (largely
associated with our growth-centric investment approach) was responsible for
most of the Trust's underperformance as investors rotated away from smaller,
longer-duration assets in favour of more solid, lower-multiple assets. In
addition, a handful of mega-cap stocks that explain a large part of our
benchmark including Alphabet (+5%), Apple (+33%) and Microsoft (+22%)
delivered strong positive returns while smaller-cap peers fell significantly.
Given that we are underweight in these names compared to the benchmark, their
relative strength dragged on our relative performance. More broadly, the
underperformance of smaller companies, which we were overweight relative to
the benchmark, during the period acted as a meaningful performance headwind.
On the positive side, our average cash position of 5.3% added 95bps of
performance (aided by USD strength) although our NDX puts dragged by -17bps
for the full year, despite strong recent positive contribution. Asset
allocation also benefited from an underweight exposure to China which
underperformed following increasingly hostile government scrutiny of
technology platforms and (towards period end) economic weakness due to
lockdowns.
At the stock level, weakest relative performance was delivered by earlier
COVID beneficiaries that suffered a stark reversal in fortune during the year.
These included ecommerce companies such as Amazon (-21%) and HelloFresh (-31%)
as well as digital payment platforms such as PayPal (-53%) and Square (-55%),
which similarly struggled with the slowdown in online sales and the withdrawal
of government stimulus.
Two of our largest stock detractors were Internet stocks: Netflix (-59%) which
struggled to maintain its earlier subscriber momentum growth amid reopening;
and Snap (-49%) which was hurt by user-tracking changes made by Apple.
Software companies that had previously enjoyed tailwinds associated with
remote and hybrid work also experienced significant drawdowns typified by
DocuSign (-60%) and Twilio (-66%). Other software stocks also struggled with
valuation compression that more than offset fundamental progress, while a few
were punished following more mixed execution including Okta (-51%) and Elastic
(-30%). Long-duration stocks were particularly weak as sentiment reversed as
risk free rates rose, which negatively impacted companies such as 10x Genomics
(-73%) and Guardant Health (-57%). As ever, there were also a few genuine
disappointments such as Chegg (-70%) Everbridge (-64%) and 2U (-72%), although
these were mostly contained to the portfolio tail. However, the most
significant stock level detractors were our underweight positions in Apple
(+32%) and Microsoft (+21%) which combined cost nearly -240bps relative,
despite strongly contributing to absolute returns.
In terms of positives, the Trust benefitted from the outperformance of
cybersecurity stocks which enjoyed strong fundamentals and positive sentiment
(buttressed by events in Ukraine) in contrast with software peers. Noteworthy
performances were delivered by Tenable (+61%), Cloudflare (+12%) and
CrowdStrike (+5%). Companies exposed to strong cloud capex /datacentre
spending also performed well including Arista Networks (+61%), AMD (+15%) and
Marvell Technology (+41%). Electric vehicle (EV) plays such as Tesla (+35%)
and BYD (+60%) continued to benefit from strong adoption trends while managing
to avoid too much supply chain disruption. The Trust also benefited from its
underweight exposure to Chinese stocks with Alibaba (-54%) the largest
individual positive contributor (c.88bps) to relative performance. Strong
performance from E-Ink (+172%) is deserving of mention as the Taiwanese
manufacturer delivered strong growth aided by Walmart's adoption of its
electronic shelf labels.
Portfolio Changes
While our core themes (and our growth-centric approach) had previously mapped
well to the pandemic, we continued to realign the portfolio to better position
it for reopening. This resulted in us significantly reducing our exposure to
earlier work-from-home (WFH) beneficiaries, many of which suffered spectacular
reversals.
This resulted in us exiting positions in Adyen, Avalara, Delivery Hero,
Fiverr, Kahoot!, ON24, Peloton, Shimano, Wise and Zalando during the year. We
also significantly reduced exposure to longer-duration stocks post the Fed
pivot in November, exiting Affirm, Pinduoduo and Sea. On the positive side, we
continued to add to our semiconductor exposure reflecting myriad thematic
drivers (including AI and EV) as well as the ongoing demandsupply imbalance.
Changes to the portfolio made during the year meaningfully ameliorated
underperformance with the Trust's actual return more than 4.5% ahead of what a
static (i.e. unchanged) portfolio would have delivered.
Market Outlook
With the worst of the pandemic apparently behind us, investors could be
forgiven for thinking that recovery might have been more straightforward.
Instead, we are faced with a more uncertain macroeconomic backdrop than at any
stage since the pandemic and - given the loss of policymaker support -
arguably since the Great Financial Crisis (GFC). As recently as January, the
IMF was forecasting global growth of 4.4% and 3.8% in 2022 and 2023
respectively - a deceleration from an estimated 6.1% in 2021 - reflecting
higher interest rates, slower US growth and troubles in China. However, the
invasion of Ukraine in late February has seen growth forecasts contract
further while resultant soaring food and energy prices have led to inflation
expectations of 5.7% in advanced economies and 8.7% in emerging markets this
year, significantly ahead of earlier forecasts. Beyond the tragic humanitarian
consequences of the war, the conflict has also highlighted Europe's reliance
on Russian energy with the EU receiving nearly 40% of its gas and more than a
quarter of its oil from Russia. With the war ongoing (and with systemic risk
thus far avoided), higher commodity and energy prices will be the primary
mechanism for how the conflict affects the global economy. While Russia only
explains c.1.6% of global GDP, it is the world's largest exporter of natural
gas (c.20% global share) and the second largest exporter of crude oil. Russia
is also the largest exporter of wheat (c.20% share) and supplies c.10% of the
world's copper and aluminium and 40% of palladium. Consumer spending is being
challenged by higher energy costs with UK families said to face the biggest
real income squeeze in nearly 50 years. In the US, a gallon of gas recently
exceeded $5 - the first time ever - with negative implications for disposable
incomes and consumer confidence which recently fell to a decade low.
Sharply higher energy prices also pose a new and substantial risk to an
inflationary backdrop that had already become problematic. As previously
discussed, inflation has soared almost everywhere with annual CPI growth rates
in the US and Europe at multi-decade highs. Originally understood as a supply
shock due to COVID-related disruption, the past year has seen higher prices
become more pervasive and less transitory. As previously mentioned, US CPI
reached +6.5% in November, while in the same month, Eurozone inflation came in
at +4.9% y/y, way ahead of the ECB's earlier forecast of +1.5% for 4Q21. Tight
labour markets have also led to wage inflation, with unit labour costs +6.3%
y/y in 3Q21, the biggest increase since 1982. As a result, the narrative has
shifted to inflation as a demand problem caused by stimulus, excess savings,
and pent-up demand which, when paired with more inelastic supply, has created
a "perfect storm of higher prices".
Since the start of the pandemic, highly accommodative fiscal and monetary
policy designed to prevent financial collapse has 'flooded the economy and
financial markets' with unprecedented liquidity. Between February 2020 and
November 2021, M2 rose $6trn to $21.4trn - equivalent to almost a year's worth
of nominal GDP, a record. Excess liquidity was recently estimated at c.$3trn
while fiscal support packages have seen government deficits balloon. In the
US, the federal budget deficit reached c.$2.8trn, almost three times the 2019
level. The Fed's balance sheet has expanded by almost $5trn too, reaching a
record $8.7trn by the end of the calendar year. While the Fed may have
"greatly miscalculated" the inflationary impact of earlier stimulus, they
could not have known the pandemic would result in a labour supply issue. Just
two years ago the pandemic was said to have "triggered one of the worst jobs
crises since the Great Depression". Instead, and despite the US economy being
1.4% larger than it was pre-pandemic, there are still 3.6 million fewer people
in jobs and nearly 1.9 job openings per job seeker. This is largely the result
of the 3m additional 'early retirees' equivalent to c.2% of the US workforce
(aka the 'Great Retirement'), another pandemic-related twist which has
accelerated the labour market recovery timeline. As a result, wages are
rising, with the National Federation for Independent Businesses (NFIB)
recently reporting a record net 48% of small businesses increasing worker
compensation. Despite this, labour force participation remains subdued at
62.3% (as compared to c.63% pre-pandemic) leading to massive employee churn
(aka the 'Great Resignation'). Labour shortages may persist which will put
further upward pressure on wages and could presage a self-reinforcing
wage-price spiral unless productivity growth improves significantly.
As such, a US tightening cycle was necessary to prevent inflation becoming
more embedded in the labour market. While the Fed may appear behind the curve,
inflation expectations appear to remain relatively well anchored. The Fed will
want to keep it that way; to fail to have pivoted after the November data
"would have risked Powell's rhetoric degenerating into self-parody". Since
then, rate hikes have begun with further increases anticipated this year and
next. The decision by the ECB in early March to accelerate tapering despite
events in Ukraine highlighted the fact that central banks will (and should)
always prioritise credibility over policy error risk. As such, we expect
Powell to "do whatever it takes" to becalm inflation but do not anticipate a
Volcker re-run given the very different backdrop with one notable exception -
soaring energy prices. Regardless, it is difficult to see how central banks
can come to the rescue of markets with interest rates near zero. Moreover,
reducing inflation has become an increasingly important political focus, and a
more important consideration than bailing out equity investors. At some point
concerns about reflexivity will resurface but there is no obligation for the
Fed to act and, in any case, we know it failed twice to stop selloffs of as
much as 50% in the bear markets that ended in 2002 and 2009.
Until recently, our base case was slowing growth rather than stagflation or
recession. However, we have to acknowledge the increasing risks posed to this
relatively sanguine view by tighter monetary conditions, war, and soaring
energy costs. For now, we are encouraged by earnings expectations that have
remained relatively robust with growth in earnings and revenues this year
forecast at 7.7% and 11.5% respectively. While these forecasts may prove stale
and subject to downward revision, it is worth recalling that while GDP is
measured in real terms, earnings estimates are nominal. As such, inflation
currently represents a greater risk to multiples than to corporate earnings.
Of course, much depends on the durability of cycle-high corporate profit
margins given an increasing number of cost pressures. We continue to keep a
close eye on the direction of operating earnings given its strongly positive
(0.94) correlation with the S&P 500.
Following the recent market correction, valuations look less problematic today
with the S&P 500 trading at c.15.8x forward earnings as compared to last
year when we noted they were "somewhat extended" at c.23x. As a result, US
stocks now trade below both five-year (18.6x) and ten-year (16.9x) averages.
However, this year we are forced to consider valuations against a very
different inflation backdrop. That said, we are somewhat willing to look
through current elevated inflation because longerterm expectations remain well
anchored and because the Fed is alive to inflationary risk. Equity valuations
should also be somewhat supported by a paucity of alternatives. Compared to
bonds, the Fed Model suggests stocks are c.50% undervalued compared to
Treasuries, and c.20% undervalued versus investment-grade credit. Cash
continues to look unattractive with negative real returns guaranteed in most
major markets, although elevated levels of equity market volatility have added
to its relative lustre.
Upside risk could manifest via the cessation of hostilities in Ukraine -
unlikely in the very near term but possible in time. While a return to the
prior equilibrium enjoyed between Russia and the West appears impossible, an
end to hostilities could significantly ameliorate current market uncertainty,
becalm energy prices, and meaningfully reduce the risk of escalation.
Structural inflation fears may also be overdone with many of the imbalances
that existed prior to the invasion of Ukraine appearing pandemic-related:
pent-up demand boosted by household savings bloated during COVID, supply-chain
challenges frustrated by uneven vaccine availability and draconian approaches
to COVID containment, particularly in China. Heightened labour market churn
also appears to be somewhat pandemic related with the pursuit of more flexible
work and/or relocation important reasons for changing jobs. Reopened borders
and easier international travel may also ameliorate labour shortages in
lowerpaid work where wage growth has been strongest. This malalignment of
demand and supply is reminiscent of the post-war period when the end of price
controls saw CPI leap from 1.7% in February 1946 to a peak at 19.7% in March
1947, before plunging to zero in 1949. The cause of this volatility was a
combination of pent-up demand, as soldiers were demobilised, and plunging
industrial production, as factories retooled from armaments to consumer goods.
Two years later, production rebounded dramatically, helping to bring inflation
down. A similar experience also occurred during the Korean War. Both of these
episodes revealed that inflation can rise and fall very quickly without
inflation expectations being permanently altered. Fed Chair Powell may have
been alluding to this possibility when he stated that "appropriate monetary
policy in this environment requires a recognition that the economy evolves in
unexpected ways".
Other positive impulses include the so-called 'CFO put' with S&P companies
sitting on $2.4trn in cash and other liquid assets. Leverage at public
companies (as measured by net debt/EBITDA) is back at 2014 lows which should
support capital spending, higher dividends and stock repurchases. It should
also fuel greater M&A activity with private equity additionally said to
have c.$2.3trn of 'dry powder' cash reserves. During 2022, we have seen
private equity spend more than $34bn acquiring three software vendors -
Citrix, SailPoint and Anaplan. A return of strategic M&A may also prove
supportive too, with $95bn of gross transaction value announced in the
videogaming industry alone this year following Microsoft's $69bn bid for
Activision Blizzard and Take-Two's $13bn bid for Zynga. In early March, Google
also announced the $5.4bn cash acquisition of cybersecurity company Mandiant.
We also see many of the conditions necessary for a rally falling into place:
the IPO market is essentially shut, and investor sentiment is at post-1992
lows (a recent AAII survey of US retail investors revealed that just 15% of
investors are bullish). Small caps have underperformed considerably from highs
and new issues have been smashed as the GS Recent Liquid IPO Index has halved
from November highs, both of which have typically been preconditions of
previous rallies
Market Risks
While COVID remains a wildcard, war, inflation, and recession represent the
most significant interconnected risks this year. In terms of COVID, we
continue to believe the worst of the pandemic is behind us thanks to vaccine
rollouts that have broken the link between cases and mortality, as well as the
link between cases and behavioural adjustments. Put differently, most people
appear to have concluded that the health risks associated with COVID are no
longer significant enough for them to change their behaviour. As long as
Omicron remains the dominant strain, our base case is a continuation of the
transition from pandemic to endemic disease. The main risk to this is a
significantly different new variant that changes the trajectory of the virus.
In addition, current lockdowns in China - where omicron is challenging the
efficacy of local vaccines and the zero-COVID policy - are a pertinent
reminder that COVID is likely to continue disrupting life and supply chains
for the foreseeable future. We also cannot know how the Ukraine conflict will
evolve. At the same time, China will be watching closely given its One-China
Principle is similar to Putin's desire to rebuild a Greater Russia. There is
also a real (if small) risk of escalation (evidenced by potential NATO
enlargement) - a chilling prospect given Russia controls the world's biggest
nuclear arsenal and has been unafraid to sanction the use of chemical weapons
in Syria.
The conflict also poses additional risks to the prevailing investment
backdrop. History says we should expect higher inflation: as the saying goes,
"war is inflationary; peace is deflationary". Put differently, the pursuit of
both "guns and butter" comes at an inflationary cost. In the US, inflation
spiked during the War of 1812, the American Civil War, WWI, and WWII through
the end of the Cold War. We might also do well to consider the implications of
permanently higher defence spending and the potential for a new arms race. If
so, this may coalesce around hypersonic weapons which reduce the effectiveness
of existing ballistic missile defence systems. With the potential to derail
the theory of deterrence based on mutually assured destruction (MAD), higher
defence budgets look inevitable. Germany has already announced an immediate
€100bn budget to modernise its army and an ambition to exceed a target of 2%
of GDP in defence spending (from c.1.5% today). This pivot is significant, as
was the recent decision by some ESG funds to allow defence stocks within their
investment remits. During the Cold War, the US spent around 7% of GDP on
defence which détente saw fall to c2.8% today. The war in Ukraine has drawn a
line under that peace dividend with US defence spending already forecast to
rise towards 3.5-4% over the coming years.
War in Ukraine has also highlighted Europe's dependence on Russian oil and
gas, particularly in Germany where 65% of gas comes from Russia. Naturally,
this has brought energy security to the fore and Europe's urgent need to
reduce this vulnerability. While this should accelerate the clean energy
transition, the reality is that it takes a lot of alternative energy to
replace gas. The invasion has so shaken Germany that its economic minister
from the Green Party is reviewing the possibility of keeping both coal and
nuclear plants online to reduce dependence on Russian energy. We are excited
about the opportunity to participate in another wave of environmental
technology spending, but the climate transition also represents another "slow-
moving negative supply shock" because it embeds the cost of carbon emissions
in production prices. It is also another reminder we may already be past peak
globalisation. This process arguably began with Brexit and Trump's tariff wars
but stepped up a gear with COVID when the world's interdependence was tested.
Vaccine nationalism was a particularly difficult moment, while post-pandemic
challenges have further highlighted the risk associated with global supply
chains built on hyperspecialisation and finely-tuned just-in-time (JIT)
inventory management. The risks to US equities from a decline in globalisation
are not insignificant: Bank of America estimates that globalisation has driven
more than half of all margin expansion due to lower COGS on exports, taxes,
and labour.
More significantly, the risk is that peak globalisation is part of broader
inflation regime shift. In recent years we have seen a wave of populism
presage significant minimum wage increases and social unrest, while a number
of COVID policy responses in the developed world (such as massive transfer
payments indirectly financed by central banks) represent a "generational shift
in fiscal policy". The demand for more flexible work post-pandemic is also
perhaps symptomatic of a recalibrated relationship between labour and capital
that could persist. Taken together, these factors represent a significant
challenge to the disinflationary era that has been in place since the early
1980s. Finally, we might highlight the long-term risk posed to the
dollar-based system following the freezing of Russian US dollar reserves,
described as "the weaponization of money". While a paucity of alternatives
suggests limited immediate risk to the dollar's reserve currency status, so-
called 'de-dollarisation' could become a key theme in an "increasingly
multi-polar and potentially more contentious world".
Technology Outlook
Earnings outlook
After increasing 9% in 2021, worldwide IT spending is expected to reach
$4.4trn this calendar year representing an increase of 4.0%, in current dollar
terms. However, this forecast has already been revised lower from +5% forecast
in January reflecting deepening geopolitical and macroeconomic risks. For
2022, the technology sector is expected to deliver revenue and earnings growth
of 11.2%/12% while the S&P 500 is forecast to grow at 9.8%/10.3%
respectively. These forecasts do not look unreasonable, particularly after a
solid Q1 results seasons that at the time of writing has seen the sector
deliver 11.7% y/y revenue growth. However, guidance has been more mixed than
usual, likely reflecting inflation, supply chain challenges, USD strength and
the impact of the conflict in Ukraine. These headwinds come at a tricky time
for the technology sector's net profit margins which are elevated at c.25% as
compared to the five-year average of 21.8%. Sustained US Dollar strength could
challenge revenue estimates given the sector's international exposure of 59%
(the highest of any sector) vs. 41% for the market.
Valuation
Having made a new cycle high of 28x ahead of the Fed Pivot in November 2021,
technology valuations have been in retreat. Today, the forward P/E of the
technology sector is c.19 - considerably less than this time last year (26x),
below the five-year average (21.7x) but still ahead of the ten-year (18.2x)
average. In addition, technology remains the best-capitalised US sector and
the only one with net cash. The sector's relative rating has also contracted
from post-2004 highs of 1.4x registered in late 2021. Today, technology stocks
trade at 1.1x the market PE multiple, towards the middle of its post-dotcom
bubble range of 0.9-1.4x and a far cry from levels seen during the dotcom
bubble, when the sector traded at more than twice the market multiple.
However, as we have long argued, aggregate valuations continue to be diluted
by 'cheap' incumbents such as HP and Intel (and now arguably Meta / Facebook)
that trade on P/Es of between 7-13x.
Last year, we highlighted how the technology story had hardly gone unnoticed,
evidenced by next-generation valuations that had expanded to cycle highs,
revisiting levels not seen since the late 1990s. While this group of stocks
boasted unusual growth profiles, we cautioned that elevated valuations also
reflected several late-cycle features - elevated retail participation, SPAC
issuance, concentrated portfolios and 'classic late-cycle exuberance' that had
coalesced around long-term 'total addressable market' (TAM) investing. Since
then, those pockets of exuberance have been truly burst including ARK (a proxy
for TAM investing) which peaked in February 2021 - a full nine months before
our own benchmark made its highs- and has subsequently suffered peak-to-trough
decline of c.77%. SPACs have fallen by c.50%. At time of writing, valuations
across the SaaS space have more than halved across all growth groups. While we
have been nervous about high-growth valuations, our own base case did not
envisage a derating that would be as deep or dramatic as it is currently
proving; what began as an overdue valuation reset has gathered momentum of its
own as investors have begun to question the durability of growth and even the
validity of some companies' non-GAAP profitability given high (and persistent)
levels of share-based compensation. While macroeconomics and the Fed pivot
have played a significant part in this, it has been the reversing fortunes of
the working from home (WFH) and other pandemic beneficiaries that began this
process.
Sending Prioritise/Favoured Themes
Although next-generation valuations are currently under pressure, IT spending
priorities are unlikely to change nearly as dramatically. Indeed, a recent JP
Morgan survey of 142 Chief Information Officers (CIO) responsible for $114bn
spend expect IT budget growth of +5.3% and +5.7% in 2022 and 2023
respectively, versus c.4.8% expected during the pandemic. The survey (and
others like it) support the view that IT budgets continue to be reallocated in
favour of new technologies. Cloud computing remains the number one IT
priority, while other high priority areas include security, digital
transformation, analytics, collaboration, and AI. Demand for IT services also
remains strong due to accelerated digital demand and the constrained talent
environment. In contrast (and at the margin) there does appear to be some
levelling off in spend intentions for communications software likely due to
reopening/WFH digestion. Hardware also remains one of the slowest growth
areas, with PCs seeing a deterioration in CIO prioritisation post-WFH, while
the cloud shift continues to represent significant longer-term risk.
More broadly, and consistent with previous years, legacy technologies, and
vendors such as IBM, Oracle and Dell are expected to remain market-share
donors despite their best efforts (and M&A) to reinvent themselves. At a
time when growth stocks are under sustained pressure, this is a good reminder
of why value investing within technology is something of a Faustian pact (and
why we avoid it). Instead, we construct our portfolio around seven core
themes: internet advertising / ecommerce, software-as-a-service, cloud
infrastructure, cybersecurity, data economy / AI, digital entertainment and
connectivity/5G. In addition, we have exposure to a number of secondary themes
including fintech/ payments, automotive, clean energy, and medical technology.
We are also excited about the long-term disruptive potential of emerging
themes such as blockchain and the metaverse.
Technology Risks
As ever, there are multiple risks to our constructive mediumterm view. Many of
these relate to macroeconomics (recession; inflation; war, and others) that
are covered broadly elsewhere. In addition, we should highlight the risk to
technology spending should CEO confidence meaningfully deteriorate. Despite
survey results suggesting otherwise, there could be some risk to cloud
spending should earlierstage companies/unicorns spend less aggressively. Other
'big picture' risks include widespread component shortages and labour market
tightness. Valuation is another risk because even after this atypical
correction, technology stocks have retraced back to average, rather than cheap
territory versus history. While earnings progress is expected to moderate this
year, numbers look at risk of downward revision given the weaker global growth
outlook and US Dollar strength while record technology margins could be
challenged by soaring input prices, tight labour markets and/or reopening (as
companies give up or reinvest some of their pandemic savings).
As we warned last year, a steeper yield curve (noticeably absent at present)
is unlikely to prove good news for technology stocks. Regulation remains a key
risk with events in China after the aborted IPO of Ant a salient reminder of
regulatory risk. That said, we are comforted by the existence of due legal
process in liberal democracies painfully absent elsewhere. However, we would
not be surprised to see a resurgence in regulatory scrutiny in the US
post-COVID. While legislation will not be easy to pass, restrictive
legislation has already been proposed by members of both parties that focus on
app stores, first party/third party seller conflicts and responsibility for
content on internet platforms (revising Section 230). We expect 'Big Tech' and
their natural monopolies to continue to invite scrutiny and the drumbeats in
Washington to grow louder over the coming year ahead of key lawsuits slated
for 2023.
Concentration Risk
In addition to market and sector specific risks, it would be remiss of us not
to remind our shareholders about the concentration risk both within the Trust
and the marketcap weighted index around which we construct the portfolio. At
the end of June, our three largest holdings - Microsoft, Apple and Alphabet -
represented c.28.5% of our NAV and c.41.3% of our benchmark respectively. Five
years ago, our top three positions (Alphabet, Apple and Microsoft) accounted
for c.22% of NAV and c.30% of our benchmark. The higher concentration of both
our portfolio and benchmark reflects the spectacular performance of a handful
of stocks that captured the zeitgeist of this cycle. These are unique,
nonfungible assets and their long-term success represents their dominance of
their respective industries in an interconnected world where network effects
are paramount, and the marginal cost of distribution is low. Their influence
is not only felt within technology indices; at the end of June, the largest
ten stocks (including these three) in the S&P 500 accounted for 28.0% of
its market cap. While off recent highs, this level of concentration is
commensurate with levels not seen since the early 1980s. Although this makes
the portfolio (and indices) more sensitive to the performance of a few stocks,
we are encouraged by the fact that the largest ten stocks also explained 29%
of index earnings as at year end. Trading at/ around a market multiple, these
stocks dominate market cap indices because of their earnings progress, rather
than because they sport outlandish valuations as was the case in the late
1990s. We are very comfortable moving materially underweight them should we
become concerned about their growth or return prospects, or should we find
more attractive risk-reward profiles elsewhere in the market.
Conclusions
As one of the largest beneficiaries of the pandemic, reopening was always
going to generate crosscurrents for the technology sector. E-commerce
normalisation has led to significant retracements within the internet and
payment subsectors which are likely to take time to recapture. However, we are
confident that secular tailwinds will reassert themselves, supported by
favourable demographics. Software spending growth remains robust as companies
digitally transform, automate workflows, gain insight from AI, secure
themselves from cyberattacks and apply technology to drive productivity gains.
Gartner believe software spending will increase 9.6% this year; IDC size
digital transformation as a $10trn opportunity through 2025. And then there's
a myriad of other secular themes within technology to get excited about - AI,
cybersecurity, electric vehicles (EVs), healthcare and clean energy to name a
few, as well as optionality associated with autonomous vehicles, the metaverse
and blockchain/ distributed computing. With macroeconomics currently
dominating equity markets and near-term volatility high, it is easy to forget
how good the long-term technology story is.
Long-term returns ultimately reflect economic value added, even if market
disruptions and cyclical impulses can overwhelm the powerful underlying
drivers of longer- term technological progress in the short term. If the past
year has shown anything, it is the enormous risk associated with hubristic and
Panglossian investment approaches: TAM, growth at any price, disregard for
liquidity, and high conviction trumping risk management as the basis for
portfolio construction. None of these things, however, alter the underlying
criticality of technology (via its contribution to total factor productivity)
to future economic growth, especially as the other two inputs to growth
(capital and labour) may contribute less as they become relatively scarcer. As
the OECD puts it (quoting Krugman): "Productivity isn't everything, but in the
long run it is almost everything.". Technology is the handmaiden to
productivity improvement, and so long as the sector can continue to help the
economy become more productive and create economic value, we expect value to
continue to accrue to equity holders in the most impactful companies enabling
this change.
While valuations have now corrected back to mediumterm averages, they are
still susceptible to further downside given increased volatility, the growing
influence of energy prices and real rates on equity markets as well as
heightened recession risk. The current drawdown (c.21%) is already consistent
with the average nonrecessionary bear market (-18% over eight months).
However, the average recessionary bear market has seen the market fall by
c.33% over 17 months, suggesting the current correction may only be c.
two-thirds complete in the event of a recession. That said, technology
valuations have meaningfully corrected such that next generation software
stocks now trade broadly in line with incumbents on a forward EV/sales basis.
The last time this happened was 2015/2016 when the market was also
significantly concerned about a hard landing, suggesting that technology
stocks have begun to meaningfully price in recession risk. As such, we have
begun to rebuild our exposure to higher-growth stocks while maintaining a
modest amount of Nasdaq put protection and cash to help ameliorate the impact
of further market weakness while ensuring the portfolio remains highly liquid.
Ben Rogoff & Team
19 July 2022
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 2022 30 April 2021
US & Canada 74.2% 70.1%
Asia Pacific (ex-Japan) 10.2% 12.6%
Other Net Assets 7.9% 4.9%
Japan 3.4% 4.7%
Europe (inc -UK) 2.9% 7.1%
Middle East & Africa 1.4% 0.6%
Market Capitalisation of Underlying Investments As at As at
30 April 2022 30 April 2021
>$10bn 88.0% 91.8%
$1bn-$10bn 11.7% 7.8%
<$1bn 0.3% 0.4%
All data sourced from Polar Capital LLP.
CLASSIFICATION OF INVESTMENTS*
as at 30 April 2022
North Europe Asia Pacific (inc. Middle East) Total Total Benchmark Weightings as at 30 April
America % % % 30 April 30 April 2022
2022 2021
% %
Software 26.5 0.1 1.0 27.6 25.2 25.9
Semiconductors & Semiconductor Equipment 15.4 2.1 4.9 22.4 18.3 22.6
Technology Hardware, Storage & Peripherals 11.7 0.2 2.7 14.6 12.5 14.4
Interactive Media & Services 12.4 - 1.6 14.0 19.6 13.3
Internet & Direct Marketing Retail 2.2 0.1 0.6 2.9 5.0 2.9
IT Services 2.2 - 0.1 2.3 3.5 4.1
Automobiles 0.9 - 0.7 1.6 0.6 1.6
Electronic Equipment, Instruments & Components - - 1.6 1.6 2.8 1.6
Communications Equipment 1.5 - - 1.5 - 1.5
Entertainment 0.4 - 0.8 1.2 2.5 1.2
Aerospace & Defense 0.7 - - 0.7 0.4 0.7
Machinery - - 0.7 0.7 1.3 0.8
Healthcare Equipment & Supplies 0.3 - 0.3 0.6 0.3 0.6
Electrical Equipment - 0.4 - 0.4 0.2 0.4
Diversified Consumer Services - - - - 0.9 -
Leisure Products - - - - 0.8 -
Healthcare Providers & Services - - - - 0.7 -
Auto Components - - - - 0.4 -
Media - - - - 0.1 -
Total investments (£2,811,080,000) 74.2 2.9 15.0 92.1 95.1
Other net assets (excluding loans) 6.0 2.3 1.3 9.6 6.4
Loans (0.9) - (0.8) (1.7) (1.5)
Grand total (net assets of £3,050,985,000) 79.3 5.2 15.5 100.0 -
At 30 April 2021 (net assets of £3,408,763,000) 72.4 8.5 19.1 - 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 2022
Value of holding % of net assets
Ranking 30 30 30 April 2022 30 April 2021
April April
2022 2021
2022 2021 Stock Sector Region £'000 £'000 % %
1 (1) Microsoft Software North America 336,977 296,561 11.0 8.7
2 (3) Apple Technology Hardware, Storage & Peripherals North America 305,244 281,211 10.1 8.2
3 (2) Alphabet Interactive Media & Services North America 249,058 292,143 8.2 8.6
4 (9) Nvidia Semiconductors & Semiconductor Equipment North America 95,065 74,141 3.1 2.2
5 (13) Advanced Micro Devices Semiconductors & Semiconductor Equipment North America 86,045 52,175 2.8 1.5
6 (5) Samsung Electronics Technology Hardware, Storage & Peripherals Asia Pacific 82,312 115,503 2.7 3.4
7 (6) Taiwan Semiconductor Semiconductors & Semiconductor Equipment Asia Pacific 82,012 110,029 2.7 3.2
8 (10) ASML Semiconductors & Semiconductor Equipment Europe 59,248 61,023 1.9 1.8
9 (15) Amazon.com Internet & Direct Marketing Retail North America 57,558 47,029 1.9 1.4
10 (22) ServiceNow Software North America 56,280 30,463 1.8 0.9
Top 10 investments 1,409,799 46.2
11 (4) Meta Platforms (previously Facebook) Interactive Media & Services North America 54,509 143,131 1.8 4.2
12 (20) Micron Technology Semiconductors & Semiconductor Equipment North America 48,220 38,249 1.6 1.2
13 (-) Arista Networks Communications Equipment North America 44,318 - 1.5 -
14 (8) Tencent Interactive Media & Services Asia Pacific 43,880 78,674 1.4 2.3
15 (-) KLA-Tencor Semiconductors & Semiconductor Equipment North America 39,816 - 1.3 -
16 (28) CrowdStrike Software North America 39,441 25,213 1.3 0.7
17 (17) HubSpot Software North America 38,675 44,270 1.3 1.3
18 (44) Marvell Technology Semiconductors & Semiconductor Equipment North America 38,601 16,803 1.2 0.5
19 (11) Applied Materials Semiconductors & Semiconductor Equipment North America 36,986 59,068 1.2 1.7
20 (18) Snap Interactive Media & Services North America 36,334 41,944 1.2 1.2
Top 20 investments 1,830,579 60.0
21 (37) Qualcomm Semiconductors & Semiconductor Equipment North America 32,622 19,753 1.0 0.6
22 (26) Seagate Technology Technology Hardware, Storage & Peripherals North America 27,421 28,123 0.9 0.8
23 (-) Tesla Motors Automobiles North America 26,891 - 0.9 -
24 (25) Mastercard IT Services North America 26,330 28,215 0.9 0.8
25 (12) Adobe Software North America 25,980 53,963 0.8 1.6
26 (57) Lattice Semiconductor Semiconductors & Semiconductor Equipment North America 24,788 14,916 0.8 0.4
27 (23) Zendesk Software North America 24,415 30,294 0.8 0.9
28 (21) Tokyo Electron Semiconductors & Semiconductor Equipment Asia Pacific 23,889 38,083 0.8 1.1
29 (-) Five9 Software North America 23,654 - 0.8 -
30 (-) Elastic Software North America 23,453 - 0.8 -
Top 30 investments 2,090,022 68.5
31 (88) Nintendo Entertainment Asia Pacific 23,413 8,557 0.8 0.2
32 (96) BYD Automobiles Asia Pacific 23,080 7,073 0.7 0.2
33 (71) Axon Enterprise Aerospace & Defense North America 21,985 12,144 0.7 0.4
34 (51) CyberArk Software Software Asia Pacific 21,721 15,768 0.7 0.5
35 (63) Monolithic Power Systems Semiconductors & Semiconductor Equipment North America 20,305 14,258 0.7 0.4
36 (-) Pure Storage Technology Hardware, Storage & Peripherals North America 19,712 - 0.7 -
37 (42) Airbnb Interactive Media & Services North America 19,708 17,276 0.7 0.5
38 (24) Visa IT Services North America 19,629 29,196 0.6 0.9
39 (-) E Ink Electronic Equipment, Instruments & Components Asia Pacific 19,235 - 0.6 -
40 (7) Alibaba Internet & Direct Marketing Retail Asia Pacific 18,888 79,532 0.6 2.3
Top 40 investments 2,297,698 75.3
41 (-) Palo Alto Networks Software North America 18,479 - 0.6 -
42 (27) Salesforce.com Software North America 18,315 25,730 0.6 0.8
43 (81) Unity Software Software North America 17,761 9,456 0.5 0.3
44 (84) Smartsheet Software North America 16,414 8,900 0.5 0.3
45 (65) Cloudflare Software North America 15,864 13,727 0.5 0.4
46 (76) Power Integrations Semiconductors & Semiconductor Equipment North America 14,930 10,635 0.5 0.3
47 (-) ON Semiconductor Semiconductors & Semiconductor Equipment North America 14,451 - 0.5 -
48 (48) TripAdvisor Interactive Media & Services North America 14,362 16,227 0.5 0.5
49 (64) Snowflake Software North America 13,973 13,956 0.5 0.4
50 (80) MongoDB Software North America 13,343 9,522 0.5 0.3
Top 50 investments 2,455,590 80.5
51 (89) Shopify IT Services North America 13,251 8,338 0.4 0.2
52 (30) Twilio Software North America 13,034 24,094 0.4 0.7
53 (35) Tenable Software North America 12,985 19,893 0.4 0.6
54 (38) Zoom Video Communications Software North America 12,578 19,029 0.4 0.6
55 (101) SolarEdge Technologies Semiconductors & Semiconductor Equipment Asia Pacific 12,519 5,295 0.4 0.2
56 (-) eMemory Technology Semiconductors & Semiconductor Equipment Asia Pacific 12,388 - 0.4 -
57 (36) Okta Software North America 12,146 19,789 0.4 0.6
58 (-) SiTime Semiconductors & Semiconductor Equipment North America 11,860 - 0.4 -
59 (87) Ceres Power Electrical Equipment Europe 11,569 8,743 0.4 0.2
60 (47) Workday Software North America 11,557 16,379 0.4 0.5
Top 60 investments 2,579,477 84.5
61 (-) Synopsys Software North America 11,533 - 0.4 -
62 (53) MediaTek Semiconductors & Semiconductor Equipment Asia Pacific 11,125 15,489 0.4 0.5
63 (49) TDK Electronic Equipment, Instruments & Components Asia Pacific 10,791 15,954 0.4 0.5
64 (-) Paycom Software Software North America 10,780 - 0.3 -
65 (-) Square IT Services North America 9,990 - 0.3 -
66 (72) Atlassian Software Asia Pacific 9,414 12,115 0.3 0.3
67 (-) Kornit Digital Machinery Asia Pacific 9,356 - 0.3 -
68 (106) Kinaxis Software North America 9,169 3,593 0.3 0.1
69 (79) Qualtrics International Software North America 8,840 9,627 0.3 0.3
70 (86) Dexcom Healthcare Equipment & Supplies North America 8,749 8,756 0.3 0.3
Top 70 investments 2,679,224 87.8
71 (-) Hoya Healthcare Equipment & Supplies Asia Pacific 8,746 - 0.3 -
72 (59) Roblox Entertainment North America 8,655 14,585 0.3 0.4
73 (55) Keyence Electronic Equipment, Instruments & Components Asia Pacific 8,251 15,371 0.3 0.4
74 (-) Coupa Software Software North America 7,487 - 0.3 -
75 (58) Fuji Machine Manufacturing Machinery Asia Pacific 7,403 14,793 0.2 0.4
76 (-) Ambarella Semiconductors & Semiconductor Equipment North America 7,377 - 0.2 -
77 (16) Infineon Technologies Semiconductors & Semiconductor Equipment Europe 6,891 44,581 0.2 1.3
78 (60) Harmonic Drive Systems Machinery Asia Pacific 6,430 14,480 0.2 0.4
79 (100) Hamamatsu Photonics Electronic Equipment, Instruments & Components Asia Pacific 6,376 5,299 0.2 0.2
80 (-) Disco Corporation Semiconductors & Semiconductor Equipment Asia Pacific 6,256 - 0.2 -
Top 80 investments 2,753,096 90.2
81 (-) Naver Interactive Media & Services Asia Pacific 6,137 - 0.2 -
82 (-) UiPath Software North America 5,720 - 0.2 -
83 (-) Intuit Software North America 5,521 - 0.2 -
84 (-) Etsy Internet & Direct Marketing Retail North America 5,067 - 0.2 -
85 (-) CS Disco Software North America 4,266 - 0.2 -
86 (-) DoorDash Internet & Direct Marketing Retail North America 4,212 - 0.1 -
87 (94) Take-Two Interactive Software Entertainment North America 3,926 7,108 0.1 0.2
88 (99) Qt Software Europe 3,542 5,731 0.1 0.2
89 (50) HelloFresh Internet & Direct Marketing Retail Europe 3,456 15,942 0.1 0.5
90 (-) Impinj Semiconductors & Semiconductor Equipment North America 3,417 - 0.1 -
Top 90 investments 2,798,360 91.7
91 (-) Logitech Technology Hardware, Storage & Peripherals Europe 3,309 - 0.1 -
92 (107) Zuken IT Services Asia Pacific 3,081 3,582 0.1 0.1
93 (103) Seeing Machines Electronic Equipment, Instruments & Components Asia Pacific 2,894 4,074 0.1 0.1
94 (102) Tobii Technology Hardware, Storage & Peripherals Europe 2,181 4,140 0.1 0.1
95 (109) ilika Electronic Equipment, Instruments & Components Europe 1,254 2,747 - 0.1
96 (110) Cermetek Microelectronics Electronic Equipment, Instruments & Components North America 1 2 - -
97 (-) Logitech Technology Hardware, Storage & Peripherals Europe 3,309 - 0.1 -
98 (107) Zuken IT Services Asia Pacific 3,081 3,582 0.1 0.1
99 (103) Seeing Machines Electronic Equipment, Instruments & Components Asia Pacific 2,894 4,074 0.1 0.1
100 (102) Tobii Technology Hardware, Storage & Peripherals Europe 2,181 4,140 0.1 0.1
Total equities 2,811,080 92.1
Other net assets 239,905 7.9
Total net assets 3,050,985 100.0
Note: Asia Pacific includes Middle East.
STRATEGIC REPORT
The Strategic Report section of this Annual Report comprises the Chair's
Statement, the Investment Manager's Report, including information on the
portfolio, and this Strategic Report. This report has been prepared 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 2022, the position of the Company at the year end and
a description of the principal risks and uncertainties. Throughout the
Strategic Report there are certain forward looking statements made by the
Directors in good faith based on the information available to them at the time
of their approval of this Report. Such statements should be treated with
caution due to inherent 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 World 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 the last four 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.
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 does not presently and
has not immediate intention to hold stocks in Russia.
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 Company's Articles of Association permit borrowings up to the amount of
its paid up share capital plus capital and revenue reserves, but any net
borrowings in excess of 20% of the Company's net assets at the time of
drawdown will only be made with the approval of the Board.
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 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, two-year loan facilities with ING Bank
NV: One for 36m US Dollars at a fixed rate of 1.335% pa and one for 3.8bn
Japanese Yen at a fixed rate of 0.9% pa, both of which were drawn down on 30
September 2020. These loans fall due for repayment on 30 September 2022. It is
anticipated that the loan facilities will 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 (2021: 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,
including print, production and website services which it arranges through
Perivan and Huguenot Limited respectively, and administrative services,
including accounting, portfolio valuation and trade settlement which it has
arranged to deliver through HSBC Securities Services ('HSS').
The Company also contracts directly, on terms agreed periodically, with a
number of third parties for the provision of specialist services:
· 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; and
· Camarco as PR advisors
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, and procuring accountancy services,
company secretarial, marketing and day to day administrative services,
including the monitoring of third-party suppliers, which are directly
appointed by the Company.
While the Board reviews the performance of the Investment Manager at each
Board meeting, and the Company's performance against Benchmark and a peer
group of funds with similar objectives, the Management Engagement Committee
formally carries out an annual review of the Investment Manager and other
suppliers' performance during the year.
Polar Capital provides a team of technology specialists led by Ben Rogoff.
Each team member focuses on specific areas while Ben 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 and Accounts.
The Investment Manager has other investment resources which support the
investment team and has experience in administering and managing other
investment companies.
Termination Arrangements
The Investment Management Agreement ("IMA") may be terminated by either party
giving 12 months' notice, but under certain circumstances the Company may be
required to pay up to one year's management charges if immediate notice is
given. Compensation will be on a sliding scale if less than 12 months' notice
is given. The IMA may be terminated earlier by the Company with immediate
effect on the occurrence of certain events, including: (i) if an order has
been made or an effective resolution passed for the liquidation of the
Investment Manager; (ii) if the Investment Manager ceases or threatens to
cease to carry on its business; (iii) where the Company is required to do so
by a relevant regulatory authority; (iv) on the liquidation of the Company; or
(v) subject to certain conditions, where the Investment Manager commits a
material breach of the IMA.
Fee Arrangements
As reported within the Chair's Statement, following negotiations with the
Manager, on 12 January 2022 the Company announced that it had concluded its
three-yearly review of the base management fee arrangements. The revised terms
came into force on 1 May 2022.
Performance periods coincide with the Company's accounting periods. In the
event of a termination of the investment management agreement, the date the
agreement is terminated will be deemed to be the end of the relevant
performance period and any performance fee payable shall be calculated as at
that date. Under the terms of the IMA the Board will undertake the
three-yearly review of the fee arrangements with the anticipation that any
changes proposed and subsequently agreed will take effect from the start of
the following financial year.
Management Fee
With effect from 1 May 2022, the base management fee, which is 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;
· Tier 3: 0.60 per cent. for such of the NAV above £3.5bn.
Prior to 1 May 2022, and the fee basis for the financial year ended 30 April
2022, the management fee was payable quarterly in arrears based on the NAV per
share ('NAV') on a per share basis as follows:
· Tier 1: 1 per cent. for such of the NAV as exceeds £0 but is less
than or equal to £800 million;
· Tier 2: 0.85 per cent. for such of the NAV as exceeds £800 million
but is less than or equal to £1.6 billion;
· Tier 3: 0.80 per cent. for such of the NAV as exceeds £1.6 billion
but is less than or equal to £2 billion; and
· Tier 4: 0.70 per cent. for such of the NAV as exceeds £2 billion.
Any investment in funds managed by Polar Capital are wholly excluded from the
base management fee calculation. In addition to the base management fee, the
Investment Manager may be entitled to receive a performance fee as detailed
below. Management fees of £28,281,000 (2021: £24,134,000) have been paid for
the year to 30 April 2022 of which £6,374,000 (2021: £6,844,000) was
outstanding at the year end.
Performance Fee
The performance fee participation rate is 10 per cent. of outperformance above
the Benchmark, subject to a cap on the amount which may be paid out in any one
year of 1 per cent. of NAV. Any amount over the 1 per cent. payment is written
off.
There was no performance fee payable for the year to 30 April 2022 (2021:
nil), and therefore no amount (2021: nil) was outstanding at the year end.
Calculation
A notional performance fee entitlement ('NPFE') is calculated and if positive,
accrued daily, having made up all past underperformance; however, it is only
at the financial year end that payment of the performance fee is tested.
The calculation period starts at the end of the financial year in which the
last performance fee was paid and is open until the end of the financial year
that the next performance fee is paid.
The 1 per cent. cap is applied as part of the NAV calculation so the
performance fee accrual will never exceed 1 per cent. of the NAV.
Any under performance since the last performance fee was paid must be made
good before a fee may be paid.
Payment Conditions
On the final day of each financial year the NPFE will be tested:
If the NPFE is positive, then a performance fee may be paid to the Manager if
the following conditions have been achieved:
· There has been outperformance of the Benchmark in the financial year;
· The NAV per share at the financial year end is equal to or higher
than the NAV per share when the last performance fee was paid; and
· The NAV per share at the financial year end is equal to or higher
than the NAV per share at the beginning of the financial year.
· If the NPFE is negative, then no performance fee is paid, and the
calculation period remains open
Other
In addition to the above, the Investment Manager is responsible for the first
£200,000 of marketing costs (previously £100k) and all research costs.
Continued Appointment of Investment Manager
The Board, through the Management Engagement Committee, has reviewed the
performance of the Investment Manager in managing the portfolio over the
longer-term. The review also considered the quality of the other services
provided, including the strength of the investment team, the depth of the
other services provided and the resources available to provide such services.
The Board reflected on the positive impact from the continued recruitment into
various teams at the Investment Manager to support the Company, which includes
the investment team, marketing, administration, and the organisation on the
Company's behalf of third party suppliers, and the quality of the Shareholder
communications.
The Board, on the recommendation of the Management Engagement Committee, has
concluded that on the basis of longer-term performance, it is in the best
interests of Shareholders as a whole that the appointment of Polar Capital LLP
as Investment Manager is continued on the terms agreed on 12 April 2019.
LONG-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 the continued 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 and Accounts.
In establishing the positive outlook for the Company over the next five years
to 30 April 2027, the Board has taken into account:
The ability of the Company to meet its liabilities as they fall due The financial position of the Company and its cash flows and liquidity
position are described in the Strategic Report and the Financial Statements.
Note 27 to the Financial Statements includes the Company's policies and
process for managing its capital; its financial risk management objectives;
details of financial instruments and hedging activities. Exposure to credit
risk and liquidity risk are also disclosed.
The portfolio comprises investments traded on major international stock
exchanges, there is a spread of investments by size of company.
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
Annual 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. COVID-19 was also factored into the key
assumptions made by assessing its impact on the Company's key risks and
whether the key risks had increased in their potential to affect the normal,
favourable and stressed market conditions.
99.8% 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 2022
(excluding performance fees) were 0.84% (2021: 0.82%).
Repayment of the bank facilities, drawn down at the year end, and due in
September 2022, would equate to approximately 16.7% of the cash or cash
equivalents available to the Company at 30 April 2022, 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 good performance is achieved over
the period until the next continuation vote Shareholders will vote in favour
of continuation.
Factors impacting the forthcoming years The Strategic Report and Governance sections, comprising the Chair's
Statement, 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, as set out 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 in comparison to other
competitive products.
Closed-ended Investment Funds 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 considerable growth 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 believe it appropriate to confirm their assessment for the
longer-term viability of the Company for the next five years to 30 April 2027.
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 cash
flows, its liquidity position and its assessment of any material uncertainties
and events that might cast significant doubt upon the Company's ability to
continue as a going concern. In conjunction with the financial considerations
taken into account when reviewing the longer-term viability, the Board
considered the performance of the Company's net asset value per share (-7.7%)
and the benchmark (-0.9%); the liquidity of the portfolio (an estimated 99.8%
can be liquidated over seven days) and the opportunity for investment and
reinvestment of funds. In reaching these conclusions and those in the
Longer-Term Viability Statement, the stress testing conducted also featured
consideration of the effects of COVID-19. This is discussed further in the
Report of the Audit Committee in the Annual Report and Accounts. The Board
believe that the Company is able to continue in operation and meet its
liabilities as they fall due over the next twelve-month period from the date
of this Report and it is appropriate to present the Company and the Financial
Statements as a Going Concern.
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 2021 the total net assets of the Company amounted to
growth and relative performance against the Benchmark. views of the Investment Manager at each meeting. £3,408,763,000 (2020: £2,308,597,000). The Company's NAV has, over the year
to 30 April 2021, marginally underperformed the Benchmark. The NAV per share
rose by 45.5%% from 1715.59p to 2496.44p while the Benchmark rose 46.4% in
Sterling terms over the same period. As at 30 April 2021 the portfolio
comprised 110 (2020: 101) investments.
Investment performance is explained in the Chair's Statement and the
Investment Manager's Report. Over the longer-term, as shown by the historic
performance data shown in the financial highlights above, growth in the NAV
has exceeded the Benchmark.
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 patterns and discount/premium levels of the (diluted when appropriate) has been as follows:
discount volatility for Shareholders. Company's ordinary shares.
Financial year to 30 April 2022
A daily NAV per share, diluted when appropriate, calculated in accordance with
the AIC guidelines, is issued to the London Stock Exchange. • Minimum discount over year: 0.3%
• Maximum discount over year: 15.4%
The Board is aware of the vulnerability of a sector specialist investment • Average discount over year: 8.6%
trust to a change in investor sentiment to that sector. The Board discusses
the market factors giving rise to any discount or premium, 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 In the year ended 30 April 2022, the Company bought back 4,188,338 ordinary
issue or buy back of shares when appropriate market conditions prevail. The shares at an average discount of 9.6%, Subsequent to the year end and to 15
Company does not have an absolute target discount level at which it buys back July 2022, the Company bought back a further 1,475,096 shares
shares but has historically bought back significant amounts of the outstanding
share capital when deemed appropriate and remains ready to do so again. 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 2022
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
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 premium over period: 6.1%
review and has been buying back shares actively in recent months at levels set
out in the adjacent column. · Maximum discount over period: 15.9%
· Average discount over period: 4.3%
Over the previous five financial years ended 30 April 2022 the Company has
issued 4,978,841 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 2022 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 risk both investment and administrative, and reviews on a cycle the provision of report of the Investment Manager and other key suppliers including contingency
controlled environment. services from third parties including the costs of their services. 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 approved by the Board The ongoing charges of the Company for the year ended 30 April 2022 excluding
the performance fee were 0.84% of net assets (2021: 0.82%). There was no
performance fee payable for the year ended 30 April 2022 (2021: nil) and
therefore the ongoing charges including the performance fee were 0.84% (2021:
0.82%) 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. Furthermore, 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.
As part of this process, the Committee also identifies any emerging risks
during its review process and continues to closely monitor these risks along
with any other emerging risks as they develop and implements mitigating
actions as necessary. Current emerging risks include Climate change,
inflation, recession and rising interest rates.
The Committee is mindful of the uncertainty surrounding inflation, recession
and rising interest rates coupled with the invasion of Ukraine by Russia and
the longer term impact this may have on the market and global economy. The
impact of this is discussed further in the Chair's Statement and Investment
Manager's Report. Further information on how the Committee has assessed the
Company's ability to operate as a going concern and the Company's longer-term
viability can be found in this Strategic Report and in the Report of the Audit
Committee.
The Principal risks 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
Failure to achieve investment objective due to poor performance ↑
The Board seeks to manage the impact of such risks through regular reporting
and monitoring of investment performance. In addition, the Board regularly
considers, the level of premium and discount of the share price to the NAV and
ways to enhance Shareholder value including share issuance and buy backs.
A detailed annual review of the investment strategy is undertaken by the
Investment Manager with the Board including analysis of investment markets and
sector trends.
The Board is committed to a clear communication program to ensure Shareholders
understand the investment strategy. A resolution is put forward every five
years to provide Shareholders with an opportunity to vote on the continuation
of the Company. The last continuation vote was held in September 2020 and had
100% of votes cast in favour, the next continuation resolution will be
proposed at the AGM to be held in September 2025.
Given the current market volatility as well as the Company's underperformance
for the last two years, the Board agreed to elevate this risk following the
Company's year-end.
Gearing - Breach of covenants/limits or restrictions ↔
Detailed reports containing financial information are provided to each Board
meeting and are used to assess portfolio construction and the degree of risk
which the Investment Manager incurs to generate investment returns.
Lenders covenants and AIFMD limits are hard coded into the Investment
Manager's Bloomberg accounts and trading system which are populated by the
Investment Manager's Risk Team. Monthly returns are made to the lender to
ensure regular reporting of lending level and covenant monitoring.
The Depositary also monitors compliance with lending restrictions. Any
material breaches immediately notified to Board
Portfolio management Errors e.g. breach of policy ↔
Investment limits and restrictions are encoded into the dealing and operations
systems of the Investment Manager and various oversight functions are
undertaken to ensure there is early warning of any potential issue of
compliance or regulatory matters.
The Investment Manager on behalf of the Company undertakes counterparty
monitoring and only trades with brokers which have satisfied the approval
process. Trade settlement, currency exposure and all dealing operations are
monitored by various systems and groups including the Investment Manager's
Operations and Risk Teams and independent monitoring by the depositary.
Management of risks through Mitigation & Controls
OPERATIONAL RISK
Failure to achieve investment objective due to poor performance ↔
The Board carries out an annual review of internal control reports from
suppliers which includes the Investment Manager's cyber protocols and disaster
recovery procedures.
Accounting, Financial or Custody errors ↔
Due diligence and service reviews are undertaken with third-party service
providers including the Custodian and Depository.
IT failure and Cyber Risk ↑
The number, severity and success rate of cyberattacks have increased
considerably over recent years However, controls are in place and the Board
proactively seeks to keep abreast of developments through updates with
representatives of the Investment Manager who undertakes meetings with
relevant service providers.
The Audit Committee once again sought assurance via the Investment Manager,
from each of the Company's service providers on the resilience of their
business continuity arrangements. These assurances and the subsequent detailed
updates that were given to the Committee provided a satisfactory level of
assurance that there had not been, and there was no anticipation of any
disruption in the ability of each service provider to fulfil their duties as
would typically be expected.
↔
Black Swan event -e.g. unforeseen natural disaster
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.
Failure of Depositary, Custodian, Sub-Custodian ↔
A full review of the internal control framework is carried out at least
annually. Regular reporting is received by the Investment Manager on behalf of
the Board from the Depositary on the safe custody of the Company's assets. The
Board undertakes independent reviews of the Depositary and external
Administrator services and additional resources have been put in place by the
Investment Manager. 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.
Supplier risk - failure in provision of efficient services by service ↔
providers
The Board considers, approves and monitors supplier appointments. The
Investment manager reports on breaches of service level agreements and failure
to meet standards as it becomes aware of the issue.
Annual controls reports from service providers are reviewed by Board, and
exceptions highlighted to the Board. Representatives from each service
provider attend meetings to apprise the Board of exceptions found in their
control environments. Directors regularly attend due diligence visits to
service providers.
Management of risks through Mitigation & Controls
REGULATORY RISKS
Breach of Statutes and Regulation ↔
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.
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 keeps abreast of third party service provider internal controls
processes to ensure requirements are met in accordance with regulatory
requirements.
Failure to effectively communicate with investors ↔
Polar Capital Sales Team and the Corporate Broker provide periodic reports to
the Board on communications with shareholders and feedback received.
The Audit Committee received the half-year and annual financial statements
prior to sign-off and makes recommendations to the Board.
Contact details and how to contact the Board are provided in regulatory
announcements and in half year and annual reports. The Board are present at
the AGM to speak to shareholders.
ECONOMIC AND MARKET RISK
Global geo-political risk ↑
The Board regularly discusses the global geopolitical issues and general
economic conditions and developments. Note 27 in the Annual Report and
Accounts describes the impact of changes in foreign exchange rates. The
Company's largest exposure is to the level of US $ holdings.
Subsequent to the Company's year-end, this risk was elevated following the
invasion of Ukraine by Russia coupled with the uncertainty and volatility in
financial markets. The medium and longer term impacts of this risk will
continue to be assessed by the Audit Committee in light of how they may affect
the Company's portfolio and the economic and geopolitical environment in which
the Company operates within overall.
Uncertainty in regulatory environment and impact of Brexit ↔
Due to the high level of US investments (74.2% based on the NAV) and the low
level of UK investments (0.42% based on the NAV) the Board does not believe
that there is likely to be any direct impact on the operation of the Company
or the structure of the portfolio following the completion of the Brexit
transition period.
The Company has a varying level of cash which is primarily held in US Dollars
and also has loan facilities in both Japanese Yen and US Dollars. Fluctuations
in exchange rates are monitored which may impact investor returns. An analysis
of currency is given in Note 27 to the Financial Statements.
KEY STAFF RISK
Loss of Portfolio Manager or other Key staff ↔
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.
Insufficient resource or experience on the Board ↔
Respected recruiters are used to source suitably experienced candidates for
Non-executive directorships. 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 listed in s171-177 of the Companies
Act 2006. Under s172, Directors have a duty to promote the success of the
Company for the benefit of its members (our 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 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 legislative and regulatory
developments. They also have continued access to the advice and services of
the Company Secretary and, when deemed necessary, the Directors can 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
stakeholders and these are taken into account during all of its discussions
and as part of its decision-making. 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 below.
SHAREHOLDERS
Engagement
The Directors have considered this duty 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 Directors were unable to have the usual face to face interactions with
shareholders for most of the financial year due to the guidance from the UK
government in respect of gatherings of people, however some of these were
replaced with remote meetings between the Chair and investors. Once
restrictions allowed, the Directors along with the Portfolio Manager
reinstated face to face meetings and interacted with a number of shareholders
and institutions in addition to holding the annual Investor Relations dinner
in October 2021. Positive feedback was received from all attendees of the
dinner who welcomed the opportunity to interact with the Board and Manager
again.
The Board will continue to respond to the helpful pointers given and welcome
other interaction with shareholders wherever possible; the Portfolio Manager
will look to continue face to face shareholder meetings once again in the
second half of the year. In addition, the Chair will write to the Company's
largest Shareholders following the publication of the Annual Report and
Financial Statements offering the opportunity to have a meeting.
The Company's AGM will be held at 2:30pm on Thursday 8 September 2022.
Following the events of the COVID-19 years, we have decided to continue to
offer the flexibility to Shareholders to attend the meeting either in person
or electronically. Feedback from the hybrid meeting held in 2021 was positive
and we found that while the meeting was not well-attended when compared to the
pre-COVID years, Shareholders were encouraged by the options presented to them
which translated into near-equal attendance in person and electronically. 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 vote and participate either in person or electronically. Unless
circumstances change, the meeting will be held at Haberdashers' Hall, 18 West
Smithfield, London, EC1A 9HQ and online via the Lumi Global Electronic
Platform.
The Board believes that shareholder engagement remains important, especially
in the current market conditions 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 gives a presentation and the Chair of the Board and of each
Committee attends and are 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 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 meetings attended
with Shareholders and any concerns that are raised in those meetings. The
Board also reviews correspondence from Shareholders and may attend investor
presentations.
The Chair has communicated directly with the shareholders representing in the
region of 67% of the share register, 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 Board without
using the Manager or Company Secretary as a conduit. The Chair or other
Directors are available to Shareholders who wish to raise matters either in
person or in writing. The Chair and Directors may be contacted through the
registered office of the Company.
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
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
4,188,338 shares during the year under review. Subsequent to the year end and
to 15 July 2022, the Company bought back a further 1,475,096 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 2022 and consideration will
be given to the renewal of or the replacement of the term loans if it is
deemed to be in the best interests of the Company's Shareholders in maximising
returns.
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.
Directors Remuneration
As detailed in the Chair's statement and Remuneration Committee report, the
remuneration of Directors is reviewed regularly and was increased with effect
from 1 May 2021 and again from 1 May 2022, to reflect the greater regulation,
increasing workload and to attract and retain the necessary calibre of
Director for the Company.
THE INVESTMENT MANAGER
Engagement
Through the Board meeting cycle, which was enhanced in 2020 to include
additional monthly informal update meetings, 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 Policy;
· Ensuring excessive risk is not undertaken in the pursuit of
investment performance;
· Ensuring adherence to the Investment Management Policy and
reviewing the agreed
management and performance fees;
· Reviewing the Investment Manager's decision making and
consistency in investment process; 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
During the year under review, the Board continued to develop its approach to
ESG and engages with the Investment manager to better understand how ESG has
been further integrated into the investment and decision-making process. The
Board also receives information on how ESG affects Polar Capital as a business
and the technology team in particular.
In addition to this, the Board has chosen to appoint Catherine Cripps as ESG
lead. Catherine has been responsible for ensuring that the Board is kept
abreast of the latest developments in this area to develop how the Company can
report to stakeholders in line with such. Catherine has worked with the
manager to develop a dashboard which allows us to see how the manager is
considering ESG matters, and whether that meets our requirements. Please see
page the ESG Report in the Annual Report and Accounts for further information.
The Management Engagement Committee has recommended the continued appointment
of the Investment Manager on the terms agreed within the Investment Management
Agreement.
Fees
During the financial year under the review, a three-yearly review of the fee
arrangements was undertaken as per the IMA and following this review, it was
agreed that the base management fees be reduced to three tiers. Further
information is contained in the Strategic report in the Annual Report and
Accounts.
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 2022, votes were cast at 97.4% of investee
company general meetings held. At 53.5% 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 in the Annual Report and
Accounts.
Outcomes and strategic decisions during the year
During the year the Board discussed the impact of ESG and how the Investment
Manager factors it into its decision making. In addition, consideration was
given to the Company's ESG journey going forward and the form this would take.
SERVICE PROVIDERS
Engagement
The Directors have frequent engagement with the Company's other service
providers through the annual cycle of reporting and when possible site visits
and due diligence meetings. As reflected below, the schedule of deep-dive
in-person meetings are due to re-commence in 2022. 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 in a virtual fashion
and where possible, service providers have joined video conference meetings to
present their reports directly to the Board or the Audit Committee as
appropriate. While we have been unable to hold in-person due diligence
sessions with suppliers due to COVID restrictions a programme of meetings has
been put together for the year ahead.
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
Company. 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.
Prior to AGMs, the Company engages with these agencies to fact check their
advisory reports and clarify any areas or topics that the agency requests.
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.
Outcomes and strategic decisions during this year
The Nomination Committee considers the time commitment required of Directors
and the Board considers each Director's independence on an ongoing basis. The
Directors have also considered the proxy adviser agencies policies on
overboarding when Directors request approval for additional appointments and
when recruiting new Directors. The Board is aware that some investment
companies and other AIM listed companies have less regulatory burden than
companies with a premium listing and this is taken into consideration when
approving such requests. The Board have confirmed that all Directors remain
independent and are able to commit sufficient time in fulfilling their duties,
including those listed on s172 of the Companies Act. Accordingly, all
Directors are standing for election/re-election at the Company's AGM, with the
exception of the Chair who shall retire from the Board in line with the
Company's succession plans. Further information has been provided where
appropriate in each directors biography in the Annual Report and Accounts.
THE AIC
Engagement
The Company is a member of the AIC and has supported lobbying activities such
as the consultation on the 2019 AIC Code, the 2021 BEIS Restoring Trust in
Audit and Corporate Governance and the FCA's 2021 consultation on Diversity
and Inclusion on Company Boards. The Directors also cast votes in the AIC
Board Elections each year and regularly attend AIC events.
Approved by the Board on 19 July 2022
By order of the Board
Tracey Lago, FCG
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.
Sarah Bates
Chair
19 July 2022
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 2022 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 2022
have not yet been delivered to the Registrar of Companies. The figures and
financial information for the year ended 30 April 2021 are extracted from the
published Annual Report and Financial Statements for the year ended 30 April
2021 and do not constitute the statutory accounts for that year. The Annual
Report and Financial Statements for the year ended 30 April 2021 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 2022
Notes Year ended 30 April 2022 Year ended 30 April 2021
Revenue return Capital return Total return Revenue return Capital return Total return
£'000 £'000 £'000 £'000 £'000 £'000
Investment income 3 15,870 - 15,870 18,156 - 18,156
Other operating income 4 31 - 31 8 - 8
(Losses)/gains on investments held at fair value 5 - (253,694) (253,694) - 1,127,646 1,127,646
Losses on derivatives 6 - (5,799) (5,799) - (49,111) (49,111)
Other currency gains/(losses) 7 - 17,535 17,535 - (4,379) (4,379)
Total income 15,901 (241,958) (226,057) 18,164 1,074,156 1,092,320
Expenses
Investment management fee 8 (28,281) - (28,281) (24,134) - (24,134)
Performance fee 8 - - - - - -
Other administrative expenses 9 (1,335) - (1,335) (1,071) - (1,071)
Total expenses (29,616) - (29,616) (25,205) - (25,205)
(Loss)/profit before finance costs and tax (13,715) (241,958) (255,673) (7,041) 1,074,156 1,067,115
Finance costs 10 (973) - (973) (996) - (996)
(Loss)/profit before tax (14,688) (241,958) (256,646) (8,037) 1,074,156 1,066,119
Tax 11 (2,000) - (2,000) (2,432) - (2,432)
Net (loss)/profit for the year and total comprehensive (expense)/income (16,688) (241,958) (258,646) (10,469) 1,074,156 1,063,687
(Losses)/earnings per share (basic and diluted) (pence) 12 (12.36) (179.25) (191.61) (7.65) 784.40 776.75
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 2022
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 2020 33,641 12,802 170,532 7,536 2,183,728 (99,642) 2,308,597
Total comprehensive income/(expense):
Profit/(loss) for the year to 30 April 2021 - - - - 1,074,156 (10,469) 1,063,687
Transactions with owners, recorded directly to equity:
Issue of ordinary shares 688 - 52,842 - - - 53,530
Ordinary shares repurchased into treasury - - - - (17,051) - (17,051)
Total equity at 30 April 2021 34,329 12,802 223,374 7,536 3,240,833 (110,111) 3,408,763
Total comprehensive expense:
Loss for the year to 30 April 2022 - - - - (241,958) (16,688) (258,646)
Transactions with owners, recorded directly to equity
Ordinary shares repurchased into treasury 15 - - - - (99,132) - (99,132)
Total equity at 30 April 2022 34,329 12,802 223,374 7,536 2,899,743 (126,799) 3,050,985
The notes below form part of these Financial Statements.
BALANCE SHEET
as at 30 April 2022
Notes 30 April 2022 30 April 2021
£'000 £'000
Non-current assets
Investments held at fair value through profit or loss 13 2,811,080 3,243,034
Current assets
Receivables 31,096 36,096
Overseas tax recoverable 286 162
Cash and cash equivalents 14 311,363 216,205
Derivative financial instruments 13 6,479 4,090
349,224 256,553
Total assets 3,160,304 3,499,587
Current liabilities
Payables (57,284) (36,241)
Bank loans (52,035) -
Bank overdraft 14 - (3,473)
(109,319) (39,714)
Non-current liabilities
Bank loans - (51,110)
Net assets 3,050,985 3,408,763
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 2,899,743 3,240,833
Revenue reserve (126,799) (110,111)
Total equity 3,050,985 3,408,763
Net asset value per ordinary share (pence) 17 2305.13 2496.44
The Financial Statements were approved and authorised for issue by the Board
of Directors on 19 July 2022 and signed on its behalf by:
Sarah Bates
Chair
The notes below form part of these Financial Statements.
Registered number 3224867
CASH FLOW STATEMENT
for the year ended 30 April 2022
2022 2021
Notes £'000 £'000
Cash flows from operating activities
(Loss)/profit before tax (256,646) 1,066,119
Adjustments:
Losses/(gains) on investments held at fair value through profit or loss 5 253,694 (1,127,646)
Losses on derivative financial instruments 6 5,799 49,111
Proceeds of disposal on investments 2,822,328 3,089,314
Purchases of investments (2,618,737) (2,998,482)
Proceeds on disposal of derivative financial instruments 13 39,006 8,735
Purchases of derivative financial instruments 13 (47,194) (58,545)
(Increase)/decrease in receivables (64) 116
(Decrease)/increase in payables (355) 5,720
Overseas tax (2,124) (2,500)
Foreign exchange (gains)/losses 7 (17,535) 4,379
Net cash generated from operating activities 178,172 36,321
Cash flows from financing activities
Loans repaid - (10,300)
Loans drawn - 9,870
Ordinary shares repurchased into treasury (98,001) (17,051)
Issue of ordinary shares - 57,078
Net cash (used in)/generated from financing activities (98,001) 39,597
Net increase in cash and cash equivalents 80,171 75,918
Cash and cash equivalents at the beginning of the year 212,732 146,677
Effect of movement in foreign exchange rates on cash held 7 18,460 (9,863)
Cash and cash equivalents at the end of the year 14 311,363 212,732
2022 2021
Notes £'000 £'000
Reconciliation of cash and cash equivalents
to the Balance Sheet is as follows:
Cash held at bank and derivative clearing houses 14 219,403 162,479
BlackRock's Institutional Cash Series plc 14 91,960 50,253
(US Treasury Fund), money market fund
Cash and cash equivalents at the end of the year 14 311,363 212,732
The notes below form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 April 2022
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 April 2021 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 2022 is shown in the
balance sheet above. As at 30 April 2022 the Company's total assets exceeded
its total liabilities by a multiple of over 28. The assets of the Company
consist mainly of securities that are held in accordance with the Company's
Investment Policy, as set out on page l 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 2022. 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 to the assessment the Company carried out stress testing which used a
variety of falling parameters to demonstrate the effects in the Company's
share price and net asset value. 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
In order to reflect better the activities of an investment trust company and
in accordance with the guidance set out by the 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.
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 £91,960,000 (2021: £50,253,000) 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 to the Financial Statements within the Annual Report.
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 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.
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 were no unquoted investments (2021: same).
(S) NEW AND REVISED ACCOUNTING
STANDARDS
There were no new IFRSs or amendments to IFRSs 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
IFRS 9, IAS 39, IFRS 7, IFRS IBOR Reform - Phase 2 addresses issues that might affect financial reporting 1 January 2021
during the reform of an interest rate benchmark, including the effects of
16 and IFRS 4: Interest Rate Benchmark Reform - phase 2 (amended) changes to contractual cash flows or hedging relationships arising from the
replacement of an interest rate benchmark with an alternative benchmark rate.
The Phase 2 amendments apply only to changes required by the interest rate
benchmark reform to financial instruments and hedging relationships.
ii) ii) At the date of authorisation of the Company's financial
statements, there were no relevant standards that potentially impact the
Company are in issue but are not yet effective and have not been applied in
the financial statements.
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 2022 Year ended
£'000 30 April 2021
£'000
Revenue:
Overseas Dividend income 15,870 18,156
Total investment income 15,870 18,156
All investment income is derived from listed investments.
Included within income from investments is £172,000 (2021: £3,229,000) of
special dividends classified as revenue in nature in accordance with note 2
(c). No special dividends have been recognised in capital (2021: nil).
4. OTHER OPERATING INCOME Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Bank interest 4 1
Money market fund interest 27 7
31 8
5. (LOSSES)/GAINS ON INVESTMENTS HELD AT FAIR VALUE Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Net gains on disposal of investments at historic cost 232,360 736,118
Transfer on disposal of investments (353,508) (255,764)
(Losses)/gains on disposal of investments based on carrying value at previous (121,148) 480,354
balance sheet date
Valuation (losses)/gains on investments held during the year (132,546) 647,292
(253,694) 1,127,646
6. LOSSES ON DERIVATIVES Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Losses on disposal of derivatives held (10,212) (60,474)
Gains on revaluation of derivatives held 4,413 11,363
(5,799) (49,111)
The derivative financial instruments represent the call and put options, which
are used for the purpose of efficient portfolio management. As at 30 April
2022, the Company held NASDAQ 100 Stock Index put option and the market value
of these open put option position was £6,431,000 (2021: NASDAQ 100 Stock
Index put options with a market value of £2,793,000). The Company also held
Apple Inc. call options and the market value of these open call option
position was £48,000 (2021: Apple Inc. call options with a market value of
£1,297,000).
7. OTHER CURRENCY GAINS/(LOSSES) Year ended Year ended
30 April 2022 30 April 2021
£'000 £'000
Exchange gains/(losses) on currency balances 18,460 (9,863)
Exchange losses on settlement of loan balances - (3,517)
Exchange (losses)/gains on translation of loan balances (925) 9,001
17,535 (4,379)
8. INVESTMENT MANAGEMENT AND PERFORMANCE FEE
Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Investment management fee payable to Polar Capital (charged wholly to 28,281 24,134
revenue)
Performance fee payable to Polar Capital (charged wholly to capital) - -
There was no performance fee payable in respect of the year nor outstanding at
the year end (2021: 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.
Although the net asset value reduced in absolute terms towards the end of the
financial year, on average it had increased during the year under review when
compared to the prior year, hence an increase in management fee was incurred
during the year.
A new investment management fee arrangement was agreed with the Manager and
announced on 12 January 2022. The revised arrangement reduced rates of the
base management fee and simplified the structure of the base fee to three
tiers. Details of the investment management agreement are disclosed in the
Strategic Report above.
9. OTHER ADMINISTRATIVE EXPENSES
Year ended Year ended 30 April 2021
30 April 2022 £'000
£'000
Directors' fees(1) and expenses 229 182
National Insurance Contributions 24 18
Depositary fee (2) 233 220
Registrar fee (3) 51 43
Custody and other bank charges(4) 358 327
UKLA and LSE listing fees(5) 190 124
Legal & professional fees and other financial services 4 11
AIC fees 21 21
Auditors' remuneration - for audit of the Financial Statements(6) 45 44
Directors' and officers' liability insurance 23 12
AGM expenses(7) 31 10
Corporate brokers' fee(8) - 37
Marketing expenses(9) 25 -
Shareholder communications 57 57
Other expenses (10) 44 (35)
1,335 1,071
1. Full disclosure is given in the Directors' Remuneration
Report contained within the Company's 2022 Annual Report.
2. Depositary fee is based on the value of the net assets. The
daily average net asset value increased by 14.6% during the current financial
year compared to the previous year.
3. 2022 includes additional cost in relation to processing of
Treasury shares.
4. Custody fees are based on the value of the assets and
geographical activity and determined on the pre-approved rate card with HSBC.
5. Fees are based on the market capitalisation of the Company
which increased over the last invoice period.
6. The base audit fee for the statutory audit was £45,000
(2021: £40,000k plus overrun fee of £3,500 for the 2020 financial year which
was recognised in 2021). Overrun fees incurred in the completion of the 2021
audit and during the financial year 2022, £12,000 and £10,000 respectively.
The company recharged these to the investment manager given the nature of the
additional audit work undertaken.
7. Includes additional costs in relation to hybrid AGM and 2021
Haberdasher' Hall AGM cancellation due to COVID restrictions in place.
8. 2021/2022 annual fee was offset by the commission credit on
shares repurchases.
9. Bespoke promotional marketing cost of £25,000 in Q1 2022.
The first £100,000 was absorbed by the Investment Manager.
10. Includes Non-executive Directors search fee and external third
party Board evaluation cost.
10. FINANCE COSTS Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Interest on loans and overdrafts 973 910
Loan arrangement and facility fees - 86
973 996
11. TAXATION Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
(a) Analysis of tax charge for the year:
Overseas tax 2,000 2,432
Total tax for the year (see Note 11b) 2,000 2,432
(b) Factors affecting tax charge for the year:
The charge for the year can be reconciled to the (loss)/profit per the
Statement of Comprehensive Income as follows:
(Loss)/profit before tax (256,646) 1,066,119
Tax at the UK corporation tax rate of 19% (48,763) 202,563
Tax effect of non-taxable dividends (3,015) (3,450)
Tax effect of gains on investments that are not taxable 45,972 (204,090)
Unrelieved current year expenses and deficits 5,806 4,977
Overseas tax suffered 2,000 2,432
Total tax for the year (see Note 11a) 2,000 2,432
(c) Factors that may affect future tax charges:
There is an unrecognised deferred tax asset comprising:
Unrelieved management expenses 61,780 41,326
Non-trading loan relationship deficits 1,807 1,194
63,587 42,520
The deferred tax asset is based on a prospective corporation tax rate of 25%
(2021: 19%).
It was substantively enacted on 24 May 2021 that the rate of UK corporation
tax will increase from 19% to 25% from 1 April 2023. Therefore, the
unrecognised deferred tax asset of £63,587,000 on 30 April 2022 has been
calculated using a corporation tax rate of 25%.
It is unlikely that the Company will generate sufficient taxable profits in
the future to utilise these expenses and deficits and therefore no deferred
tax asset has been recognised.
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. (LOSSES)/EARNINGS PER ORDINARY SHARE
Year ended 30 April 2022 Year ended 30 April 2021
Revenue return Capital return Total return Revenue return Capital return Total
return
The calculation of basic earnings per share is based on the following data:
Net (loss)/profit for the year (£'000) (16,688) (241,958) (258,646) (10,469) 1,074,156 1,063,687
Weighted average ordinary shares in issue during the year 134,984,460 134,984,460 134,984,460 136,938,993 136,938,993 136,938,993
From continuing operations
Basic and diluted (12.36) (179.25) (191.61) (7.65) 784.40 776.75
- ordinary shares (pence)
As at 30 April 2022 there are no potentially dilutive shares in issue and the
earnings per share therefore equate to those shown above (2021: 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 2022 Year ended
£'000 30 April 2021
£'000
Opening book cost 2,199,334 1,566,135
Opening investment holding gains 1,043,700 652,172
Opening fair value 3,243,034 2,218,307
Analysis of transactions made during the year
Purchases at cost 2,639,004 2,978,969
Sales proceeds received (2,817,264) (3,081,888)
(Losses)/gains on investments held at fair value (253,694) 1,127,646
Closing fair value 2,811,080 3,243,034
Closing book cost 2,253,434 2,199,334
Closing investment holding gains 557,646 1,043,700
Closing fair value 2,811,080 3,243,034
Of which:
Listed on a recognised Stock Exchange 2,811,080 3,243,034
The Company received £2,817,264,000 (2021: £3,081,888,000) from disposal of
investments in the year. The book cost of these investments when they were
purchased were £2,584,904,000 (2021: £2,345,770,000). 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 £1,005,000 (2021:
£1,345,000). Included in proceeds of disposals are sales costs of £1,182,000
(2021: £1,522,000). These costs primarily comprise commission.
(ii) Changes in derivative financial instruments Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Valuation at 1 May 4,090 3,391
Additions at cost 47,194 58,545
Proceeds of disposal (39,006) (8,735)
Losses on disposal (10,212) (60,474)
Valuation gains 4,413 11,363
Valuation at 30 April 6,479 4,090
(iii) Classification under Fair Value Hierarchy:
The table below sets out the fair value measurements using the IFRS 7 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 note above.
There have been no transfers during the year between Levels 1 and 2. A
reconciliation of fair value measurements in Level 3 is set out below.
Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Equity Investments and derivative financial instruments
Level 1 2,817,559 3,247,124
Level 2 - -
Level 3 - -
2,817,559 3,247,124
Year ended 30 April 2022 Year ended
£'000 30 April 2021
£'000
Level 3 investments at fair value through profit or loss
Opening balance - 52
Distribution proceeds - (104)
Total gains included in the Statement of Comprehensive Income - on assets held - 52
during the year
Closing balance - -
(iv) Unquoted investments
As at 30 April 2022, the portfolio comprised no unquoted investment (30 April
2021: same):
Herald Ventures Limited Partnership made its final distribution of £104,000
in the previous year.
Level 3 investments are recognised at fair value through profit & loss on
a recurring basis.
14. CASH AND CASH EQUIVALENTS 30 April 2022 30 April 2021
£'000 £'000
Cash at bank 211,940 165,952
Cash held at derivative clearing houses 7,463 -
Money market funds 91,960 50,253
Cash and cash equivalents 311,363 216,205
Bank overdraft - (3,473)
311,363 212,732
As at 30 April 2022, the Company held BlackRock's Institutional Cash Series
plc - US Treasury Fund with a market value of £91,960,000 (30 April 2021:
£50,253,000), 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
2022 2021
£'000 £'000
Allotted, Called up and Fully paid:
Ordinary shares of 25p each
Opening balance of 136,544,764 (30 April 2021: 134,566,000) 34,136 33,641
Issue of nil (30 April 2021: 2,749,000) ordinary shares - 688
Repurchase of 4,188,338 (30 April 2021: 770,236) ordinary shares into treasury (1,047) (193)
Allotted, called up and fully paid: 132,356,426 (30 April 2021: 136,544,764) 33,089 34,136
ordinary shares of 25p
4,958,574 (2021: 770,236) ordinary shares held in treasury 1,240 193
At 30 April 2022 34,329 34,329
During the year, there were no ordinary shares issued (2021: 2,749,000
ordinary shares were issued, with nominal value of £688,000 for a net
consideration received of £53,715,000). A total of 4,188,338 (2021:770,236)
ordinary shares were repurchased into treasury at a cost of £98,639,000
(2021: £16,966,000).
Subsequent to the year end, and to 15 July 2022 (latest practicable date),
1,475,096 ordinary shares were repurchased into treasury at an average price
of 1,899.35p 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 2022 were £28,281,000 (2021: £24,134,000) of
which £6,374,000 (2021: £6,844,000) was outstanding at the year end.
There was no performance fee payable in respect of the year nor outstanding at
the year end (2021: same).
In addition, with effect from 1 May 2019, the research costs and the first
£100,000 of marketing costs are borne by the Manager.
The overrun audit fees of £12,000 and £10,000 were incurred by the Company
in the completion of the 2021 audit and during the financial year ended 2022
and were recharged to the Investment Manager given the nature of the
additional audit work undertaken. See note 9 and the Audit Committee Report
above for more details.
A new investment management agreement was put in place with the Manager and
announced on 12 January 2022 which took effect on 1 May 2022. The revised fee
arrangement agreed lower rates of the management base fee and simplified the
structure of the base fee to three tiers and is calculated on the daily net
asset value; The Manager also agreed to increase the contribution to the
marketing costs payable by the Company to the first £200,000 per annum.
Details of the revised terms of the investment management agreement are
provided in the Strategic Report above.
(B) RELATED PARTY TRANSACTIONS
The compensation payable to key management personnel in respect of short term
employee benefits is £229,000 (2021: £182,000) which comprises £229,000
(2021: £182,000) paid by the Company to the Directors.
Refer to Company's 2022 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
2022 2021
Undiluted:
Net assets attributable to ordinary Shareholders (£'000) 3,050,985 3,408,763
Ordinary shares in issue at end of year 132,356,426 136,544,764
Net asset value per ordinary share (pence) 2305.13 2496.44
As at 30 April 2022, there were no potentially dilutive shares in issue (2021:
there was no dilution).
18. POST BALANCE SHEET EVENT
Subsequent to the year end, and to 15 July 2022, 1,475,096 ordinary shares
were repurchased and placed in the treasury at an average price of 1,899.35p
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.
FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report and Financial Statements
contain forward-looking information concerning the Company's strategy,
operations, financial performance or condition, outlook, growth opportunities
or circumstances in the countries, sectors or markets in which the Company
operates. By their nature, forward looking statements involve uncertainty
because they depend on future circumstances, and relate to events, not all of
which are within the Company's control or can be predicted by the Company.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, no assurance can be given that such
expectations will prove to have been correct. Actual results could differ
materially from those set out in the forward-looking statements. For a
detailed analysis of the factors that may affect our business, financial
performance or results of operations, we urge you to look at the principal
risks and uncertainties included in the Strategic Report within the Annual
Report. No part of these results constitutes, or shall be taken to constitute,
an invitation or inducement to invest in Polar Capital Technology Trust plc or
any other entity and must not be relied upon in any way in connection with any
investment decision. The Company undertakes no obligation to update any
forward-looking statements.
Annual Report and Notice of AGM
The Annual Report and Financial Statements for the year ended 30 April 2022
will shortly be available on the Company's website
www.polarcapitaltechnologytrust.co.uk
(http://www.polarcapitaltechnologytrust.co.uk) and will be posted to
Shareholders in late July.
The Annual General Meeting will be held on 8 September 2022, full details of
the arrangements will be provided in the Notice of AGM and on the Company's
website in due course.
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