REG - Polar Cap Tech Tst - Final Results
19/07/2023 07:00
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RNS Number : 4375G Polar Capital Technology Trust PLC 19 July 2023
POLAR CAPITAL TECHNOLOGY TRUST PLC
AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2023
FINANCIAL HIGHLIGHTS
FINANCIAL SUMMARY Change%
As at As at Year Ended 2023
30 April 2023 30 April 2022
Year Ended 2022
Total net assets £2,828,141,000 £3,050,985,000 (7.3%) (10.5%)
Net Asset Value (NAV) per ordinary share 2239.48p 2305.13p (2.8%) (7.7%)
Benchmark(1) 3604.43 3504.44 2.9% (0.9%)
Price per ordinary share 1940.00p 2040.00p (4.9%) (13.7%)
Discount of ordinary share price to the NAV per ordinary share(2) (13.4%) (11.5%)
Ordinary shares in issue(3) 126,285,544 132,356,426 (4.6%) (3.1%)
Ordinary shares held in treasury 11,029,456 4,958,574 122.4% 543.8%
KEY DATA For the year to 30 April 2023
Local Currency % Sterling Adjusted %
Benchmark(1)
Dow Jones Global Technology Index (TR) 3.0 2.9
Other Indices over the year (total return)
FTSE World 3.4 3.4
FTSE All-Share 6.1
S&P 500 Composite 2.7 2.7
Nikkei 225 10.0 4.9
Eurostoxx 600 7.3 12.3
As at 30 April
EXCHANGE RATES 2023 2022
US$ to £ 1.2569 1.2555
Japanese Yen to £ 171.15 162.66
Euro to £ 1.1385 1.1901
For the year to 30 April
EXPENSES 2023 2022
Ongoing charges ratio(2) 0.81% 0.84%
Ongoing charges ratio including performance fee(2) 0.81% 0.84%
Data supplied by Polar Capital LLP and HSBC Securities Services.
1 Dow Jones Global Technology Index (total return, Sterling adjusted, with the
removal of relevant withholding taxes).
2 Alternative Performance Measures provided in the Annual Report.
3 The issued share capital on 13 July 2023 (latest practicable date) was
137,315,000 ordinary shares of which 12,258,825 were held in treasury.
HISTORIC PERFORMANCE
As at 30 April 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Net Assets (£m) 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 2,828.1
Share price (pence) 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 1,940.0
NAV per share (pence) 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 2,239.5
Indices of Growth(1)
Share price 100.0 110.9 148.6 142.0 237.6 288.1 339.8 445.2 593.2 511.9 486.8
NAV per share 100.0 111.2 145.3 146.8 229.2 281.2 350.7 416.0 605.3 559.0 543.0
Dow Jones Global Technology Index (2) 100.0 113.1 146.4 146.2 224.3 262.5 318.8 376.5 551.0 546.3 561.8
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 2013
2 Dow Jones Global Technology Index (total return, Sterling adjusted) with the
removal of relevant withholding taxes.
All data sourced from Polar Capital LLP.
For further information please contact:
Ben Rogoff Ed Gascoigne-Pees
Polar Capital Technology Trust PLC Camarco
Tel: 020 7227 2700 Tel: 020 3757 4984
CHAIR'S STATEMENT
Introduction
On behalf of myself and the Board I am pleased to share with you the Annual
Report of the Company for the year to 30 April 2023. This is my first full
year Chair Statement following my appointment as Chair in September 2022.
The year under review and in particular the period since my appointment as
Chair, has been a tumultuous one for markets, with the post-COVID settling
down period, the continuation of the Russia-Ukraine war and the sizeable hikes
in interest rates as the central banks sought somewhat belatedly to tackle the
surge in inflationary pressures causing a global cost of living crisis. This
has also had a resultant negative impact on long-duration assets such as
technology stocks. To add to these, on the day of my appointment we sadly
marked the passing of Queen Elizabeth II and of course more recently we
celebrated the coronation of our newest monarch, King Charles III.
Performance
The Manager's report gives an overview of the year past and the outlook for
the near future. Over the year under review, your Company's net asset value
(NAV) per share fell from 2305.13p to 2239.48p, a decrease of 2.8%, while the
Benchmark increased 2.9% in Sterling terms over the same period. I would like
to be reporting more positive performance numbers, but generally markets have
not been constructive and technology in particular has suffered in the
post-Covid reset and high interest rate environment. Furthermore, our
underweighting of "mega-cap" technology stocks which now dominate the index
and which continue to lead the sector was a significant factor in our
underperformance relative to the benchmark. That said, the Company has
performed well against its technology investment trust peer group. We believe
that there are interesting and exciting times ahead for our sector,
particularly in the field of Artificial Intelligence ("AI") and this is
discussed further in the Manager's Report.
Discount Management
The Board actively monitors the discount at which the Company's ordinary
shares trade in relation to the Company's underlying NAV and, whilst the Board
does not have a formal discount policy or a fixed target level for all times
and circumstances, it will continue to exercise its discretion to buy back
shares at a discount. Equally, should fortunes change, the Board will also use
discretion to issue shares at a premium as has been done in the past. The
intent when buying back shares is 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, repurchasing a total of
6,070,882 shares in the year under review at an average price of 1932.28 pence
per share and an average discount of 11.95%. Following the year end and up to
13 July 2023, the Company has bought back a further 1,229,369 shares. While
purchase levels have been relatively low on an individual transaction basis,
we should note that this activity does not preclude the Manager determining
that a more significant amount than usual on any one day should be purchased.
Such a decision may be influenced by, in the Manager's view, there being a
particular investment opportunity best accessed through buying shares in the
Company rather than buying individual securities.
Board Composition
Outside of my appointment as Chair on the retirement of Sarah Bates after
12-years, there have been no other changes to the membership of the Board
during the financial year under review. Biographical details of all Directors
are available on the Company's website and are provided in the Annual Report
and Accounts.
The Board is aware of the FCA's Diversity and Inclusion Policy and notes that
its current composition meets two of the three 'comply or explain' targets
with three of the six members being female and two of the three senior
positions being occupied by females. However we do not meet the recommended
ethnicity requirements. While there are no immediate plans to recruit to the
Board, the Board has put in place a succession plan based on the recommended
nine-year tenure of Directors. It is a priority of the Board to be able to
meet all aspects of the FCA's Diversity policy as part of these future
succession plans. Of paramount importance is having the correct mix of skills
around the table, diversity of thought and a constructive culture that
engenders lively discussion. When we next select our recruitment consultant to
assist us with a director search we will set parameters that ensure potential
candidates are sourced from a broad pool such that the Board can consider
candidates with minority ethnic backgrounds, especially at the final round of
the recruitment process. Further information is provided in the Nomination
Committee Report.
Annual General Meeting
We are pleased to confirm that the Company's AGM will be held on 7 September
2023 at 2:30pm. We have considered feedback from the prior few years AGM's and
analysed the attendance levels pre, during and post-COVID. Due to the previous
lack of take up for the option of attendance on-line we are opting this year
to hold an in-person only meeting and will not be providing a hybrid
attendance option. We have also considered comments from shareholders on cost
and location, and have this year decided to move the meeting to a central City
base. We will therefore be using the auditorium at the offices of Herbert
Smith Freehills, Exchange House, Primrose Street, London, EC2A 2EG. We look
forward to welcoming shareholders to the meeting who will receive a
presentation from the Manager and his team and shareholders will also have the
opportunity to ask questions and meet the Board; light refreshments will again
be available following the meeting.
The notice of AGM will shortly be provided to shareholders and will also be
available on the Company's website. Detailed explanations on the formal
business and the resolutions to be proposed at the AGM is contained within the
Shareholder Information section of the Annual Report and Accounts as well as
the Notice of AGM.
Environmental, Social And Governance Matters (ESG)
We continue to keep abreast of ESG developments and changes in the landscape.
Through regular engagement with the Manager, we have seen how ESG
considerations have been integrated into the overall house style, the
technology team investment approach and decision making as well as the
methodology behind this. As a Board, we believe that the Manager is best
placed to integrate ESG factors into the investment decision-making process,
with the Board providing oversight and challenge, to ensure that the process
is being executed as expected. This challenge is undertaken through regular
reporting and engagement with the Manager. The Board receives tailored ESG
related information including the ratings of investee companies and is able to
use this as a tool to inform discussions with the Manager during Board
meetings. As at 30 April 2023, based on MSCI ESG ratings, the portfolio and
the benchmark were both rated A.
The Board also receives regular updates on the progress that has been made on
the corporate side of Polar Capital's business. Please refer to the ESG Report
in the Annual Report and Accounts which incorporates both the investment and
corporate approaches.
Outlook
Given the recent breakthroughs in Artificial Intelligence ("AI"), we remain
positive on the outlook and the future of technology, despite a challenging
macro backdrop. We look forward to the investment opportunities this brings
for the sector, which looks well placed to benefit from AI disruption.
Finally, the Board is delighted to welcome Alastair (Ali) Unwin formally as
Deputy Fund Manager following his recent promotion within Polar Capital. Ali
joined the Polar Capital Technology team in 2019, has worked closely with Ben
Rogoff since joining the team and has been a regular presenter to the Board.
This appointment formalises the involvement that Ali has on the portfolio and
the Board are pleased to support this move. Ben and Ali are supported by an
experienced technology team who have significant experience of investing in
the sector. Shareholders will have the opportunity to meet and talk with Ali,
along with other members of the technology team at the AGM.
Catherine Cripps
Chair
18 July 2023
FINANCIAL AND PERFORMANCE REVIEW FOR THE YEAR ENDED 30 APRIL 2023
The NAV per share declined to 2239.48p as at 30 April 2023 from 2305.13p at
the start of the year. The Company's NAV per share total return for the period
was a loss of 2.8% and finished the year with a total net assets of
£2,828.1m. The Investment Manager's Report sets out in detail the performance
of the Company for the financial year. The chart contained in the annual
report shows in greater detail the movement in total net assets for the year.
Total Return
The Company generates returns from both capital growth (capital return) and
dividend income received (revenue return). The total return from the portfolio
for the year was a loss of £105.2m (2022: £258.6m loss), of which there was
a £98.3m loss (2022: £241.9m loss) from capital and a £6.9m loss (2022:
£16.7m 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
Accounts and the allocation methodology is considered on an annual basis, no
change to the policy is recommended (2022: no change). The total net losses
per share were 81.28p (2022: net losses of 191.61p per share). The total net
losses per share was made up of 75.98p from capital return and a loss of 5.30p
from revenue return.
Capital Return
The investment portfolio was valued at £2,640.2m (2022: £2,811.1m) at the
year end 30 April 2023. The investment portfolio delivered a realised loss on
disposals of £190.5m (2022: £121.2m loss) and valuation gains on investment
of £83.7m (2022: £132.5m loss) for the year ended 30 April 2023. The
Company's valuation approach is described in Note 2 (f) in the Annual Report
and Accounts. The derivative gains of £0.03m (2022: £5.8m loss) 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
Managers Report.
Revenue Return
The total investment income of £16.2m (2022: £15.87m) represents dividend
income derived from listed investments. The investment income, excluding any
one-off special dividends, increased by 0.7% 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
increase in interest rates which started at the end of the 2022 financial year
has continued. This led banks and Money Market Funds (MMF) to make higher
interest income payments. As a result, during the year under review, the
Company received other operating income of £3.8m (2022: £0.031m) which was
derived from bank interest and MMF interest. It should be noted, however, that
the MMF is held primarily as a cash diversification factor rather than an
income generating investment. As stated above, as a matter of policy, all
expenses (excluding the performance fee) are charged to revenue and as a
result, expenses normally exceed the income received in any given year. As has
been the case for many years, the revenue reserve therefore remains negative.
The Company historically has not paid dividends given the nature of its focus
on longer-term capital growth. The Board reviews this stance on a periodic
basis.
Expenses
The total expenses for the year under review amounted to £24.7m (2022:
£30.6m) and include investment management fees of £21.9m (2022: £28.3m),
administrative expenses of £1.2m (2022: £1.3m) and finance costs of £1.6m
(2022: £1.0m). The Company's operating expenses comprise predominantly
variable costs, such as management, depositary and custody fees which increase
and decrease based on the net asset value. Other expenses remained at a
similar level to the last year. The finance costs increased slightly due to
the increase in interest rates. As noted in last year's Annual Report, the
agreement which was made with Polar Capital to amend the base management fee
tier levels came into effect from 1 May 2022, and this resulted in a 8.7%
reduction in management fees for the year when compared to the prior
management tiers calculation. There was no performance fee accrued at the year
ended 30 April 2023 (2022: £nil).
Ongoing Charges
Ongoing Charges Ratio (OCR) is a measure of the ongoing operating costs of the
Company. It is calculated in line with the AIC recommended methodology,
represents the total expenses of the Company, excluding finance costs, and is
expressed as a percentage of the average daily net asset value during the
year. The OCR demonstrates to Shareholders the annual percentage reduction in
NAV as a result of recurring operational expenses, that is, the expected cost
of managing the portfolio. Whilst based on historical information, the OCR
provides an indication of the likely level of costs that will be incurred in
managing the Company in the future. The OCR for the year to 30 April 2023 was
0.81% (2022: 0.84%). The OCR including the performance fee for the year to 30
April 2023 was the same as no performance fee was accrued at the year end. As
noted above under expenses, the reduction in the OCR is mainly due to the
reduction in management fee tier levels which came into effect from 1 May
2022, and the change in the net asset value during the year under review. See
Alternative Performance Measures in the Annual Report and Accounts.
Cash and Cash Equivalents
As in the prior years, the Company's cash level remained relatively high,
closing the year with £239.1m (2022: £311.4m). 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 2023, the Company held the
BlackRock Institutional Cash Series - US Treasury Fund with a market value at
year end of £90.4m (2022: £92.0m).
Portfolio Turnover
Portfolio turnover (purchases and sales divided by two) totalled £2,268.9m
equating to 77% for the year to 30 April 2023 (2022: 84%) of average net
assets over the year. Details of the investment strategy and portfolio are
given in the Investment Manager's Review in the Annual Report and Accounts.
Gearing
The Company can use gearing for investment purposes as stated in the Annual
Report and Accounts. In September 2022, the Company entered into replacement
contracts with ING Bank N. V for two, two-year fixed rate term loans (JPY
3.8bn and US$36m). These loans replaced the previously held two‑year loans
of JPY 3.8bn and US$36m which expired on 30 September 2022. Both loans fall
due for repayment on 30 September 2024. The repayment of both loans, totalling
approximately £50.8m (2022: £52.0m), would equate to less than 2% of the
Company's NAV as at 30 April 2023.
Foreign Exchange
The majority of the Company's assets and revenue are denominated in currencies
other than Sterling and are impacted by foreign exchange movements. As at the
year ended the other currency gains of £8.4m represents the exchange gains on
currency balances of £7.2m and net gains on translation of loan balances of
£1.2m. The Company's total return and net assets can be affected by the
currency translation and movements in foreign exchange. Note 27 (a) (ii) in
the Annual Report and Accounts, analyses the currency risk and the management
of such risks.
Catherine Cripps
Chair
18 July 2023
INVESTMENT MANAGER'S REPORT
Market Review
As discussed in our last Annual Report, we believe 2022 is best understood as
the year 'risk was repriced' as central banks moved forcefully to rein in the
economy, defend their credibility and prevent inflation expectations becoming
unanchored. Proving anything but 'transitory', inflation continued to surprise
to the upside taking global risk-free rates with it. In the US, consumer price
inflation (CPI) averaged 8.0% during the calendar year, while the +9.1%
reading in June was the largest year-on-year (y/y) monthly gain since 1981.
The inflation shock was hardly unique to the US, with soaring energy and food
prices, Labour markets with more jobs than available workers and the release
of pent-up demand combining to create the most inflationary backdrop globally
for 40 years. For the full year, global inflation averaged 8.8% compared to
pre‑pandemic levels of around 3.5%.
As a result of this persistent inflation, 2022 was also a year of
unprecedented interest rate rises, after an oddly slow start by central banks.
In the US, the Federal Reserve (Fed; the US central bank) embarked on the
steepest set of rate hikes in 40 years as rates were raised by 450 basis
points (bps), including four 75bps hikes, in addition to the resumption of
quantitative tightening (QT) whereby the Fed reduces its monetary reserves to
'tighten' its balance sheet. Futures markets at the start of 2022 had priced
in expectations for Fed Funds (the key benchmark rate targeted by the Fed) to
be at c1% by June 2023; by year end, this figure had risen to c5%. In Europe,
the decade‑long experiment with negative interest rates ended as the
European Central Bank (ECB) raised rates by 250bps despite a high likelihood
of recession. Most other major markets experienced tightening in excess of
200bps.
Sharply higher risk-free rates weighed heavily on asset prices, not least
bonds which experienced their worst calendar year returns since at least the
1970s, the Bloomberg US Aggregate Float-Adjusted Index losing 13.1%. This
theme was painfully echoed in equity markets- the longer the duration, the
worse the return. Ten-year US Treasuries suffered their worst annual
performance since 1788 while record government bond losses were recorded in
Japan, Europe, and the UK with drawdowns of 16.2%, 22% and c32% respectively.
Having stood at $10trn in January 2022, the global stock of negative yielding
bonds had fallen to essentially zero by calendar year end.
Higher sovereign yields weighed heavily on global equities, which also had to
contend with elevated recession risk and negative earnings revisions. During
the calendar year, 2yr-10yr Treasury yields fell to their most negative spread
(where 2-year yields are higher than 10-year yields) in more than 40 years.
Aggregate earnings estimates for companies in the S&P 500 Index in 2023
fell from $245 to around $230, while 2024 forecasts fell to c$250, essentially
losing a year of growth. As measured by the MSCI All-Country World Index
(ACWI), global equities fell by -18.4%, in dollar terms, their worst showing
since 2008. The S&P 500 Index (-19.4%) also posted its biggest fall since
2008 and its seventh worst year since 1926. The unusual correlation between
bond and equity markets, courtesy of inflation, meant that 2022 will probably
be remembered for being the first year that both the S&P 500 (equities)
and 10-year US Treasuries (bonds) each registered losses of more than 10% on a
total return basis. It was also the worst year for combined total returns of
stocks and bonds since 1982.
A bad year for US equities proved a calamity for growth stocks which suffered
their worst year compared to value stocks since 2000. Helped by energy's
record year (+59%) versus the broader market, the Morningstar US Value Index
fell just c1% while the Morningstar US Growth Index plunged by c37%.
Equities started strongly in 2023 as extreme pessimism and bearish positioning
were challenged by disinflationary data, weaker energy prices and sharply
lower real rates, as well as a better than feared Q4 company earnings season
and a momentum / short squeeze. European equities and 60/40
portfolios recorded their best start to a year since at least 1987, while the
tech-heavy NASDAQ Composite Index enjoyed its strongest year-to-date
performance since 2001.
However, sentiment turned more negative in February as a slew of strong
economic data for January challenged the excitement that the interest rate
tightening cycle was largely complete. Investment grade global bond markets
gave back their year-to-date gains, while corresponding equity market weakness
has seen US indices either approach or break 50-day moving averages as
positioning and sentiment tailwinds came to an end and stocks began to fall on
bad news or weak earnings reports.
The collapse of Signature Bank and then Silicon Valley Bank (SVB) in March
provided the most significant casualties of aggressive Fed tightening. In
order to prevent contagion, the US Treasury, Federal Reserve and Federal
Deposit Insurance Corporation (FDIC) announced that all deposits of SVB and
Signature Bank would be insured, solving the immediate risk to deposit
holders, and helping to stem rapid withdrawals which totalled $42bn in just
four hours at peak. However, concerns remained that these bank failures were
emblematic of wider issues in the banking sector, prompting extreme bond
volatility and a 'flight to safety' with US 2-year yields falling by 130bps in
just eight trading days. Credit Suisse fell soon afterwards, when actions by
the Swiss central bank failed to stem client outflows and counterparty
de-risking. UBS Group agreed to buy the 166-year-old lender for 3bn Swiss
francs (40% of its market value) in a historic government-brokered deal aimed
at containing the crisis.
Technology Review
In addition to the pressures felt by the broader market, technology stocks
also had to contend with the further unwinding of perceived 'Covid winners'
which weighed on the sector's relative growth and its companies' valuations.
However, marked outperformance by the sector giants during early 2023 left the
technology sector (represented by the Dow Jones Global Technology Index)
modestly ahead of the broader market (MSCI ACWI) for our full fiscal year to
30 April 2023, the Dow Jones Global Technology Index returning +2.7% and the
MSCI ACWI +2.1% respectively, both in sterling terms.
However, overall index returns contrasted with those enjoyed by the average
stock, especially during 2022, when just 30% of technology stocks
outperformed. For the 2022 calendar year (two-thirds of which fell within our
past fiscal year), the Dow Jones Industrial Average (DJIA) outpaced the NASDAQ
Composite Index by more than 2,400bps, the greatest divergence between the two
since 2000. During this period, value significantly outperformed, outpacing
the most expensive quintile of technology stocks by 35% in 2022. Perceived
defensive businesses such as Hewlett Packard Enterprise (+17%), IBM (+24%) and
Oracle (+7%) sidestepped the massive de‑rating of growth stocks that all but
wiped out the EV/sales valuation premium normally enjoyed by next-generation
software stocks over legacy incumbents, making it another challenging year for
growth-oriented technology investors, us included.
As in 2021, the greatest weakness was reserved for the longest duration assets
with limited valuation support. Tesla fell an incredible 65% during 2022,
commensurate with the decline experienced by MSCI Ukraine and Bitcoin,
revealing extreme cross-correlation. Weakness in category leaders like Tesla
presaged a collapse in 'second liners' such as would-be electric vehicle (EV)
makers Rivian (-82%) and Lucid (-82%). The ARK Innovation fund fell a further
63% in 2022 after declining 23% in 2021. Thankfully - and something we have
highlighted for the past two years - the most pain was felt beyond listed
equities as bubbles in cryptocurrency, non-fungible tokens (NFTs) and Special
Purpose Acquisition Companies (SPACs) were destroyed. Cryptocurrencies plunged
in 2022, led by Solana (-94%), Cardano (-81%) and Ethereum (-68%) leading to
many industry bankruptcies before engulfing FTX and Sam Bankman-Fried. PCTT
does not invest in either SPACs or cryptocurrencies.
Thankfully the technology sector's fortunes reversed with the arrival of the
new calendar year, covering the final four months of our fiscal year, during
which our benchmark advanced +16.9% as compared to the MSCI ACWI's +4.7% gain.
This was driven by better-than-expected macroeconomic data which prompted
optimism around e-commerce and digital advertising growth against low
expectations, while Artificial Intelligence ("AI") provided a new growth
outlet to many semiconductor companies given the calculation
(compute)-intensive nature of large language model (LLM - see more below)
training and inference. However, this period also saw extraordinary
outperformance of large-cap companies, as measured by the Russell 1000
Technology Index, which delivered +22% while small-caps as measured by the
Russell 2000 Technology Index, fell 1.9%, both in sterling terms. Megacap
technology stock performance has been even more pronounced, benefitting from a
'flight to quality' amid the collapse of SVB, money flowing from the
financials and
energy sectors and excitement about and desire for AI exposure.
At the technology subsector level, AI enthusiasm proved an important driver
for semiconductors, the Philadelphia Stock Exchange Semiconductor Index (SOX)
returning +4.2%. This was impressive given weakness in other end markets
including smartphones and PCs. Earlier widespread semiconductor shortages and
price increases scared customers who then scrambled to modify procurement
policies to secure supply at the expense of inventory discipline, resulting in
a severe inventory correction. Auto and industrial markets were more stable
and datacentre spending remained relatively resilient as the large cloud
providers continue to invest in anticipation of a compute‑intensive AI
future. These trends, together with further evidence of 'semiconductor
sovereignty'(epitomised by the $280bn CHIPS and Science Act) saw wafer
fabrication equipment (WFE) spending surpass $100bn for the first time.
Despite enthusiasm about AI, there was a significant slowdown in cloud revenue
growth as customers optimised spend following the pandemic-induced
acceleration. Aggregate cloud revenue growth slowed by 400-500bps per quarter
from +36% in Q2'22 and +31% in Q3 before falling to +26% and +21% in Q4 and Q1
respectively. This was a disappointment despite the public cloud's vast scale
at >$170bn annualised revenue run rate.
The slowdown in cloud revenues reflected a broader slowdown within software,
especially at Software as a Service (SaaS) companies. During the year, many
software companies highlighted greater deal scrutiny, longer sales cycles,
deal compression and in later months found it more difficult to expand seat
counts as customers retrenched. While the Bloomberg Americas Software Index
returned 4%, this largely reflected strong returns from legacy players with
limited growth profiles but generally strong pricing power and undemanding
valuation multiples. Microsoft also delivered strong returns (+11.8%) as Azure
continued to grow well and customers consolidated spend on the largest
platforms. Conversely, diminished risk appetite and a higher interest rate
environment presaged a material valuation reset in the higher growth parts of
the sector which saw the Goldman Sachs Expensive Software basket return -27%.
In the internet sector, echoes of the pandemic period continued to impact
results, from still-slowing gross merchandise value (GMV) growth at many
e-commerce companies, inventory issues at retailers and an ongoing travel and
entertainment spending boom, as consumer spending continued to shift from
goods to services. The NASDAQ Internet Index returned +1.0% during the fiscal
year with a material divergence between mega-cap and smaller-cap constituents.
Portfolio Performance
The Company underperformed its benchmark with the net asset value (NAV) per
share falling -2.8% during the fiscal year versus an increase of 2.9% for the
Dow Jones Global Technology Index. The Company's share price fell by -4.9%,
reflecting the additional impact of the discount widening from 11.5% to 13.4%
during the period. We continue to monitor the discount and the Company bought
back 6.07 million shares during the fiscal year, at an average discount of 12%
to NAV.
The greatest headwind to the Company's relative performance was the dominance
of large-cap technology stocks which we are structurally underweight. The
Russell 1000 Technology Index (large cap) returned +5.5%, while the small-cap
Russell 2000 Technology Index declined -13.8%, in sterling terms, with
divergence becoming more accentuated into the end of the fiscal year following
the collapse of SVB. Mega-cap outperformance was even more striking as Goldman
Sachs' equal-weighted index of the six largest technology stocks returned
+10.2% during the fiscal year and +16.3% since the end of February 2023.
Within the growth part of the technology market, the divergence in performance
was even more stark. The Russell 1000 Growth Technology Index returned +6.3%
while the Russell 2000 Growth Technology Index returned -14.4% during the
fiscal year. Unsurprisingly, mega-cap technology companies were responsible
for some of the largest individual detractors to the Company's relative
performance versus the benchmark. This included large absolute but relative
underweight positions in Meta Platforms, Microsoft and Apple. Underweight
positions in the largest five index names were responsible for a little more
than a fifth of underperformance, with a larger portion of underperformance
due to compression of next generation valuations.
During the latter half of 2022 we looked to cautiously rebuild the Company's
exposure to next-generation software companies following significant valuation
compression. This proved premature and was responsible for several of our
largest detractors that included CrowdStrike (-40%), CloudFlare (-45%),
Atlassian (-34%) and GitLab (-37%). Software proved our biggest detractor at
the subsector level as a period of extreme multiple derating was followed by
softer 2023 guidance as growth slowed and customers looked to optimise their
cloud and software spending post-Covid. Less expensive software companies
fared little better as our positions in Elastic (-25%), Five9 (-41%), CyberArk
(-21%) and Tenable (-33%) all contributed negatively to relative performance.
There were also a number of genuine disappointments which impacted performance
despite their modest position sizes, including Snap (-69%), Bill.com (-55%),
Square (-39%) and Kornit Digital (-72%).
In terms of positives, our growth semiconductor positions made a strong
positive contribution given ongoing strength in data centre demand and
enthusiasm around AI. This included Lattice Semiconductor (+66%), Monolithic
Power Systems (+18%), eMemory Technology (+36%), Advanced Micro Devices (+5%)
and the impact of our zero-weight position in Intel (-29%), which made up c1%
of our benchmark. Leading networking company Arista Networks (+39%) also
benefitted from robust hyperscale data centre spending. Strong automotive
demand and an inflection in electronic vehicle ("EV") adoption helped power
semiconductor holdings Infineon Technologies (+26%) and ON Semiconductor
(+38%). Semiconductor capital equipment players KLA Tencor (+21%) and Disco
(+40%) also delivered solid returns.
Given the weak performance of most major technology subsectors (especially
beyond the largest companies), a number of positive contributors to our
relative performance came from peripheral areas including public sector
technology, MedTech and FinTech. They included Axon Enterprise (+88%),
Intuitive Surgical (+26%), Dexcom (+19%) and Wise (+39%).
We are never happy when we underperform our benchmark, even during periods
when growth stocks are deeply out of favour. However, we are heartened by the
fact that according to Lipper data, the performance of the Company versus the
broader technology peer group remains first or second quartile over almost
every period which suggests that the challenge posed by a highly concentrated
benchmark firing on most cylinders is being widely felt.
Market Outlook
Last year we observed how risk was being repriced as the range of potential
macroeconomic outcomes had become unusually wide. Valuations were elevated,
earnings numbers at risk and early hopes that inflation would subside proved
sadly complacent. Twelve months and 350bps of US rate hikes later, the range
of potential outcomes appears narrower. Tightening has weighed on growth
expectations: in its May update, the IMF forecast global growth of 2.8% in
2023, a moderation from 3.4% in 2022, and c10bps lower than it estimated in
January. The slowdown continues to reflect sharply higher central bank rates
necessary to combat inflation as well as the conflict in Ukraine. While growth
may be bottoming out (aided by lower energy prices, robust private
consumption, and ongoing fiscal support), recent turmoil in the financial
sector following the collapse of several US regional banks is a reminder that
recovery is unlikely to be straightforward.
The end of China's zero-Covid policy has already seen emerging markets
accelerate, led by China and India which are forecast to grow 5.2% and 5.9%
respectively this year. In contrast, growth in advanced economies is expected
to slow to just 1.3% (2022: 2.7%). Risks to this outlook appear skewed to the
downside while inflation, expected to fall to 5.6% this year and 3.7% in 2024,
is likely to continue to dictate the tenor of monetary policy.
The good news for the market outlook is that most of the world's major central
banks appear substantially through their rate tightening cycles. At the
beginning of 2022, Fed Funds were near zero with futures markets pricing in
c70bps of rate hikes. Ten-year US Treasury yields were 1.5% while real rates
were negative. A little more than a year later and following 500bps of rate
hikes, the Fed had begun to signal that the current rate-tightening cycle
might be over. However, recent central bank rhetoric and/or action has become
incrementally hawkish, dampening earlier hopes of a more benign interest rate
environment.
With the Fed remaining 'data dependent', we are hopeful that rate expectations
will moderate given our view that peak inflation is behind us. At the February
Fed press conference, Fed Chair Jerome Powell unexpectedly declared it was
"most welcome to be able to say that we are now in disinflation". While he
offered many caveats, Powell mentioned disinflation 15 times during the press
conference. While subsequent data has been mixed; headline inflation almost
certainly peaked last summer. Others also appear to be past peak inflation
with c84% of countries expected to have lower headline CPI in 2023 than in
2022. A key contributor to headline disinflation has been sharply lower energy
prices, as well as falling goods prices as supply bottlenecks improve. Without
question, the faster-than-expected adjustment in commodity prices to the shock
from Russia's invasion of Ukraine represents the most constructive market
development during the past year. In Dollar terms, crude oil has fallen by
c.40% since its June highs while natural gas prices (having risen to 18x their
pre-crisis level) have fallen precipitously, although they remain
significantly higher than before Russia began preparing to invade Ukraine. The
combination of a fortuitously warm winter, an impasse in Ukraine and
conservation measures recently saw EU consumption of natural gas fall 25%
below the 2017-21 average.
Although both core and service inflation remain uncomfortably high,
policymakers will likely be encouraged by falling headline prices that may
help reduce wage pressure by feeding into lower wage demands that are
typically informed by headline rates. Inflation expectations also remain
well-anchored, with market expectations of US inflation 5-10 years out still
around 2.5%, less than half the current level. Policymakers may also regard
recent bank failures as evidence that the long and variable lag associated
with significant monetary tightening is beginning to show up, with US regional
bank turmoil acting like a further rate hike transmitted through the credit
creation channel.
According to the ECB, the negative impact on inflation will increase from 0.2%
in 2022 to 1.2% this year before rising to 1.8% in 2024. Likewise, excess
savings, which have acted as a buffer for consumption, have also been
significantly depleted. In the US, an estimated $1.6trn of the $2.5trn in
Covid-related stimulus savings have been spent while the personal saving rate
is at its lowest in more than 60 years (except for July 2005). These factors
may end up proving Powell right on disinflation, stock returns have been
strong following a peak in inflation as long as a severe recession is avoided.
Since 1948, the S&P 500 has averaged a 59.2% price gain five years
post‑peak inflation, including the negative 2008 and 1973-74 experiences.
While we do not anticipate a severe downturn, US recession risk remains
elevated as indicated by the spread between two-year and 10-year Treasury
yields. However, this remains at odds with a US economy that, despite record
monetary tightening, still grew 1.1% y/y during Q1, supported by an incredibly
robust labour market, sharply lower energy prices and "remarkably resilient"
consumer spending. While we expect the backdrop to remain choppy,
first-quarter reporting season has been better-than-expected as 54% of S&P
500 firms have beaten consensus earnings expectations by more than one
standard deviation of analyst estimates versus a historical average of 46%,
according to Goldman Sachs. The downward slope of earnings per share (EPS)
revisions has also continued to improve, which could suggest the steepest of
the estimate cuts are behind us. This apparent contradiction is in part
explained by the fact that GDP is measured in real terms while earnings
estimates are nominal. As such, inflation - which has been supportive for
(nominal) corporate revenues - continues to represent a greater risk to
valuations (via a higher discount rate/ lower multiple) than to corporate
earnings, although cost pressures have seen S&P net margins slip to 11.2%
in Q4'22 from 12.4% in Q4'21.
Against a more persistent inflationary backdrop and a good start for markets
this calendar year, valuations appear relatively full, with the S&P 500
trading at 18.8x forward earnings (2022: 19x). This leaves US stocks trading a
little above both the five (18.6x) and 10-year (17.4x) averages. Having
previously lent on past data that compares inflation to average PE ratios,
history suggests there is further valuation downside (to c.15x PE) should
inflation remain above 4%, and considerably more with inflation above 6%
(c.11x). However, significantly lower valuation ranges may be more appropriate
during periods where central banks are less able to curtail inflation (as with
the 1970s' oil crisis) or when policymakers choose to de-emphasise it. For
now, central banks remain highly credible and longer-term inflation
expectations well‑anchored. Inevitably, equities will have to contend with
greater competition from bonds and cash than during the era of 'free money',
when long-term rates averaged 2.3%. However, over the medium term we can
envisage many scenarios where equities outperform bonds but very few where the
opposite is true. That said, we remain cautious of assets that are illiquid,
complex, or dependent on access to capital.
Upside risk will likely depend on the worst of inflation being behind us and
recession being avoided. A Fed pause suggests that significantly tighter
monetary policy has begun to bite. This is evident not just in the banking
sector but also in waning consumer confidence, CEO sentiment, housing
affordability and the availability of credit. However, should the Fed prove
able to becalm the labour market without causing a major spike in
unemployment, the most widely forecast recession in history might still be
averted. While history suggests this is unlikely, there is little that is
'normal' about the current cycle - the Fed has tightened substantially over
the past 15 months without any significant impact on the labour market while
price inflation has declined. This unusual combination - coined 'immaculate
disinflation' - offers hope the Fed is able to recalibrate price expectations
without causing an economic dislocation. With no post‑1950 precedent,
economists are naturally dismissive, but as Fed Governor Philip Jefferson, put
it, "history is useful, but it can only tell us so much, particularly in
situations without historical precedent". Supply-chain disruptions are
improving, the labour participation rate is recovering, and Fed credibility is
high. While 1970s throwbacks make good copy ("another winter of discontent"),
the US became a net exporter of energy in 2019 and union membership in the US
stands at a third of its 1960 peak. Even if the US cannot avoid a recession,
it does not have to be a disaster, just as a loss does not have to be total.
With investors said to be facing "the worst backdrop for equities in over 40
years", a mild recession may not prove too bitter a pill. Also, absent a
recession, markets may have bottomed in October 2022.
If 'immaculate disinflation' seems fanciful, consider the post WWII period
when a temporary malalignment of demand and supply saw CPI leap from 1.7% in
February 1946 to a peak of 19.7% in March 1947, before plunging to zero in
1949 with no lasting impact on inflation expectations. Pent-up demand was part
sated, part choked by a modest Fed-induced recession while supply recovered as
factories retooled from armaments to consumer goods. If this sounds oddly
familiar, consider how the rejection (or resignation) of 'victorious' pandemic
leaders - Ardern, Conte, Johnson, Merkel, Sturgeon, and Trump - is also
reminiscent of Churchill and De Gaulle's post-war experiences.
Market Risks
Except for Covid (which has diminished further as a risk, thanks to a high
level of immunity and lack of a new variant), many of the key challenges posed
to equities are unchanged from last year. The principal risk faced by most
risk assets is inflation with central banks focused on preventing relative
price changes becoming entrenched. However, calibrating monetary policy to
prevent "transitions from low to high inflation regimes" is extremely
challenging. Thankfully, the Fed's preferred measure - the personal
consumption expenditures (PCE) price index - has fallen back to 4.4%, from a
high of 7% in June 2022. However, services inflation and wage growth remain at
levels incompatible with central bank inflation targets. Services inflation
will not be easy to resolve due to post-pandemic pent-up demand and the fact
that it has averaged c3.3% growth per annum between 1982-2021. It will also be
made more difficult by an extremely tight US labour market with unemployment
recently at its lowest in over 50 years (3.4%) and only 0.6 unemployed people
available for every job opening. Although a weaker economy should help, the
market remains desynchronised with sectors such as healthcare and leisure
still operating with fewer people than pre-Covid.
Should inflation fail to return to old ranges, policymakers may adopt much
more restrictive policy or admit defeat and accept that the post-pandemic
world is likely to experience persistent higher levels of inflation. This
scenario envisages many of the same medium-term inflationary headwinds we
discussed last year: greener but more expensive energy, deglobalisation and
supply‑chain fragmentation. These (and others, such as the loss of the peace
dividend) may be incompatible with present inflation targets that are "too low
for such a world and yet hard to revise given [the risk to] central bank
credibility". However, we remain relatively sanguine about inflation given
potential productivity gains that have yet to manifest themselves (especially
related to
AI) that could offset some of these potential inflationary headwinds. We are
also encouraged by the fact that high and persistent US inflation is rare,
especially outside war.
While the overarching need for central banks to remain credible means monetary
policy will remain data dependent, the risk of policy error is magnified by
the potential shift from a low to high inflation regime. The Fed will also
wish to avoid a repeat of the 1962-66 cycle when aggressive easing in late
1966 was followed by "a decade of engrained inflation". If so, rates might
stay higher for longer, with the first rate cut arriving later than the
typical 7-9 months after the last hike. As such, recession risk remains
elevated; the economy might 'slow dance' into recession, as in 2000, or a 'no
landing' scenario might force the Fed into inducing a recession to bring
inflation down. If history is any guide, markets may retest lows if recession
is not avoided. According to Ned Davis Research, the broader market takes a
median of 5.3 months to reach its nadir following the official declaration of
a recession by the National Bureau of Economic Research (NBER). Meanwhile the
average recessionary bear market has seen the market fall by c33% over 17
months.
Recent financial sector stress has highlighted the liquidity risk associated
with unwinding record monetary and fiscal pandemic stimulus. While we are
hopeful that recent bank failures have been contained, they - together with
the earlier cryptocurrency collapse and disfunction last year in the UK
pension market - are salient reminders of the systemic risk posed by continued
withdrawal of liquidity. Likewise, the geopolitical risk remains heightened
too. While Ukraine no longer dominates the headlines, war remains a key
determinant of the ongoing energy/cost of living crisis while continuing to
pose myriad risks. Despite both sides threatening major new offensives, our
base case assumes the current 'impasse' in Ukraine persists as neither side
looks capable of winning the conflict nor acceding to peace terms this year.
While there remains a very serious risk of escalation, the conflict has
remained relatively well contained even as the rhetoric has flared up on
occasion. For now, stalemate ahead of a 'frozen conflict' (as per Korea)
rather than a negotiated peace, looks the most likely outcome. Beyond Ukraine,
other key geopolitical risks include US-Sino relations with the downing of
three Chinese spy balloons over US airspace earlier this year reminding us of
the risk associated with rising nationalism in both countries. In the US, this
has taken the form of economic policy designed to frustrate Chinese
technological progress with recent export controls aimed at denying Chinese
access to advanced semiconductors representing a notable escalation. While
anti-China rhetoric is likely to remain heightened ahead of US presidential
elections, we remain hopeful that further decoupling need not end in
acrimonious divorce. However, industrial policy is clearly back in vogue,
evidenced by greater subsidies, export restrictions and content requirements
such as the Inflation Reduction Act, which collectively may unwind some of the
benefits of post-war globalisation.
Finally, there are a number of tail risks. These include a new deadlier Covid
variant, a faltering Chinese recovery or a particularly cold winter that might
reignite energy prices. Iran also represents an elevated tail risk with a
number of factors - domestic repression, nuclear advances, military support
for Russia and a Netanyahuled government in Israel - increasing the likelihood
of confrontation this year.
Technology Outlook
Earnings outlook
Having only increased 0.5% in 2022, worldwide IT spending is expected to reach
$4.6trn this calendar year, representing an increase of 5.5%, in dollar terms.
However, this relatively sanguine forecast captures recent dollar weakness;
constant currency growth is likely to prove considerably weaker. For 2023, the
technology sector is expected to deliver revenue and earnings growth of 1.4%
and 0.8% respectively. Although this compares unfavourably with the market,
which is forecast to grow revenues and earnings 2.4% and 1.1% respectively,
the technology sector is expected to revert to more typical above-market
growth in 2024 with revenues and earnings progress currently pegged at 8.7%
and 16.3% y/y. Technology sector progress will likely be driven by
macroeconomic conditions; net profit margins remain a key focus for earnings
as they remain above long-term averages, despite having fallen back to 22.6.%
from 26% last year After two years of strength, recent dollar weakness
represents a potential tailwind for technology estimates given the sector's
international exposure of 58% (the highest of any sector) versus 40% for the
market.
Valuation
The forward price to earnings (P/E - comparing a company's share price to its
annual net profits) of the technology sector continued to contract during the
past year. A year ago, valuations had fallen back to 24x forward P/E, having
earlier made cycle highs of c28x ahead of the Fed pivot in November 2021.
Since then, valuations have continued to compress against a backdrop of higher
risk-free rates and greater economic uncertainty, with technology stocks
ending the year at c19x forward P/E. However, the calendar year to date surge
in large‑cap technology stocks (against a backdrop of falling estimates) has
seen valuations recover to 27.1x at the time of writing, ahead of both five
(22.4x) and 10‑year (19.2x) averages. The premium enjoyed by the sector has
also expanded during 2023 with technology stocks today trading at 1.4x the
market multiple in excess of the post-bubble range of between 0.9-1.3x. While
current ebullience reflects understandable excitement around AI, the recent
recovery in valuations may leave the sector vulnerable to near-term setbacks.
However, downside risk associated with full valuations should be considered
alongside actual progress made in AI, which we believe represents a key moment
for the technology sector. It is also worth recalling that during the dot.com
period, the technology sector traded well in excess of twice the market
multiple.
No valuation premium for next-generation stocks
While aggregate sector valuations have fully recovered, next-generation
stocks, particularly within software, have not. Last year we referenced that
valuations were in "price discovery mode" but the correction proved far more
dramatic than we anticipated. What began as an overdue reset has seen software
valuations fall back to c.6.3x forward EV/sales having peaked at c.14.8x in
late 2020. According to KeyBanc, this leaves them 25% below the trailing five
year average (8.4x) and broadly in line with the ten-year average (6.6x). This
has also recently left next generation software stocks trading at a small
discount to legacy ones on a forward EV/sales metric.
What pandemic?
The current situation is highly unusual, reflecting a challenging investment
backdrop as well post-pandemic 'demand normalisation' with many of the
vestiges of the pandemic period being swept away. Reopening has not just
challenged 'new' pandemic categories such as home fitness and telehealth; it
has also hurt existing ones such as online dating and videogaming, while more
durable segments such as e-commerce and payments have had to contend with
decelerating demand and/or increased competition. In more mature markets,
earlier working from home ('WFH')-related strength has been followed by
exceptionally weak demand. This is most evident in the PC market where an
extraordinary 2021 was followed by a dismal 2022 as units shipped declined by
the most year-on-year since Gartner began tracking PC data. This dynamic has
also played a part in slower cloud and associated software demand as customers
moved to optimise their spending having earlier migrated aggressively to the
cloud. The impact on cloud spending demonstrates the breadth of readjustment
and why it has been so difficult to avoid the miasma of post-Covid demand
normalisation.
Risk/reward much improved
We hope the largest part of any next-generation valuation reset is behind us.
In the absence of a recession, it is highly likely we have already seen the
valuation lows. While the absence of strategic M&A remains something of a
headscratcher, we are encouraged by private equity (PE) activity that has
picked up significantly, with Avalara, Coupa, Duck Creek and ForgeRock all
being taken private in recent months. These take-private transactions were
consummated between 6.9-8.9x Enterprise Value/ next 12 months sales - well in
excess of where most software stocks trade today. As the recent (and
competitive) bid for Software AG attests, we expect private equity to remain
very active, providing software valuations with something of a floor. Private
equity is said to have c$2trn of 'dry powder' available while Thoma Bravo (an
investor in more than 420 technology companies over two decades) raised $32bn
across PE funds last year. In January, founder Orlando Bravo revealed that
despite the large fund raise, the selloff in software stocks meant the
opportunity to buy assets was "many, many, many, many, many multiples of that.
Adopting a slower growth playbook
In the meantime, companies are borrowing from the so‑called 'PE playbook' by
recalibrating their businesses to account for slower growth and earlier
disruption‑related exuberance. The pivot towards profitability is evident
from widespread workforce reductions within the technology sector that have
intensified during 2023, with activist investors such as Starboard helping
drive the focus on greater cost discipline. Epitomised by restructuring at
Salesforce (which announced a 10% headcount reduction and increased operating
margin targets), the unwinding of erroneous extrapolation of pandemic-related
demand has seen layoffs move from growth-challenged companies to high-flyers
like Confluent and HubSpot. Cost-cutting initiatives have shown positive early
results: the median software company operating margin has expanded by nine
percentage points over the past three quarters, according to Goldman Sachs.
Nonetheless, revenue growth is slowing just as it did in the recessions of
1990, 2002 and 2009 as well as during the 2016 deflationary echo. While
macroeconomics will likely dictate the magnitude of the current slowdown, the
good news is the best companies should still grow, just as the median SaaS
company grew 18% in 2009 while, in 2002, median maintenance/subscription
revenue growth was 14%. Salesforce was still able to grow revenues 21% in 2009
- impressive given the prevailing macroeconomic conditions - and therein lies
the even better news which is that growth slowdowns should help us identify
more than our fair share of next-cycle winners. After all, there is nothing
like an ordeal to test strength. In 2009, each of Baidu, Google, MercadoLibre,
and Salesforce. com were able to grow through a financial crisis before
becoming multi-baggers during the following cycle.
Artificial Intelligence
While the macroeconomic backdrop remains highly uncertain, Chief Information
Officer (CIO) spending priorities still align well with many of our key themes
such as digital transformation (software), cloud and cybersecurity. The
portfolio also has several additional core themes including connectivity/5G,
digital advertising/ e‑commerce and EV/energy transition as well as
secondary/ emerging themes such as fintech/ payments. However - as the theme
of this year's Annual Report attests - 2023 belongs to Artificial Intelligence
(AI). We have been excited about the potential of AI for many years,
highlighting the remarkable progress the technology has made in narrow fields.
This was led by Google's DeepMind acquisition which achieved 'superhuman'
ability in games such as Go (2016) and Chess (2017) before solving one of the
grand challenges in biology during 2021 when AlphaFold was able to predict 3D
models of protein structures described at the time as "the most important
achievement in AI ever".
That lasted until ChatGPT used a transformer model trained on 175Tb of text to
generate human-like responses to seemingly any question. Able to take on
different personas, write poems or programming code, even offer opinions,
ChatGPT is already the first AI to "viably compete with humans". This is
likely to prove a pivotal moment for AI with Microsoft's $10bn investment in
ChatGPT maker OpenAI best understood as one of the 'opening shots' in an AI
war that has just commenced. We have long argued that the semiconductor
industry looks well positioned, with McKinsey arguing this sector might
capture as much as 40-50% of the value associated with AI. This view was
seemingly supported following recent record-breaking July quarter guidance
from chipmaker Nvidia that was more than 50% ahead of consensus driven by
AI-related strength. On the earnings call, CEO Jensen Huang spoke to a $1trn
opportunity over ten years to replace CPU-based infrastructure with more
efficient, accelerated computing based around GPU architectures as generative
AI becomes the "primary workload of most of the world's data centres". Nvidia
stock rose 24% on the day, despite having already gained 109% on a
year-to-date basis prior to the report.
Of course, there are myriad risks associated with AI, many of which are beyond
the scope of this report. However, the fact that ChatGPT makes mistakes
(socalled 'hallucinations') is not one of them; most disruptive technologies
begin as 'good enough' and trading accuracy for speed worked wonders for the
telegraph, Encyclopaedia Britannica, and the biro. Moral and legal questions
posed by AI are more difficult to dismiss, especially those regarding bias and
the potential for it to "industrialise plagiarism". While eventual regulation
of AI seems inevitable, the industry would likely welcome the introduction of
legislative guardrails. However, this will not be straightforward; rather than
a restrictive set of regulations applied suddenly, we believe regulation may
follow a 'governance by accident' approach that has underpinned the
development of the airline industry; if aviation is any guide, it is possible
that by reducing risk, regulation actually accelerates the adoption of AI,
rather than stymies its progress.
As such, the focus on regulation - so soon after the advent of generative AI -
might say more about investor fatigue around 'technology disruption' than it
does about the risk regulation poses to the development of this nascent
industry. This is understandable, following a period that has witnessed more
than its fair share of investment hyperbole, much of which was catalysed by
the pandemic. In contrast with blockchain and the metaverse - early stage
technologies in search of a problem - artificial intelligence might be "the
most profound technology humanity is working on". From a historical
perspective, generative AI could prove another key moment in human history
when codification and dissemination of knowledge is accelerated. In the
ancient world, these included the development of writing systems (such as
cuneiform and hieroglyphics) around 3500-3000 BCE, as well as advanced
mathematics and philosophy in Ancient Greece from the eight century BCE
onwards. Libraries, historical record-keeping, and translation of ancient
texts were other key developments in the codification and preservation of
knowledge, aided by breakthroughs that enabled information to be stored (e.g.,
papyrus, paper), retrieved (e.g., cataloguing systems, encyclopaedia) and
distributed (e.g., libraries, printing press). Advances in science, technology
and communication during the Modern Era have "led to the codification of
knowledge on an unprecedented scale" epitomised by the Internet which has
facilitated knowledge sharing and democratised access to information in a
manner that has changed the world.
Generative AI offers similar- if not greater - promise. Built using
'foundation' models which contain "expansive neural networks inspired by the
billions of neurons connected in the human brain", generative AI applications
are able to process extremely large and varied sets of unstructured data and
perform more than one task. This allows them to "augment human creativity,
automate labour-intensive tasks and generate novel solutions to complex
problems". They can also understand natural language which means that
generative AI could "change the anatomy of work" by automating activities that
today account for as much as 60-70% of employees' time. However, in contrast
with historic patterns of technology automation, disruption is expected to be
disproportionately felt by knowledge workers. While Goldman Sachs estimate
that more than 300m jobs could be at risk, we remain optimistic that humans
will graduate to higher value work just as 60% of workers today are employed
in occupations that did not exist in 1940. Furthermore, McKinsey forecast that
generative AI could deliver $2.6-4.4trn annually to global GDP driven by
productivity gains that could be as high as 3.3% per annum when generative AI
is combined with other technologies. This would be remarkable given current
labour market tightness, ageing Western populations and below-average
productivity growth achieved during the past twenty years.
Artificial intelligence also has the potential to become a transformative
'general purpose technology' (GPT) which -like electricity, steel, and the
internet - may "reshape economies, drive innovation and create new
opportunities". If so, history suggests that bold, early predictions about AI
may prove extremely conservative. Not just because humans struggle with
non-linear change (an observation that has long informed our investment
approach) but also because as yet unknown technology improvements subsequently
transform the opportunity set. If early applications for steel were
predictable (e.g., bridges, ships, rails), later and significantly larger
market opportunities represented by skyscrapers, cars and home appliances
could not be known in 1855 when Bessemer perfected his steelmaking process.
The same was true for aviation when the jet engine (and other avionic
developments) transformed the cost and safety profile of flight, resulting in
passenger traffic growth compounding by more than 10% per year between
1950-1970 and helping travel and tourism become one of the world's largest
sectors. More recently, the confluence of internet, cloud and smartphone has
presaged widespread disruption and exponential change well beyond late 1990s
predictions that were only able to peer into a near and incomplete future that
was yet to feature Google, AWS, and iPhones. Today, the app economy is worth
c.$63trn, more than 60x times greater than the value of the handset market in
2007, the year that Apple introduced the iPhone.
The impact of generative AI is likely to be felt more rapidly than either the
internet or the smartphone. In part, this reflects the role that both earlier
pervasive technologies will play as AI-enablers with access to ChatGPT (and
other natural language 'chat' interfaces) only requiring an internet
connection and a smartphone. These low barriers to adoption have already
supported an unprecedented rate with ChatGPT taking just 2.5 months to reach
100m users, as compared to Instagram which took 2.5 years (in itself
extraordinary). Another major difference between AI and prior technology
shifts is the astonishing speed of AI improvement. This is most evident when
comparing the capability of two OpenAI large language models (LLMs) - GPT-4
(the latest version) and the earlier GPT-3.5 (ChatGPT) released approximately
a year apart. While GPT-3.5 was trained on 175bn parameters (akin to internal
variables the model learns during its training phase), the newer GPT-4 may
have been trained on as many as 170trn. In addition, GPT-4 also has a much
larger context window - 25,000 words vs. c.3,000 for its predecessor - which
means it is able to retain far more information from earlier conversations.
Aside from its "mastery of natural language", GPT-4 "can solve novel and
difficult tasks that span mathematics, coding, vision, medicine, law,
psychology and more, without needing any special prompting". In all of these
tasks, model performance is "strikingly close to human level performance",
evidenced by consistently high exam scores across a diverse range of
disciplines.
The improvements in GPT-4 have been so remarkable that Microsoft recently
posited in a whitepaper ('Sparks of artificial general intelligence ("AGI")
that the LLM "could reasonably be viewed as an early version of AGI system".
The concept of AGI was popularised in the early 2000s to differentiate between
'narrow AI' being developed at the time and "broader notions of intelligence".
Until recently, AGI remained a popular science fiction topic and long-term
aspirational goal within AI. That is until the range and depth of GPT-4's
capabilities "challenge(d) our understanding of learning and cognition" with
the model said to "exhibit many traits of intelligence". Naysayers argue that
large language models do not 'understand' concepts and are merely adept at
'improvising on the fly'. However, like Microsoft, we believe the question is
moot. After all, one might ask "how much more there is to true understanding
than 'on-the-fly' improvisation?".
Technology Risks
As ever, there are multiple risks to our constructive medium-term view. Many
of these relate to macroeconomics, particularly recession and inflation, that
are covered elsewhere in this report. As previously highlighted, there remain
downside risks to technology spending should CEO confidence meaningfully
deteriorate. Similarly, earnings estimates are likely to remain subject to
macroeconomic turbulence; while cost-cutting has ameliorated downward
revisions to date, technology margins may be at risk should things worsen
materially. Likewise, a weaker macroeconomic environment might see the current
semiconductor downturn extend, resulting in delayed industry recovery and/or
result in a disappointing recovery trajectory for cloud spending which would
weigh on cloud-related sentiment.
Valuation is another key risk because the recent surge in technology stocks
has seen aggregate sector valuations revisit their pandemic highs. While
next-generation valuations have already been meaningfully reset, a steeper
yield curve may delay any recovery in longer duration valuations.
As in previous years, regulation remains a key risk too, although we are
comforted by a divided Congress (making sweeping legislation unlikely) and the
fact that the largest US technology companies represent the vanguard in the
emerging AI battleground with China. However, deteriorating US-Sino relations
represent a more significant threat to supply chains, especially in
semiconductors. For now, the Chinese appear able to work around US
legislation, suggesting it is more for domestic consumption ahead of
elections, but if this is the beginning of a new economic cold war, then
Taiwan - responsible for producing c90% of leading-edge semiconductors -
represents a critical fault line while a meaningful escalation of tensions
could weigh materially on a large part of our portfolio.
Potential regulation could also stymie the explosive growth of Generative AI
which has been a key driver of technology returns during 2023. Conversely,
further excitement about Generative AI might result in large‑cap technology
stocks perceived as AI beneficiaries and safe havens continuing to 'crowd-out'
small-cap companies. We must also acknowledge the risk posed to all companies:
should it become a general purpose technology (GPT) as we suspect, history
suggests there will be far more losers than winners from today's group of
companies within and beyond the technology sector.
Concentration Risk
In addition to market and sector-specific risks, it would be remiss of us not
to remind our shareholders once again about the concentration risk both within
the Company and the market-cap-weighted index around which we construct the
portfolio. At the year end our three largest holdings - Apple, Microsoft, and
Alphabet - represented c27% and c41.9% of our NAV and benchmark (Dow Jones
Global Technology Index) respectively. Last year, when these three positions
accounted for 29.2% of NAV and 40.7% our benchmark respectively, we argued
that concentration risk was justified because they were unique, non-fungible
assets that captured the zeitgeist of this technology cycle. Following another
year of sustained outperformance from these stocks, as well as several other
outsized benchmark positions including Nvidia, we are pleased to have retained
large absolute positions in them all even if their dominance of our benchmark
has meaningfully contributed to our relative underperformance.
We remain comfortable with the strategy of moving to materially underweight
positions in the largest index constituents should we become concerned about
their growth or return prospects, or should we find more attractive
risk/reward profiles elsewhere in the market. However, this position is
complicated by the fact that concentration today does not obviously reflect
outlandish valuations as per the late 1990s; the top 10 positions in the
benchmark recently accounted for c55% of constituent market capitalisation and
an estimated 53% of net income in calendar year 2023. Likewise, Apple may have
made headlines recently when its market-cap exceeded that of the Russell 2000
(small-cap) Index, but remarkably Apple also generates similar profits as
those 2,000 companies combined. The emergence of AI also plays well into
mega-caps given the significant scale (reach; data; cost) likely required to
be competitive.
Unlike many of our competitors that are limited to a maximum 10% in any
individual position, PCT is able to hold up to a full benchmark weight subject
to a maximum limit of 15%. While this gives us more room for manoeuvre - and
fewer excuses for underperformance - we rarely exceed 10% in individual
stocks, and when we do, it is often via a smaller equity position held in
combination with a slither of call options designed to ameliorate upside risk
in exchange for a modest premium. Having been very clear with shareholders
that we do not invest in certain types of stock (including private, value and
those likely to require capital) perhaps this isa good opportunity to make it
equally clear that we are unlikely to hold individual positions much above 10%
even when they are as unique as Apple and Microsoft. If this sounds at odds
with our 'benchmark-aware' approach, it is worth recalling that this approach
has risk reduction at its core. It has helped us avoid hubris, appropriately
size overweight positions while helping ensure the portfolio reflects the best
the index has to offer. However, benchmark concentration has begun to create a
tension between managing absolute and relative risk. As stewards of your
capital as well as technology investors, we find it very difficult to argue we
are reducing risk by making the portfolio ever more concentrated. While this
may come at the expense of raw performance and greater relative variance, we
believe a diversified portfolio of growth stocks and themes capable of
outperformance, but also constructed to withstand investment setbacks will
prove superior over the medium term, particularly on a risk-adjusted basis.
Conclusions
Market conditions in early 2023 lend support to a wide range of potential
outcomes, both good and bad. Macroeconomics will likely continue to lead the
market in the near term, although the primary debate has shifted somewhat to
the timing and magnitude of a recession and its impact on revenue and earnings
estimates, rather than the extent of the central bank response required to
deal with inflation, as dominated last year. However, the relative performance
of the technology sector - particularly after a strong run - may continue to
take its cue from real rates - a good reminder that we are not out of the
inflation woods yet, and the need to remain pragmatic (and highly liquid) in
terms of portfolio positioning. While we typically avoid 'value' technology
stocks, we do own companies able to pass on inflation to the consumer should
it remain stubbornly high, even if this is not our base case.
There are two principal reasons for being more constructive on technology this
year: more attractive risk/reward and the rapid adoption of artificial
intelligence. Despite continued near-term macroeconomic uncertainty and the
likelihood of further estimate cuts, the explosion of interest in AI has been
a powerful reminder of why we remain so excited about our sector over the
medium term. We also know that market narratives can change quickly should
macroeconomic headwinds and/or exogenous risks subside. Furthermore, the
risk/reward from current levels appears better: next-generation valuations
have returned to much more attractive levels, as previously discussed. Before
the recent move higher, growth internet valuations had reached multi-year
lows, on an EV/NTM EBITDA basis, just as software growth-adjusted EV/sales
multiples sat at 10-year lows. According to Morgan Stanley, at the beginning
of 2023 80% of their software sector coverage was trading below 8.6x
EV/forward sales - the median private equity takeout multiple since 2013. The
semiconductor sector (SOX) had also meaningfully derated, by more than -40%
from its recent highs at year end, against an average cycle decline of -26%
over the past seven years. Positioning has improved too, although investor
pessimism towards technology at the start of the calendar year has been
ameliorated by its relative stability amid travails within US banking,
combined with AI-related excitement.
The combination of better than expected first-quarter results and a 'flight to
safety' (away from financials in favour of cash-generative mega-cap technology
companies) has meant five technology stocks have driven almost two-thirds of
the S&P 500's return year-to-date. An index made up of Apple, Amazon,
Microsoft, Meta Platforms and Google has returned +31% versus the other 495
S&P 500 constituents' +3% return. For the calendar year, only 30% of
S&P 500 companies have outperformed the market, a level not seen on a
full calendar year basis since 1998 (28%) and 1999 (32%). Within technology,
limited breadth is apparent by the remarkable year-to-date spread between
large and small-cap technology performance (+26%) as well as the difference
between the market-cap weighted NASDAQ 100 Index and an equally-weighted
version of it, which at +11% is the widest spread seen over any 4.5 month
period during the past 18 years.
While we expect the market to broaden, we cannot help but share the market's
excitement about the AI opportunity which - at present - is most easily
accessed via mega-cap stocks primarily within the semiconductor and cloud
computing subsectors. After decades of unrealised hopes around artificial
intelligence, we believe that generative AI is likely to prove the
technology's so-called 'iPhone moment', the new user interface that sparks
mass adoption. Other AI models will come, compete, and possibly surpass
ChatGPT but it represents the first "hands- on introduction to how powerful
modern AI has got". It has stunned consumers, investors, and companies alike;
the risk and opportunity it poses to established market shares, consumer
behaviour and existing profit pools has ignited a powerful wave of AI
spending. Inevitably there will be technology casualties from AI disruption,
while investors will have to navigate periods when narrative and fundamentals
diverge. However, the "era of generative AI is just beginning" and our sector
has front row seats for what is likely to be one of the most disruptive
performances of our investment lifetimes.
Ben Rogoff & Ali Unwin
18 July 2023
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 2023 30 April 2022
US & Canada 72.8% 74.2%
Asia Pacific (ex-Japan) 10.4% 10.2%
Other Net Assets 6.6% 7.9%
Japan 4.4% 3.4%
Europe (inc -UK) 3.9% 2.9%
Middle East & Africa 1.2% 1.4%
Latin America 0.7% 0.0%
Market Capitalisation of Underlying Investments As at As at
30 April 2023 30 April 2022
>$10bn 92.1% 88.0%
$1bn-$10bn 7.5% 11.7%
<$1bn 0.4% 0.3%
All data sourced from Polar Capital LLP.
CLASSIFICATION OF INVESTMENTS*
as at 30 April 2023
North Europe Asia Pacific (inc. Middle East) Total Total Benchmark Weightings as at 30 April 2023
America (inc. Latin America) % % % 30 April 30 April %
2023 2022
% %
Software 22.7 0.1 1.3 24.1 27.6 29.0
Semiconductors & Semiconductor Equipment 15.9 3.3 4.8 24.0 22.4 22.6
Technology Hardware, Storage & Peripherals 10.4 - 3.0 13.4 14.6 21.5
Interactive Media & Services 9.8 - 1.9 11.7 14.0 15.0
IT Services 3.8 - 0.2 4.0 2.3 5.2
Broadline Retail 2.5 - 0.8 3.3 - 1.5
Financial Services 2.7 0.4 0.2 3.3 - 0.1
Electronic Equipment, Instruments & Components 0.1 - 1.3 1.4 1.6 0.5
Communications Equipment 1.4 - - 1.4 1.5 2.6
Hotels, Restaurants & Leisure 0.7 - 0.5 1.2 - 0.5
Automobiles 0.5 - 0.6 1.1 1.6 -
Entertainment 1.0 - - 1.0 1.2 0.6
Healthcare Equipment & Supplies 0.5 - 0.5 1.0 0.6 -
Ground Transportation 0.9 - - 0.9 - -
Machinery - - 0.9 0.9 0.7 -
Healthcare Technology 0.4 - - 0.4 - 0.2
Aerospace & Defence 0.2 - - 0.2 0.7 -
Electrical Equipment - 0.1 - 0.1 0.4 -
Internet & Direct Marketing Retail - - - - 2.9 -
Total investments (£2,640,177,000) 73.5 3.9 16.0 93.4 92.1
Other net assets (excluding loans) 6.4 0.9 1.1 8.4 9.6
Loans (1.0) - (0.8) (1.8) (1.7)
Grand total (net assets of £2,828,141,000) 78.9 4.8 16.3 100.0 -
At 30 April 2022 (net assets of £3,050,985,000) 79.3 5.2 15.5 - 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 2023
Value of holding % of net assets
Ranking 30 30 30 April 2023 30 April 2022
April April
2023 2022
2023 2022 Stock Sector Region £'000 £'000 % %
1 (1) Microsoft Software North America 302,791 336,977 10.7 11.0
2 (2) Apple Technology Hardware, Storage & Peripherals North America 284,199 305,244 10.0 10.1
3 (3) Alphabet Interactive Media & Services North America 174,388 249,058 6.2 8.2
4 (4) Nvidia Semiconductors & Semiconductor Equipment North America 130,855 95,065 4.6 3.1
5 (5) Advanced Micro Devices Semiconductors & Semiconductor Equipment North America 94,299 86,045 3.3 2.8
6 (6) Samsung Electronics Technology Hardware, Storage & Peripherals Asia Pacific 83,894 82,312 3.0 2.7
7 (11) Meta Platforms Interactive Media & Services North America 82,047 54,509 2.9 1.8
8 (7) Taiwan Semiconductor Semiconductors & Semiconductor Equipment Asia Pacific 61,421 82,012 2.2 2.7
9 (10) ServiceNow Software North America 51,884 56,280 1.8 1.8
10 (8) ASML Semiconductors & Semiconductor Equipment Europe 49,941 59,248 1.8 1.9
Top 10 investments 1,315,719 46.5
11 (9) Amazon.com Broadline Retail North America 46,756 57,558 1.7 1.9
12 (17) HubSpot Software North America 45,203 38,675 1.6 1.3
13 (13) Arista Networks Communications Equipment North America 38,201 44,318 1.4 1.5
14 (16) CrowdStrike Software North America 36,041 39,441 1.3 1.3
15 (14) Tencent Interactive Media & Services Asia Pacific 35,666 43,880 1.3 1.4
16 (15) KLA-Tencor Semiconductors & Semiconductor Equipment North America 35,072 39,816 1.2 1.3
17 (24) Mastercard Financial Services North America 34,908 26,330 1.2 0.9
18 (41) Palo Alto Networks Software North America 34,847 18,479 1.2 0.6
19 (-) Analog Devices Semiconductors & Semiconductor Equipment North America 33,975 - 1.2 -
20 (77) Infineon Technologies Semiconductors & Semiconductor Equipment Europe 33,792 6,891 1.2 0.2
Top 20 investments 1,690,180 59.8
21 (60) Workday Software North America 33,429 11,557 1.2 0.4
22 (38) Visa Financial Services North America 33,156 19,629 1.2 0.6
23 (21) Qualcomm Semiconductors & Semiconductor Equipment North America 32,525 32,622 1.1 1.0
24 (35) Monolithic Power Systems Semiconductors & Semiconductor Equipment North America 32,453 20,305 1.1 0.7
25 (45) Cloudflare IT Services North America 29,973 15,864 1.0 0.5
26 (51) Shopify IT Services North America 29,497 13,251 1.0 0.4
27 (42) Salesforce.com Software North America 27,910 18,315 1.0 0.6
28 (49) Snowflake IT Services North America 27,622 13,973 1.0 0.5
29 (80) Disco Corporation Semiconductors & Semiconductor Equipment Asia Pacific 26,960 6,256 1.0 0.2
30 (-) Uber Technologies Ground Transportation North America 25,788 - 0.9 -
Top 30 investments 1,989,493 70.3
31 (34) CyberArk Software Software Asia Pacific 24,330 21,721 0.9 0.7
32 (73) Keyence Electronic Equipment, Instruments & Components Asia Pacific 23,561 8,251 0.8 0.3
33 (28) Tokyo Electron Semiconductors & Semiconductor Equipment Asia Pacific 23,016 23,889 0.8 0.8
34 (40) Alibaba Broadline Retail Asia Pacific 22,333 18,888 0.8 0.6
35 (50) MongoDB IT Services North America 22,107 13,343 0.8 0.5
36 (-) MercadoLibre Broadline Retail North America 20,965 - 0.8 -
37 (26) Lattice Semiconductor Semiconductors & Semiconductor Equipment North America 20,572 24,788 0.7 0.8
38 (-) Dynatrace Software North America 19,644 - 0.7 -
39 (47) ON Semiconductor Semiconductors & Semiconductor Equipment North America 19,534 14,451 0.7 0.5
40 (37) Airbnb Hotels, Restaurants & Leisure North America 19,073 19,708 0.7 0.7
Top 40 investments 2,204,628 78.0
41 (-) Confluent Software North America 18,140 - 0.6 -
42 (72) Roblox Entertainment North America 17,444 8,655 0.6 0.3
43 (-) Baidu Interactive Media & Services Asia Pacific 16,616 - 0.6 -
44 (32) BYD Automobiles Asia Pacific 15,976 23,080 0.6 0.7
45 (-) Trip.Com Hotels, Restaurants & Leisure Asia Pacific 15,415 - 0.5 -
46 (-) Pinterest Interactive Media & Services North America 15,134 - 0.5 -
47 (56) eMemory Technology Semiconductors & Semiconductor Equipment Asia Pacific 14,524 12,388 0.5 0.4
48 (71) Hoya Healthcare Equipment & Supplies Asia Pacific 14,264 8,746 0.5 0.3
49 (18) Marvell Technology Semiconductors & Semiconductor Equipment North America 13,879 38,601 0.5 1.2
50 (23) Tesla Motors Automobiles North America 13,358 26,891 0.5 0.9
Top 50 investments 2,359,378 83.4
51 (-) Intuitive Surgical Healthcare Equipment & Supplies North America 13,230 - 0.5 -
52 (44) Smartsheet Software North America 13,018 16,414 0.5 0.5
53 (78) Harmonic Drive Systems Machinery Asia Pacific 12,777 6,430 0.5 0.2
54 (64) Paycom Software Software North America 12,567 10,780 0.4 0.3
55 (-) Adyen Financial Services Europe 12,348 - 0.4 -
56 (66) Atlassian Software Asia Pacific 12,039 9,414 0.4 0.3
57 (39) E Ink Electronic Equipment, Instruments & Components Asia Pacific 12,028 19,235 0.4 0.6
58 (68) Kinaxis Software North America 11,909 9,169 0.4 0.3
59 (36) Pure Storage Technology Hardware, Storage & Peripherals North America 10,694 19,712 0.4 0.7
60 (83) Intuit Software North America 10,538 5,521 0.4 0.2
Top 60 investments 2,480,526 87.7
61 (-) Veeva Systems Healthcare Technology North America 10,390 - 0.4 -
62 (-) Activision Entertainment North America 10,372 - 0.4 -
63 (58) SiTime Semiconductors & Semiconductor Equipment North America 9,912 11,860 0.4 0.4
64 (-) ASM International Semiconductors & Semiconductor Equipment Europe 9,614 - 0.3 -
65 (-) Flywire Financial Services North America 9,503 - 0.3 -
66 (30) Elastic Software North America 9,134 23,453 0.3 0.8
67 (55) SolarEdge Technologies Semiconductors & Semiconductor Equipment Asia Pacific 8,976 12,519 0.3 0.4
68 (-) Enphase Energy Semiconductors & Semiconductor Equipment North America 8,577 - 0.3 -
69 (-) First Solar Semiconductors & Semiconductor Equipment North America 7,708 - 0.3 -
70 (-) Teradyne Semiconductors & Semiconductor Equipment North America 7,012 - 0.2 -
Top 70 investments 2,571,724 90.9
71 (75) Fuji Machine Manufacturing Machinery Asia Pacific 5,680 7,403 0.2 0.2
72 (48) TripAdvisor Interactive Media & Services North America 5,535 14,362 0.2 0.5
73 (-) Nabtesco Machinery Asia Pacific 5,533 - 0.2 -
74 (33) Axon Enterprise Aerospace & defence North America 5,357 21,985 0.2 0.7
75 (-) GMO Payment Gateway Financial Services Asia Pacific 5,224 - 0.2 -
76 (92) Zuken IT Services Asia Pacific 5,187 3,081 0.2 0.1
77 (-) Freshworks Software North America 4,659 - 0.2 -
78 (46) Power Integrations Semiconductors & Semiconductor Equipment North America 4,388 14,930 0.2 0.5
79 (-) GitLab Software North America 4,063 - 0.2 -
80 (-) Darktrace Software Europe 4,039 - 0.1 -
Top 80 investments 2,621,389 92.8
81 (90) Impinj Semiconductors & Semiconductor Equipment North America 4,012 3,417 0.1 0.1
82 (-) Braze Software North America 3,668 - 0.1 -
83 (-) Cognex Electronic Equipment, Instruments & Components North America 3,471 - 0.1 -
84 (93) Seeing Machines Electronic Equipment, Instruments & Components Asia Pacific 3,265 2,894 0.1 0.1
85 (59) Ceres Power Electrical Equipment Europe 2,703 11,569 0.1 0.4
86 (-) HashiCorp Software North America 1,668 - 0.1 -
87 (96) Cermetek Microelectronics Electronic Equipment, Instruments & Components North America 1 1 - -
Total equities 2,640,177 93.4
Other net assets 187,964 6.6
Total net assets 2,828,141 100.0
Note: Asia Pacific includes Middle East and North America includes Latin
America.
STRATEGIC REPORT
This report has been provided in accordance with The Companies Act 2006
(Strategic Report and Directors' Report) Regulations 2013. The aim of this
report is to provide information to shareholders on the Company's strategy and
the potential for such to succeed, including a fair review of the Company's
performance during the year ended 30 April 2023, the position of the Company
at the year end and a description of the principal risks and uncertainties,
including both economic and business risk factors underlying any such
forward-looking information.
Business Model and Regulatory Requirements
The Company's business model follows that of an externally managed investment
trust providing shareholders with access to an actively managed portfolio of
technology shares selected on a worldwide basis.
The Company is designated as an Alternative Investment Fund ('AIF') under the
Alternative Investment Fund Management Directive ('AIFMD') and, as required by
the Directive, has contracted with Polar Capital LLP to act as the Alternative
Investment Fund Manager ('AIFM') and Investment Manager (or 'Manager') and
HSBC Bank Plc to act as the Depositary.
Both the AIFM and the Depositary have responsibilities under AIFMD for
ensuring that the assets of the Company are managed in accordance with the
Investment Policy and are held in safe custody. The Board remains responsible
for setting the investment strategy and operational guidelines as well as
meeting the requirements of the FCA's Listing Rules and the Companies Act
2006.
The AIFMD requires certain information to be made available to investors in
AIFs before they invest and requires that material changes to this information
be disclosed in the Annual Report of each AIF. Investor Disclosure Documents,
which set out information on the Company's investment strategy and policies,
leverage, risk, liquidity, administration, management, fees, conflicts of
interest and other shareholder information are available on the Company's
website.
There have been no material changes to the information requiring disclosure.
Any information requiring immediate disclosure pursuant to the AIFMD will be
disclosed to the London Stock Exchange. Statements from the Depositary and the
AIFM can be found on the Company's website.
Investment Objective and Policy
While observing the Dow Jones Global Technology Index (total return, Sterling
adjusted, with the removal of relevant withholding taxes) as the Benchmark
against which NAV performance is measured, shareholders should be aware that
the portfolio is actively managed and is not designed to track any particular
benchmark index or market. The performance of the portfolio can vary from the
Benchmark performance, at times considerably.
Over recent decades the technology industry has been one of the most vibrant,
dynamic and rapidly growing segments of the global economy. Technology
companies offer the potential for substantially faster earnings growth than
the broader market.
Investments are selected for their potential shareholder returns, not on the
basis of technology for its own sake. The Investment Manager believes in
rigorous fundamental analysis and focuses on:
· management quality;
· the identification of new growth markets;
· the globalisation of major technology trends; and
· exploiting international valuation anomalies and sector
volatility.
Changes to Investment Policy
Any material change to the Investment Policy will require the approval of the
shareholders by way of an ordinary resolution at a general meeting. The
Company will promptly issue an announcement to inform shareholders and the
public of any change to its Investment Policy. No changes to the Investment
Policy are presently anticipated.
Investment Strategy Guidelines and Board Limits
The Board has established guidelines for the Investment Manager in pursuing
the Investment Policy. The Board uses these guidelines to monitor the
portfolio's exposure to different geographical markets, sub-sectors within
technology and the spread of investments across different market
capitalisations.
These guidelines are kept under review as cyclical changes in markets and new
technologies will bring certain sub-sectors or companies of a particular size
or market capitalisation into or out of favour.
Asset Allocation
Technology may be defined as the application of scientific knowledge for
practical purposes and technology companies are defined accordingly. While
this offers a very broad and dynamic investing universe and covers many
different companies, the portfolio of the Company (the 'Portfolio') is focused
on companies which use technology or which develop and supply technological
solutions as a core part of their business models. This includes areas as
diverse as information, media, communications, environmental, healthcare,
finance, e-commerce and renewable energy, as well as the more obvious
applications such as computing and associated industries.
The Board has agreed a set of parameters which seek to ensure that investment
risk is spread and diversified. The Board believes that this provides the
necessary flexibility for the Investment Manager to pursue the Investment
Objective, given the dynamic and rapid changes in the field of technology,
while maintaining a spread of investments.
Market Parameters
With current and foreseeable investment conditions, the Portfolio will be
invested in accordance with the Investment Objective and Policy across
worldwide markets, generally within the following ranges:
· North America up to 85%.
· Europe up to 40%.
· Japan and Asia up to 55%.
· Rest of the world up to 10%.
The Board has set specific upper exposure limits for certain countries where
they believe there may be an elevated risk. As reported last year, the Company
does not hold stocks in Russia and has no intention of doing so in the near
future.
The Company will at all times invest and manage its assets in a manner that is
consistent with spreading investment risk and invests in a Portfolio comprised
primarily of international quoted equities which is diversified across both
regions and sectors.
Investment Limits
In applying the Policy, the Company will satisfy the following investment
restrictions:
· The Company's interest in any one company will not exceed 10% of
the gross assets of the Company, save where the Benchmark weighting of any
investee company in the Company's portfolio exceeds this level, in which case
the Company will be permitted to increase its exposure to such investee
company up to the Benchmark 'neutral' weighting of that company or, if lower,
15% of the Company's gross assets.
· The Company will have a maximum exposure to companies listed in
emerging markets (as defined by the MSCI Emerging Markets Index) of 25% of its
gross assets.
· The Company may invest in unquoted companies from time to time,
subject to prior Board approval. Investments in unquoted companies in
aggregate will not exceed 10% of the gross assets of the Company.
Such limits are measured at the time of acquisition of the relevant investment
and whenever the Company increases the relevant holding.
In addition to the restrictions set out above, the Company is subject to
Chapter 15 of the FCA's Listing Rules which apply to closed ended investment
companies with a premium listing on the Official List of the London Stock
Exchange.
In order to comply with the current Listing Rules, the Company will not invest
more than 10% of its total assets at the time of acquisition in other listed
closed ended investment funds, whether managed by the Investment Manager or
not. This restriction does not apply to investments in closed ended investment
funds which themselves have published investment policies to invest no more
than 15% of their total assets in other listed closed ended investment funds.
However, the Company will not in any case invest more than 15% of its total
assets in other closed ended investment funds.
Cash, Borrowings (Gearing) and Derivatives
The Company may borrow money to invest in the Portfolio over both the long and
short-term. Any commitment to borrow funds is agreed by the Board and the
AIFM.
The Investment Manager may also use from time-to-time derivative instruments,
as approved by the Board, such as financial futures, options,
contracts-for-difference and currency hedges. These are used for the purpose
of efficient portfolio management. Any such use of derivatives will be made in
accordance with the Company's policies on spreading investment risk as set out
in this investment policy and any leverage resulting from the use of such
derivatives will be subject to the restrictions on borrowings.
Cash
The Company may hold cash or cash equivalents if the Investment Manager feels
that these will, at a particular time or over a period, enhance the
performance of the Portfolio. The Board has agreed that management of cash may
be achieved through the purchase of appropriate government bonds, money market
funds or bank deposits depending on the Investment Manager's view of the
investment opportunities and the benefits of diversification.
Gearing and Derivatives
The Company's Articles of Association permit borrowings up to the amount of
its paid-up share capital plus capital and revenue reserves. The Company may
use gearing in the form of bank loans which are used on a tactical basis by
the Investment Manager, when considered appropriate. The Board monitors the
level of gearing available to the Portfolio Manager and agrees, in conjunction
with the AIFM, all bank facilities in accordance with the Investment Policy.
The Board approves and controls all bank facilities and any net borrowings
over 20% of the Company's net assets at the time of draw down will only be
made after approval by the Board.
During the year the Company had two loan facilities with ING Bank NV: One for
36m US Dollars at a fixed rate of 5.43% pa and one for 3.8bn Japanese Yen at a
fixed rate of 1.13% pa, both of which were drawn down on 30 September 2022.
These loans fall due for repayment on 30 September 2024. The loan facilities
will be reviewed and may be replaced on expiry.
Details of the loans are set out in Note 17 to the Financial Statements.
The Investment Manager's use of derivatives is monitored by the Board in
accordance with the Company's investment policy and any leverage from the use
of such derivatives will be subject to the restriction on gearing.
Future Developments
The Board remains positive on the longer-term outlook for technology and the
Company will continue to pursue its Investment Objective. The outlook for
future performance is dependent to a significant degree on the world's
financial markets and their reactions to economic events and other
geopolitical forces. In accordance with the Articles of Association, the Board
will propose the next five-yearly continuation vote of the Company at the
Annual General Meeting to be held in September 2025. The Chair's Statement and
the Investment Manager's Report comment on the outlook.
Dividends
The Company's revenue varies from year to year and the Board considers the
dividend position each year in order to maintain the Company's status as an
investment trust. The revenue reserve remains in deficit and historically the
Company has not paid dividends given its focus on capital growth.
The Directors do not recommend, for the year under review, the payment of a
dividend (2022: no dividend recommendation).
Service Providers
Polar Capital LLP has been appointed to act as the Investment Manager and AIFM
as well as to provide or procure company secretarial services, marketing and
website services which it arranges through Huguenot Limited, and
administrative services, including accounting, portfolio valuation and trade
settlement which it has arranged to deliver through HSBC Securities Services
('HSS' or 'the Administrator').
The Company also contracts directly, on terms agreed periodically, with a
number of third parties for the provision of specialist services. The cost of
the services outlined below are paid for directly by the Company and are
separate from the Investment Management Fee payable to Polar Capital:
· Stifel Nicolaus Europe Limited as Corporate Broker;
· Equiniti Limited as Share Registrars;
· HSBC Securities Services as Custodian and Depositary;
· RD:IR for Investor Relations and Shareholder Analysis;
· Camarco as PR advisors; and
· Perivan Limited as designers and printers for shareholder
communications.
Investment Management Company and Management of the Portfolio
As the Company is an investment vehicle for shareholders, the Directors have
sought to ensure that the business of the Company is managed by a leading
specialist investment management team and that the investment strategy remains
attractive to shareholders. The Directors believe that a strong working
relationship with the investment management team will help to achieve the
optimum return for shareholders. As such, the Board and the Investment Manager
operate in a supportive, co-operative and open environment.
The Investment Manager is Polar Capital LLP ('Polar Capital'), which is
authorised and regulated by the Financial Conduct Authority, to act as
Investment Manager and AIFM of the Company with sole responsibility for the
discretionary management of the Company's assets (including uninvested cash)
and sole responsibility to take decisions as to the purchase and sale of
individual investments. The Investment Manager also has responsibility for
asset allocation within the limits of the investment policy and guidelines
established and regularly reviewed by the Board, all subject to the overall
control and supervision of the Board.
Polar Capital provides a team of technology specialists led by Ben Rogoff.
Each team member focuses on specific areas while Ben Rogoff, with Alastair
Unwin as Deputy, has overall responsibility for the portfolio. Polar Capital
also has other specialist and geographically focused investment teams which
may contribute to idea generation. The technology investment team's
biographies can be found in the Annual Report and Accounts. The Investment
Manager has other investment resources which support the investment team and
has experience in administering and managing other investment companies.
Fee Arrangements
Under the terms of the Investment Management Agreement, the Company pays to
the Investment Manager a base fee, and in certain performance circumstances, a
performance fee.
Management Fee
With effect from 1 May 2022, the base management fee paid by the Company
monthly in arrears to the Manager is calculated on the daily Net Asset Value
('NAV') as follows:
· Tier 1: 0.80 per cent. for such of the NAV up to and including
£2bn;
· Tier 2: 0.70 per cent. for such of the NAV between £2bn and
£3.5bn; and
· Tier 3: 0.60 per cent. for such of the NAV above £3.5bn.
Any investment in funds managed by Polar Capital are wholly excluded from the
base management fee calculation. Management fees of £21,918,000 (2022:
£28,281,000) have been paid for the year to 30 April 2023 of which
£1,827,000 (2022: £6,374,000) was outstanding at the year end.
Under the terms of the IMA the Board may undertake a three-yearly review of
the fee arrangements, the next of which will commence in 2025, with the
anticipation that any changes proposed and subsequently agreed will take
effect from the start of the following financial year.
Further details on the performance fee methodology and calculation are
provided within the Shareholder Information section of the Annual Report and
Accounts.
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 believes that despite the market volatility
experienced during the financial year under review, there continues to be
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 2028, the Board has taken into
account:
The ability of the Company to meet its liabilities as they fall due The assessment took account of the Company's current financial position, its
cash flows and its liquidity position, the principal risks as set out in the
Strategic Report and the Committee's assessment of any material uncertainties
and events that might cast significant doubt upon the Company's ability to
continue as a going concern. The assessment was then subject to a sensitivity
analysis over a five-year period, which stress tested a number of the key
assumptions underlying the forecasts both individually and in aggregate for
normal, favourable and stressed conditions and considered whether financing
facilities will be renewed.
The portfolio comprises a spread of investments by size of company, traded on
major international stock exchanges.
99.8% 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 2023
(excluding performance fees) were 0.81% (2022: 0.84%).
Repayment of the bank facilities, drawn down at the year end, and due in
September 2024, would equate to approximately 21% of the cash or cash
equivalents available to the Company at 30 April 2023, without having to
liquidate the portfolio of investments.
The Company has no employees and consequently does not have redundancy or
other employment related liabilities or responsibilities.
The Company will propose a resolution on the continuation of the Company at Under the AIC SORP, where Shareholders have the opportunity to vote in favour
the AGM in September 2025 or against a company continuing in existence, it will normally be the case
that Shareholders will have to vote in favour of a liquidation before it can
occur. It is reasonable to believe that if positive long-term performance is
achieved over the period until the next continuation vote shareholders will
vote in favour of continuation.
Factors impacting the forthcoming years The Investment Manager's Report and the Strategic Report provide a
comprehensive review of factors which may impact the Company in forthcoming
years. In making its assessment, the Board considered these factors alongside
the Principal Risks and Uncertainties, and their corresponding mitigation and
controls, in the Annual Report and Accounts.
Regulatory changes Despite the increased level of regulation and the unpredictability of future
requirements it is considered that regulation will not increase to a level
that makes the running of the Company uneconomical in comparison to other
competitive products.
Closed-ended Investment Funds It is believed that the business model of being a closed ended investment fund
will continue to be wanted by investors and the Investment Objective will
continue to be desired and achievable.
Further, the Board recognises that there has been significant progress made in
the technology sector and immense change in what is deemed to be a technology
company which broadens the universe for potential investment. Technology
remains a specialist sector for which there continues to be a need for
independent specialist sector investment expertise. The Board therefore have a
reasonable expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the five years to 30 April
2028.
GOING CONCERN
The Board has also considered the ability of the Company to adopt the Going
Concern basis for the preparation of the Financial Statements.
Consideration included the Company's current financial position, its liquidity
position and its assessment. In addition, the Company's cash flows were
stressed tested for base case and reasonable worse case scenarios such as
higher inflation and interest rate increases. Further detail on the assessment
for going concern is provided in the Report of the Audit Committee and in Note
2(a) of the Financial Statements.
KEY PERFORMANCE INDICATORS
The Board appraises the performance of the Company and the Investment Manager
as the key supplier of services to the Company against Key Performance
Indicators ('KPIs'). The objectives of the KPIs comprise both specific
financial and shareholder related measures and these KPIs have not differed
from the prior year.
KPI Control process Outcome
The provision of investment returns to shareholders measured by long-term NAV The Board reviews the performance of the portfolio in detail and hears the At 30 April 2023 the total net assets of the Company amounted to
growth and relative performance against the views of the Investment Manager at each meeting. £2,828,141,000 (2022: £3,050,985,000). The Company's NAV has, over the year
to 30 April 2023, underperformed the Benchmark by 5.7%. The NAV per share fell
Benchmark. by 2.8% from 2305.13p to 2239.48p while the Benchmark increased 2.9% in
Sterling terms over the same period. As at 30 April 2023 the portfolio
The Board discusses the market factors giving rise to any discount or premium, comprised 87 (2022: 96) investments.
the long or short-term nature of those factors and the overall benefit to
The Board is aware of the vulnerability of a sector specialist investment Shareholders of any actions. The market liquidity is also considered when
trust to a change in investor sentiment to that sector. authorising the issue or buy back of shares when appropriate market conditions
prevail. Investment performance is explained in the Chair's Statement and the
Investment Manager's Report. The performance of the Company over the
longer-term is shown by the ten year historic performance chart in the Annual
Report and Accounts.
Monitoring and reacting to issues created by the discount or premium of the The Board receives regular information on the composition of the share The discount/premium of the ordinary share price to NAV per ordinary share
ordinary share price to the NAV per ordinary share with the aim of reduced register including trading (diluted
discount volatility for Shareholders.
patterns and discount/premium levels of the Company's ordinary shares. when appropriate) has been as follows:
Financial year to 30 April 2023
A daily NAV per share, diluted when appropriate, calculated in accordance with • Minimum discount over year: 5.55%
the AIC guidelines, is issued to the London
• Maximum discount over year: 17.28%
Stock Exchange.
• Average discount over year: 11.85%
The Company does not have an absolute target discount level at which it buys
back shares but has historically bought back significant amounts of the In the year ended 30 April 2023, the Company bought back 6,070,882 ordinary
outstanding share capital when deemed appropriate shares (representing 4.4% of the issued share capital) at an average discount
of 11.95%, Subsequent to the year end and to 13 July 2023, the Company bought
and will continue to do so. This approach does not preclude a more active back a further 1,229,369 shares.
approach as discounts widen and the Investment Manager may consider that a
single purchase or a series of purchases of shares in current or greater
volumes, which would
Over the previous five financial years ended 30 April 2023
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 · Maximum premium over period: 6.06%
Company's
· Maximum discount over period: 17.28%
portfolio. As always, the Board keeps the level of discount under careful
review and has been buying back shares actively in recent months at levels set · Average discount over period: 6.52%
out in the adjacent column.
Over the previous five financial years ended 30 April 2023 the Company has
issued 3,520,000 Ordinary shares as a result of market demand.
To qualify and continue to The Board receives regular financial information which discloses the current This has been achieved for every year since launch in 1996.
and projected financial position of the Company against each of the tests
meet the requirements for Sections 1158 and 1159 of the Corporation Tax Act set out
2010
in Sections 1158 and 1159. HMRC has approved the investment trust status subject to the Company
('investment trust status'). 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 2023 and will continue to be met.
Efficient operation of the Company with appropriate investment management The Board considers annually the services provided by the Investment Manager, The Board has received and considered satisfactory the internal controls
resources and services from third party suppliers within a stable and both investment and administrative, and reviews on a cycle the provision and report of the Investment Manager and other key suppliers including contingency
risk-controlled environment. costs of services provided by third parties. arrangements to facilitate the ongoing operations of the Company in the event
of withdrawal or failure of services.
The annual operating expenses are reviewed and any non-recurring project
related expenditure is approved separately by the Board. The ongoing charges of the Company for the year ended 30 April 2023 excluding
the performance fee were 0.81% of net assets (2022: 0.84%). There was no
performance fee payable for the year ended 30 April 2023 (2022: nil) and
therefore the ongoing charges including the performance fee were 0.81% (2022:
0.84%) 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. Emerging risks
during the financial year under review included Climate change as well as the
deterioration of relations between China and Taiwan and the impact that a war
between the two countries may have on the Company's portfolio, the market and
global economy. This has also been captured in our risk map as an emerging
risk. 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.
The Principal Risks post mitigation are detailed on the following pages along
with a high-level summary of their management through mitigation and status
arrows to indicate any change in assessment over the past financial year.
Management of risks through Mitigation & Controls
PORTFOLIO RISK Trend year on year
Failure to achieve investment objective 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 market volatility experienced during the year under review and the
increased timeframe over which the Company's performance has suffered, the
Board agreed to hold this risk at the elevated level following the Company's
year-end.
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.
OPERATIONAL RISK
Failure in services provided by the Investment Manager
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 Depositary.
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.
IT failure, Fraud and Cyber Risk
The number, severity and success rate of cyberattacks have increased
considerably in 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 Company Secretary,
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.
In light of the increased potential for fraud and cyber attacks during the
year under review, the Board decided to elevate the pre-mitigation score
associated with this risk, the post mitigation remains unchanged.
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 Administrator
services (see glossary for further information) 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 Administrator and verified by the Investment Manager.
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. The impact on the portfolio from
geopolitical changes is monitored through existing control systems and
discussed regularly by the Board. While it is difficult to quantify the impact
of such changes, it is not anticipated that they will fundamentally affect the
business of the Company.
Uncertainty in regulatory environment (including inflation, recession and
interest rates)
The Board regularly receives reports which detail corporate matters including
legislative and regulatory developments. Guidance on implementation is sought
from and provided via the Company Secretary and professional advisers where
necessary.
Note 27 describes the impact of changes in foreign exchange rates. The
Company's largest exposure is to US$ holdings. The Company has a varying level
of cash which is primarily held in US Dollars and also has loan facilities in
both US Dollars and Japanese Yen. 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.
Ali Unwin was appointed as Deputy Fund Manager and is responsible for managing
the portfolio of the Company alongside Ben Rogoff, Lead Manager since 1 May
2006.
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 detailed in s171-177 of the
Companies Act 2006. The Board recognises that under s172, Directors have a
duty to promote the success of the Company for the benefit of its shareholders
as a whole and in doing so have regard to the consequences of any decision in
the long term, as well as having regard to the Company's wider stakeholders
amongst other considerations. The fulfilment of this duty not only helps the
Company achieve its Investment Objective but ensures decisions are made in a
responsible and sustainable way for shareholders.
To ensure that the Directors are aware of, and understand, their duties, they
are provided with an induction, including details of all relevant regulatory
and legal duties as a director when they first join the Board, and continue to
receive regular and ongoing updates on relevant good practice, legislative and
regulatory developments. They also have continued access to the advice and
services of the Company Secretary and, where deemed necessary, the Directors
may seek independent professional advice. The Schedule of Matters Reserved for
the Board, as well as the Terms of Reference of its committees are reviewed
annually and further describe Directors' responsibilities and obligations and
include any statutory and regulatory duties.
The Board seeks to understand the needs and priorities of the Company's
shareholders and stakeholders and these are taken into account during all of
its discussions and as part of its decision-making process. As an externally
managed investment company, the Company does not have any employees or
customers, however the key stakeholders and a summary of the Board's
consideration and actions where possible in relation to each group of
stakeholders are described in the table below.
SHAREHOLDERS
Engagement
The Directors have considered shareholder engagement when making the strategic
decisions during the year that affect shareholders, the confirmation of the
continued appointment of the Investment Manager and the recommendation that
shareholders vote in favour of the resolutions to be proposed at the AGM. The
Directors have also engaged with and taken account of shareholders' interests
during the year.
The Portfolio Manager has held numerous face to face meetings and interacted
with a number of shareholders and institutions in addition to presenting at a
number of conferences during the year. Where appropriate, directors are
invited to attend these conferences to meet with shareholders and prospective
investors; in addition, the annual Investor Relations dinner was again held in
October 2022. Positive feedback was received from all attendees of the dinner
who welcomed the opportunity to interact with the Board and Manager.
The Chair will write to the Company's largest shareholders following the
publication of the Annual Report and Financial Statements offering the
opportunity to meet to discuss any matters of interest or concern.
The AGM of the Company was held as a hybrid event in September 2022 and the
Board were delighted to once again welcome shareholders to the meeting in
person. However the online level of presence was minimal. The Company's next
AGM will be held at 2:30pm on Thursday 7 September 2023. Following the trials
of holding semi-virtual and hybrid meetings, and considering the feedback
received from shareholders, we have decided to return to an in-person only AGM
and will not be providing a facility for online attendance. The Board
recognises that the AGM is an important event for shareholders and the Company
and is keen to ensure that shareholders are able to exercise their right to
attend, vote and participate, we have therefore considered the meeting
location and, based on feedback received, have moved to a central London
office which is close to Liverpool Street Station with easy access from a
number of directions. The meeting will therefore be held at the offices of
Herbert Smith Freehills, Exchange House, Primrose Street, London, EC2A 2EG.
Once again, we will be inviting feedback from shareholders and will take this
into account when planning the 2024 meeting.
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 will give an in-person presentation and the Chair of the
Board and all members of the Board will be in attendance and will be available
to respond to questions and concerns from shareholders.
Should any significant votes be cast against a resolution, the Board will
engage with shareholders. Should this situation occur, the Board will explain
in its announcement of the results of the AGM the actions it intends to take
to consult shareholders in order to understand the reasons behind the votes
against. Following the consultation, an update will be published no later than
six months after the AGM and the next Annual Report will detail the impact the
shareholder feedback has had on any decisions the Board has taken and any
actions or resolutions proposed.
Relations with Shareholders
The Board and the Manager consider maintaining good communications and
engaging with shareholders through meetings and presentations a key priority.
The Board regularly considers the share register of the Company and receives
regular reports from the Manager and the Corporate Broker on shareholder
meetings attended and any concerns that have been raised in those meetings.
The Board also reviews correspondence from shareholders and may attend
investor presentations.
The Chair has met with shareholders representing in the region of 12% 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 Chair or the
Board without intervention of the Manager or Company Secretary, they may do
this either in person at the AGM or at other events, or in writing either via
the registered office of the Company or to the Chair's specific email address
Chair.pctt@polarcapital.co.uk.
Shareholders are kept informed by the publication of annual and half year
reports, monthly fact sheets, access to commentary from the Investment Manager
via the Company's website and attendance at events in which the Investment
Manager presents.
The Company, through the sales and marketing efforts of the Investment
Manager, encourages retail investment platforms to engage with underlying
shareholders in relation to Company communications and enable those
shareholders to cast their votes on shareholder resolutions; the Company
however has no responsibility over such platforms. The Board therefore
encourage shareholders invested via the platforms to regularly visit the
Company's website or to make contact with the Company directly to obtain
copies of shareholder communications.
The Company has also made arrangements with its registrar for shareholders,
who own their shares directly rather than through a nominee or share scheme,
to view their account online at www.shareview.co.uk. Other services are also
available via this service.
Outcomes and strategic decisions during the year
AGM
As detailed above the Board have decided to hold an in-person only AGM this
year and have changed the location to accommodate feedback received in 2022.
Further details can be found in the Shareholder Information section of the
Annual Report and Accounts.
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
6,070,882 shares during the year under review. Subsequent to the year end and
to 13 July 2023, the Company bought back a further 1,229,369 shares.
Gearing
The Company is aware of the positive effect that leverage can have in
increasing the return to shareholders when utilised. The Company has term
loans with ING Bank NV, which expire in September 2024, consideration will be
given to renewal or replacement ahead of the expiry date. Please see note 17
for further information.
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
The remuneration of Directors is reviewed regularly and was increased with
effect from 1 May 2022 and again from 1 May 2023, to bring the fees of the
Directors more in line with the wider market. Further details are provided in
the Report of the Remuneration Committee in the Annual Report and Accounts.
THE INVESTMENT MANAGER
Engagement
Through the Board meeting cycle, regular updates and the work of the
Management Engagement Committee reviewing the services of the Investment
Manager twice yearly, the Board is able to safeguard shareholder interests by:
· Ensuring adherence to the Investment Management Policy and
reviewing the agreed management and performance fees;
· Ensuring excessive risk is not undertaken in the pursuit of
investment performance;
· Reviewing the Investment Manager's decision making and
consistency in investment process;
· Ensuring compliance with statutory legal requirements,
regulations and other advisory guidance such as consumer duty and aspects of
operational resilience; and
· Considering the succession plans for the Technology Team in
ensuring the continued provision of portfolio management services.
Maintaining a close and constructive working relationship with the Manager is
crucial as the Board and the Investment Manager both aim to continue to
achieve consistent, long-term returns in line with the Investment Objective.
The culture which the Board maintains to ensure this involves encouraging open
discussion with the Investment Manager; recognising that the interests of
shareholders and the Investment Manager are aligned, providing constructive
challenge and making Directors' experience available to support the Investment
Manager. This culture is aligned with the collegiate and meritocratic culture
which Polar Capital has developed and maintains.
Outcomes and strategic decisions during the year
ESG
The Board continued to engage with the Investment manager to understand how
ESG has been integrated into the overall house style, the technology team
investment approach and decision making as well as the methodology behind
this. The Board also receives information on how ESG affects Polar Capital as
a business and the technology team in particular.
Consumer Duty
The Board has worked with the Investment Manager to ensure the obligations of
the new Consumer Duty regulations are appropriately applied to the Company. In
light of the obligations, all communications including the website, fact
sheets and other published documentation, have been reviewed to ensure they
are appropriate for all end users. A 'value for money' assessment has also
been undertaken and is made available to distributors on request for their due
diligence processes.
Management
The Management Engagement Committee has recommended the continued appointment
of the Investment Manager on the terms agreed within the Investment Management
Agreement.
INVESTEE COMPANIES
Stewardship
The Board has instructed the Investment Manager to take into account the
published corporate governance policies of the companies in which it invests.
The Board has also considered the Investment Manager's Stewardship Code and
Proxy Voting Policy. The voting policy is for the Investment Manager to vote
at all general meetings of companies in favour of resolutions proposed by the
management where it believes that the proposals are in the interests of
shareholders. However, in exceptional cases, where it believes that a
resolution could be detrimental to the interests of shareholders or the
financial performance of the Company, appropriate notification will be given
and abstentions or a vote against will be lodged.
The Investment Manager reports to the Board, when requested, on the
application of the Stewardship Code and Voting Policy. The Investment
Manager's Stewardship Code and Voting Policy can be found on the Investment
Manager's website in the Corporate Governance section (www.polarcapital.co.uk
(http://www.polarcapital.co.uk) ).
The Technology Investment Team also use the services of ISS to assist with
their own evaluation of companies' proposals or reporting ahead of casting
votes on behalf of the Company at their general meetings. In the event that an
investee company has share blocking in place, the default position is to
refrain from voting to ensure the ability to trade these stocks if required.
During the year ended 30 April 2023, votes were cast at 99% of investee
company general meetings held. At 52% of those meetings a vote was either cast
against management recommendation, withheld or abstained from. Further
information on how the Investment Manager considers ESG in its engagement with
investee companies can be found in the ESG Report.
Outcomes and strategic decisions during the year
During the year the Board discussed the impact of ESG and other market factors
and how the Investment Manager factors these into its strategy, investment and
decision-making process. The Board receives information on the ratings of
investee companies and is able to use this as tool to inform discussions with
the Manager during Board meetings.
SERVICE PROVIDERS
Engagement
The Directors have frequent engagement with the Company's other key service
providers through the annual cycle of reporting, site visits and due diligence
meetings. The schedule of deep-dive in-person meetings re-commenced in 2023.
This engagement is completed with the aim of having effective oversight of
delegated services, seeking to improve the processes for the benefit of the
Company and to understand the needs and views of the Company's service
providers, as stakeholders in the Company. Further information on the Board's
engagement with service providers is included in the Corporate Governance
Statement and the Report of the Audit Committee. During the year under review,
due diligence meetings have been undertaken by the Investment Manager and
where possible, service providers have joined meetings to present their
reports directly to the Board or the Audit Committee as appropriate.
Outcomes and strategic decisions during the year
The reviews of the Company's service providers have been positive and the
Directors believe their continued appointment is in the best interests of the
shareholders and the Company as a whole. The accounting and administration
services of HSBC Securities Services (HSS) are contracted through Polar
Capital and provided to the Company under the terms of the IMA. The Board,
through due diligence undertaken by the Company Secretary and the Polar
Capital Compliance team, is satisfied that the service received continues to
be of a high standard.
PROXY ADVISORS
Engagement
The support of proxy adviser agencies is important to the Directors, as the
Company seeks to retain a reputation for high standards of corporate
governance, which the Directors believe contributes to the long-term
sustainable success of the Company. The Directors consider the recommendations
of these various proxy voting agencies when contemplating decisions that will
affect shareholders and also when reporting to shareholders through the Half
Year and Annual Reports.
Recognising the principles of stewardship, as promoted by the UK Stewardship
Code, the Board welcomes engagement with all of its investors. The Board
recognises that the views, questions from, and recommendations of many
institutional investors and proxy adviser agencies provide a valuable feedback
mechanism and play a part in highlighting evolving shareholders' expectations
and concerns.
Outcomes and strategic decisions during this year
Where possible the Chair and other representatives of the Company have engaged
with the stewardship teams of some larger investors to understand and address
their expectations in terms of board governance, recruitment and diversity.
Prior to the Company's AGMs, the Company engages with agencies including PIRC
and ISS to fact check their advisory reports and clarify any areas or topics
contained within the report. This ensures that whilst the proxy advisory
reports provided to shareholders are objective and independent, the Company's
actions and intentions are represented as clearly as possible to assist with
shareholders' decision making when considering the resolutions proposed at the
AGM.
THE AIC
Engagement
The Company is a member of the AIC and has supported lobbying activities 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 18 July 2023
By order of the Board
Jumoke Kupoluyi, ACG
Polar Capital Secretarial Services Limited
Company Secretary
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK-adopted international accounting standards
and applicable law. Under company law the directors must not approve the
financial statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of its profit or loss for that
period. In preparing these financial statements, the Directors are required
to:
· select suitable accounting policies and then apply them
consistently;
· make judgements and estimates that are reasonable, relevant and
reliable;
· state whether they have been prepared in accordance with
UK-adopted international accounting standards;
· assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
· use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
Act 2006. They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND
FINANCIAL STATEMENTS
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the company; and
· the Strategic Report includes a fair review of the development
and performance of the business and the position of the issuer, together with
a description of the principal risks and uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
Catherine Cripps
Chair
18 July 2023
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 2023 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 2023
have not yet been delivered to the Registrar of Companies. The figures and
financial information for the year ended 30 April 2022 are extracted from the
published Annual Report and Financial Statements for the year ended 30 April
2022 and do not constitute the statutory accounts for that year. The Annual
Report and Financial Statements for the year ended 30 April 2022 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 2023
Notes Year ended 30 April 2023 Year ended 30 April 2022
Revenue return Capital return Total return Revenue return Capital return Total return
£'000 £'000 £'000 £'000 £'000 £'000
Investment income 3 16,160 42 16,202 15,870 - 15,870
Other operating income 4 3,820 - 3,820 31 - 31
Losses on investments held at fair value 5 - (106,807) (106,807) - (253,694) (253,694)
Gains/(losses) on derivatives 6 - 34 34 - (5,799) (5,799)
Other currency gains 7 - 8,409 8,409 - 17,535 17,535
Total income 19,980 (98,322) (78,342) 15,901 (241,958) (226,057)
-
-
-
15,9018,164
Expenses
Investment management fee 8 (21,918) - (21,918) (28,281) - (28,281)
Other administrative expenses 9 (1,176) - (1,176) (1,335) - (1,335)
Total expenses (23,094) - (23,094) (29,616) - (29,616)
Loss before finance costs and tax (3,114) (98,322) (101,436) (13,715) (241,958) (255,673)
Finance costs 10 (1,598) - (1,598) (973) - (973)
Loss before tax (4,712) (98,322) (103,034) (14,688) (241,958) (256,646)
Tax 11 (2,148) - (2,148) (2,000) - (2,000)
Net loss for the year and total comprehensive expense (6,860) (98,322) (105,182) (16,688) (241,958) (258,646)
Loss per share (basic and diluted) (pence) 12 (5.30) (75.98) (81.28) (12.36) (179.25) (191.61)
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 2023
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 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
Total comprehensive expense:
Loss for the year to 30 April 2023 - - - - (98,322) (6,860) (105,182)
Transactions with owners, recorded directly to equity:
Ordinary shares repurchased into treasury 15 - - - - (117,662) - (117,662)
Total equity at 30 April 2023 34,329 12,802 223,374 7,536 2,683,759 (133,659) 2,828,141
The notes below form part of these Financial Statements.
BALANCE SHEET
as at 30 April 2023
Notes 30 April 2023 30 April 2022
£'000 £'000
Non current assets
Investments held at fair value through profit or loss 13 2,640,177 2,811,080
Current assets
Receivables 20,605 31,096
Overseas tax recoverable 379 286
Cash and cash equivalents 14 239,096 311,363
Derivative financial instruments 13 2,571 6,479
262,651 349,224
Total assets 2,902,828 3,160,304
Current liabilities
Payables (23,842) (57,284)
Bank loans - (52,035)
(23,842) (109,319)
Non current liabilities
Bank loans (50,845) -
Net assets 2,828,141 3,050,985
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 2,683,759 2,899,743
Revenue reserve (133,659) (126,799)
Total equity 2,828,141 3,050,985
Net asset value per ordinary share (pence) 2239.48 2305.13
The Financial Statements, were approved and authorised for issue by the Board
of Directors on 18 July 2023 and signed on its behalf by:
Catherine Cripps
Chair
The notes below form part of these Financial Statements.
Registered number 3224867
CASH FLOW STATEMENT
for the year ended 30 April 2023
2023 2022
Notes £'000 £'000
Cash flows from operating activities
Loss before tax (103,034) (256,646)
Adjustments
Losses on investments held at fair value through profit or loss 5 106,807 253,694
(Gains)/losses on derivative financial instruments 6 (34) 5,799
Proceeds of disposal on investments 2,311,861 2,822,328
Purchases of investments (2,266,936) (2,618,737)
Proceeds on disposal of derivative financial instruments 13 46,536 39,006
Purchases of derivative financial instruments 13 (42,594) (47,194)
Increase in receivables (472) (64)
Decrease in payables* (4,580) (401)
Finance Costs* 1,598 973
Overseas tax (2,241) (2,124)
Foreign exchange gains 7 (8,409) (17,535)
Net cash generated from operating activities 38,502 179,099
Cash flows from financing activities
Finance costs paid* (1,539) (927)
Ordinary shares repurchased into treasury (116,449) (98,001)
Net cash used in financing activities (117,988) (98,928)
Net (decrease)/increase in cash and cash equivalents (79,486) 80,171
Cash and cash equivalents at the beginning of the year 311,363 212,732
Effect of movement in foreign exchange rates on cash held 7 7,219 18,460
Cash and cash equivalents at the end of the year 14 239,096 311,363
2023 2022
Notes £'000 £'000
Reconciliation of cash and cash equivalents
to the Balance Sheet is as follows:
Cash held at bank and derivative clearing houses 14 148,682 219,403
BlackRock's Institutional Cash Series plc 14 90,414 91,960
(US Treasury Fund), money market fund
Cash and cash equivalents at the end of the year 14 239,096 311,363
* The finance costs paid which were previously included in the cash flows from
operating activities in the year 2022 have been represented as a cash flow
from financing activities to align with the current year presentation.
The notes below form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 April 2023
1. GENERAL INFORMATION
Polar Capital Technology Trust plc is a public limited company registered in
England and Wales whose shares are traded on the London Stock Exchange.
The principal activity of the Company is that of an investment trust company
within the meaning of Section 1158/1159 of the Corporation Tax Act 2010 and
its investment approach is detailed in the Strategic Report.
The Company financial statements have been prepared and approved by the
Directors in accordance with international accounting standards in accordance
with UK-adopted international accounting standards ("UK-adopted IAS").
The Company's presentational currency is Pounds Sterling. All figures are
rounded to the nearest thousand pounds (£'000) except as otherwise stated.
2. ACCOUNTING POLICIES
The principal accounting policies, which have been applied consistently for
all years presented are set out below:
(A) BASIS OF PREPARATION
The Financial Statements have been prepared on a going concern basis under the
historical cost convention, as modified by the inclusion of investments and
derivative financial instruments at fair value through profit or loss.
Where presentational guidance set out in the Statement of Recommended Practice
(SORP) for investment trusts issued by the Association of Investment Companies
(AIC) in July 2022 is consistent with the requirements of UK-adopted IAS, the
Directors have sought to prepare the Financial Statements on a basis compliant
with the recommendations of the SORP.
The financial position of the Company as at 30 April 2023 is shown in the
balance sheet above. As at 30 April 2023 the Company's total assets exceeded
its total liabilities by a multiple of over 37. The assets of the Company
consist mainly of securities that are held in accordance with the Company's
Investment Policy, as set out in the annual report and these securities are
readily realisable. The Company has two, two-year fixed rate term loans with
ING Bank N.V. both of which fall due for repayment on 30 September 2024. The
Directors have considered a detailed assessment of the Company's ability to
meet its liabilities as they fall due. The assessment took account of the
Company's current financial position, its cash flows and its liquidity
position. In addition, the Company's cash flows were stressed tested for base
case and reasonable worse case scenarios such as higher inflation and interest
rate increases. In light of the results of these tests, the Company's cash
balances, and the liquidity position, the Directors consider that the Company
has adequate financial resources to enable it to continue in operational
existence for at least 12 months. Accordingly, the Directors believe that it
is appropriate to continue to adopt the going concern basis in preparing the
Company's Financial Statements.
(B) PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME
AIC, supplementary information which analyses the Statement of Comprehensive
Income between items of a revenue and capital nature has been presented
alongside the Statement of Comprehensive Income. The results presented in the
revenue return column is the measure the Directors believe appropriate in
assessing the Company's compliance with certain requirements set out in
section 1158 of the Corporation Taxes Act 2010.
(C) INCOME
Dividends receivable from equity shares are taken to the revenue return column
of the Statement of Comprehensive Income on an ex-dividend basis.
Special dividends are recognised on an ex-dividend basis and may be considered
to be either revenue or capital items.
The facts and circumstances are considered on a case by case basis before a
conclusion on appropriate allocation is reached.
Where the Company has received dividends in the form of additional shares
rather than in cash, the amount of the cash dividend foregone is recognised in
the revenue return column of the Statement of Comprehensive Income. Any excess
in value of shares received over the amount of the cash dividend foregone is
recognised in the capital return column of the Statement of Comprehensive
Income.
Unfranked income includes the taxes deducted at source.
Bank interest, money market fund interest and other income receivable are
accounted for on an accruals basis and is recognised in the period in which it
was earned.
Interest outstanding at the year end is calculated on a time apportioned basis
using the market rates of interest
(D) EXPENSES AND FINANCE COSTS
All expenses, including finance costs, are accounted for on an accruals basis.
All indirect expenses have been presented as revenue items per the
non-allocation method except as follows:
- any performance fees payable are allocated wholly to capital,
reflecting the fact that, although they are calculated on a total return
basis, they are expected to be attributable largely, if not wholly, to capital
performance.
- transaction costs incurred on the acquisition or disposal of
investments are expensed either as part of the unrealised gain/loss on
investments (for acquisition costs) or as a deduction from the proceeds of
sale (for disposal costs).
Finance costs are calculated using the effective interest rate method and are
accounted for on an accruals basis.
(E) TAXATION
The tax expense represents the sum of the overseas withholding tax deducted
from investment income, tax currently payable and deferred tax.
The tax currently payable is based on the taxable profit for the year. Taxable
profit differs from net profit as reported in the Statement of Comprehensive
Income because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible. The Company's liability for current tax is calculated using tax
rates that have been enacted or substantively enacted at the balance sheet
date.
In line with the recommendations of the SORP, the allocation method used to
calculate tax relief on expenses presented against capital returns in the
supplementary information in the Statement of Comprehensive Income is the
'marginal basis'. Under this basis, if taxable income is capable of being
offset entirely by expenses presented in the revenue return column of the
Statement of Comprehensive Income, then no tax relief is transferred to the
capital return column.
Deferred tax is the tax expected to be payable or recoverable on temporary
differences between the carrying amounts of assets and liabilities in the
Financial Statements and the corresponding tax bases used in the computation
of taxable profit, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Investment trusts which have approval as such under section 1158 of the
Corporation Tax Act 2010 are not liable for taxation on capital gains.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised based on tax
rates that have been enacted or substantively enacted at the balance sheet
date.
Deferred tax is charged or credited in the Statement of Comprehensive Income,
except when it relates to items charged or credited directly to equity, in
which case the deferred tax is also dealt with in equity.
(F) INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
When a purchase or sale is made under contract, the terms of which require
delivery within the timeframe of the relevant market, the investments
concerned are recognised or derecognised on the trade date and are initially
measured at fair value.
On initial recognition the Company has designated all of its investments as
held at fair value through profit or loss as defined by UK-adopted IAS.
All investments are measured at subsequent reporting dates at fair value,
which is either the bid price or the last traded price, depending on the
convention of the exchange on which the investment is quoted. Investments in
unit trusts or OEICs are valued at the closing price, the bid price or the
single price as appropriate, as released by the relevant investment manager.
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 £90,414,000 (2022: £91,960,000) is managed as part of the
Company's cash and cash equivalents as defined under IAS 7.
In the Balance Sheet bank overdrafts are shown within current liabilities.
(I) PAYABLES
Payables are initially recognised at fair value and subsequently measured at
amortised cost. Payables are not interest- bearing and are stated at their
nominal value (amortised cost).
(J) BANK LOANS
Interest bearing bank loans are initially recognised at cost, being the
proceeds received net of direct issue costs, and subsequently at amortised
cost. The amounts falling due for repayment within one year are included under
current liabilities in the Balance Sheet.
(K) DERIVATIVE FINANCIAL INSTRUMENTS
The Company's activities expose it primarily to the financial risks of changes
in market prices, foreign currency exchange rates and interest rates.
Derivative transactions which the Company may enter into comprise forward
exchange contracts, the purpose of which is to manage the currency risks
arising from the Company's investing activities, quoted options on shares held
within the portfolio, or on indices appropriate to sections of the portfolio,
the purpose of which is to provide additional capital return.
The use of financial derivatives is governed by the Company's policies as
approved by the Board, which has set written principles for the use of
financial derivatives.
A derivative instrument is considered to be used for hedging purposes when it
alters the market risk profile of an existing underlying exposure of the
Company. The use of financial derivatives by the Company does not qualify for
hedge accounting under UK-adopted IAS. As a result, changes in the fair value
of derivative instruments are recognised in the Statement of Comprehensive
Income as they arise. If capital in nature, associated change in value is
presented in the capital return column of the Statement of Comprehensive
Income.
(L) RATES OF EXCHANGE
Transactions in foreign currencies are translated into Sterling at the rate of
exchange ruling on the date of each
transaction. Monetary assets, monetary liabilities and equity investments in
foreign currencies at the balance sheet date are translated into Sterling at
the rates of exchange ruling on that date. Realised profits or losses on
exchange, together with differences arising on the translation of foreign
currency assets or liabilities, are taken to the capital return column of the
Statement of Comprehensive Income.
Foreign exchange gains and losses arising on investments held at fair value
are included within changes in fair value.
(M) SHARE CAPITAL
Represents the nominal value of authorised and
allocated, called-up and fully paid shares issued.
(N) CAPITAL RESERVES
Capital reserves - gains/losses on disposal includes:
- gains/losses on disposal of investments
- exchange differences on currency balances and on settlement of
loan balances
- cost of own shares bought back
- other capital charges and credits charged to this account in
accordance with the accounting policies above
Capital reserve - revaluation on investments held includes:
- increases and decreases in the valuation of investments and
loans held at the year end.
All of the above are accounted for in the Statement of Comprehensive Income
except the cost of own shares bought back or issued which are accounted for in
the Statement of Changes in Equity.
(O) REPURCHASE OF ORDINARY SHARES (INCLUDING THOSE HELD IN
TREASURY)
Where applicable, the costs of repurchasing ordinary shares including related
stamp duty and transaction costs are taken directly to equity and reported
through the Statement of Changes in Equity as a charge on the capital reserve.
Share repurchase transactions are accounted for on a trade date basis.
The nominal value of ordinary share capital repurchased and cancelled is
transferred out of called up share capital and into the capital redemption
reserve.
Where shares are repurchased and held in treasury, the transfer to capital
redemption reserve is made if and when such shares are subsequently cancelled.
(P) SHARE ISSUE COSTS
Costs incurred directly in relation to the issue of new shares together with
additional share listing costs have been deducted from the share premium
reserve.
(Q) SEGMENTAL REPORTING
Under IFRS 8, 'Operating Segments', operating segments are considered to be
the components of an entity about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The chief
operating decision maker has been identified as the Manager (with oversight
from the Board).
The Board is of the opinion that the Company is engaged in a single segment of
business, namely by investing in a diversified portfolio of technology
companies from around the world in accordance with the Company's Investment
Objective, and consequently no segmental analysis is provided.
In line with IFRS 8, additional disclosure by geographical segment has been
provided in Note 26.
Further analyses of expenses, investment gains or losses, profit and other
assets and liabilities by country have not been given as either it is not
possible to prepare such information in a meaningful way or the results are
not considered to be significant.
(R) KEY ESTIMATES, JUDGMENTS AND ASSUMPTIONS
Estimates and assumptions used in preparing the Financial Statements are
reviewed on an ongoing basis and are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances. The results of these estimates and assumptions form the basis
of making judgements about carrying values of assets and liabilities that are
not readily apparent from other sources.
The majority of the Company's investments are in US Dollars, the level of
which varies from time to time. The Board considers the functional and
reporting currency to be Sterling. In arriving at this conclusion the Board
considered that Sterling is most relevant to the majority of the Company's
Shareholders and creditors and the currency in which the majority of the
Company's operating expenses are paid and the Company's shares are denominated
in Sterling.
The only estimates and assumptions that may cause material adjustment to the
carrying value of assets and liabilities relate to the valuation of unquoted
investments and investments for which there is an inactive market. These are
valued in accordance with the techniques set out in Note 2(f). At the year
end, there was no unquoted investments (2022: same).
(S) NEW AND REVISED ACCOUNTING
STANDARDS
There were no new UK-adopted IAS or amendments to UK-adopted IAS applicable to
the current year which had any significant impact on the Company's Financial
Statements.
i) There were no relevant standards became effective
for the current annual reporting period that potentially impact the Company
are in issue.
ii) At the date of authorisation of the Company's
Financial Statements, the following relevant standards that potentially impact
the Company are in issue but are not yet effective and have not been applied
in the Financial Statements.
Standards & Interpretations Effective for periods commencing on or after
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Requirement amended to disclose material accounting policies instead of 1 January 2023
Statement 2) significant accounting policies and provided guidance in making materiality
judgements to accounting policy disclosure..
Definition of Accounting Estimates (amendments to IAS 8) Introduced the definition of accounting estimates and included other 1 January 2023
amendments to IAS 8 to help entities distinguish changes in accounting
estimates from changes in accounting policy.
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 2023 Year ended
£'000 30 April 2022
£'000
Revenue:
Overseas Dividend income 16,160 15,870
16,160 15,870
Capital:
Special dividends allocated to capital 42 -
All investment income is derived from listed investments.
Included within income from investments is £350,000 (2022: £172,000) of
special dividends classified as revenue in nature in accordance with note 2
(c). £42,000 of special dividend has been recognised in capital as the
dividend paid out of the proceeds from a disposal of an overseas investments
(2022: nil).
4. OTHER OPERATING INCOME Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Bank interest 1,478 4
Money market fund interest 2,342 27
3,820 31
5. LOSSES ON INVESTMENTS HELD AT FAIR VALUE Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Net (losses)/gains on disposal of investments at historic cost (130,861) 232,360
Transfer on disposal of investments (59,647) (353,508)
Losses on disposal of investments based on carrying value at previous balance (190,508) (121,148)
sheet date
Valuation gains/(losses) on investments held during the year 83,701 (132,546)
(106,807) (253,694)
6. GAINS/(LOSSES) ON DERIVATIVES Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Gains/(losses) on disposal of derivatives held 5,019 (10,212)
(Losses)/gains on revaluation of derivatives held (4,985) 4,413
34 (5,799)
The derivative financial instruments represent the call and put options, which
are used for the purpose of efficient portfolio management. Refer to Note 13
below for further
details.
7. OTHER CURRENCY GAINS Year ended Year ended
30 April 2023 30 April 2022
£'000 £'000
Exchange gains on currency balances 7,219 18,460
Exchange losses on settlement of loan balances (507) -
Exchange gains/(losses) on translation of loan balances 1,697 (925)
8,409 17,535
8. INVESTMENT MANAGEMENT AND PERFORMANCE FEE
Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Investment management fee payable to Polar Capital (charged wholly to 21,918 28,281
revenue)
Performance fee payable to Polar Capital (charged wholly to capital) - -
There was no performance payable in respect of the year nor outstanding at the
year end (2022: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.
As a result of the current fee arrangements which came into force on 1 May
2022, the management fee in 2023 is calculated on the reduced rates and daily
net asset value, as such has subsequently decreased compared to the previous
year. Details of the Investment Management Agreement are disclosed in the
Strategic Report above.
9. OTHER ADMINISTRATIVE EXPENSES
Year ended Year ended 30 April 2022
30 April 2023 £'000
£'000
Directors' fees and expenses(1) 247 229
National insurance contributions 26 24
Depositary fee(2) 192 233
Registrar fee 54 51
Custody and other bank charges(3) 267 358
UKLA and LSE listing fees(4) 204 190
Legal & professional fees and other financial services 16 4
AIC fees 21 21
Auditors' remuneration - for audit of the financial Statements 63 45
Directors' and officers' liability insurance 38 23
AGM expenses(5) 6 31
Corporate brokers' fee(6) - -
Shareholder communications(7) 38 82
Other expenses 4 44
1,176 1,335
1. Full disclosure is given in the Directors' Remuneration
Report in the Annual Report.
2. Depositary fee is based on the value of the net assets. The
daily average net asset value decreased by 19.3% compared to the previous
year.
3. Custody fees are based on the value of the assets and
geographical activity and determined on the pre-approved rate card with HSBC.
4. Fees are based on the market capitalisation of the Company
which has risen over the last invoice period.
5. Reduced 2023 AGM expenses mainly due to the removal of Lumi
online hybrid AGM option.
6. 2022/2023 annual fee was offset by the commission credit on
shares repurchases.
7. Includes reversal of prior year over accruals in this period.
10. FINANCE COSTS Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Interest on loans and overdrafts 1,514 973
Loan arrangement and facility fees -
84 84-
1,598 973
11. TAXATION Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
(a) Analysis of tax charge for the year:
Overseas tax 2,148 2,000
Total tax for the year (see Note 11b) 2,148 2,000
(b) Factors affecting tax charge for the year:
The charge for the year can be reconciled to the loss per the Statement of
Comprehensive Income as follows:
Loss before tax (103,034) (256,646)
Tax at the UK corporation effective tax rate of 19.5% (2022: 19%) (20,092) (48,763)
Tax effect of non-taxable dividends (3,159) (3,015)
Tax effect of losses on investments that are not taxable 19,181 45,972
Unrelieved current year expenses and deficits 4,070 5,806
Overseas tax suffered 2,148 2,000
Total tax for the year (see Note 11a) 2,148 2,000
(c) Factors that may affect future tax charges:
There is an unrecognised deferred tax asset comprising:
Unrelieved management expenses 66,998 61,780
Non-trading loan relationship deficits 1,807 1,807
68,805 63,587
The deferred tax asset is based on a corporation tax rate of 25% (2022:
25%).
The Company has an unrecognised deferred tax asset of £66,998,000 (2022:
£61,780,000) arising from surplus management expenses of £267,992,000 (2022:
£247,120,000) and unrecognised deferred tax asset of £1,807,000 (2022:
£1,807,000) arising from non-trade loan relationship deficits of £7,227,000
(2022: £7,227,000) based on a corporation tax rate of 25% (2022: 25%). In its
2021 budget, the government announced that the main rate of corporation tax
would increase to 25% for the fiscal year beginning on 1 April 2023. This
deferred tax asset has arisen due to the cumulative excess of deductible
expenses over taxable income. Given the composition of the Company's
portfolio, it is not likely that this asset will be utilised in the
foreseeable future and therefore no asset has been recognised in the accounts.
Due to the Company's tax status as an investment trust and the intention to
continue meeting the conditions required to maintain approval of such status
in the foreseeable future, the Company has not provided tax on any capital
gains arising on the revaluation or disposal of investments held by the
Company.
12. LOSS PER ORDINARY SHARE
Year ended 30 April 2023 Year ended 30 April 2022
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:
Loss per ordinary share (£'000) (6,860) (98,322) (105,182) (16,688) (241,958) (258,646)
Weighted average ordinary shares in issue during the year 129,409,889 129,409,889 129,409,889 134,984,460 134,984,460 134,984,460
From continuing operations
Basic - loss per ordinary share (pence) (5.30) (75.98) (81.28) (12.36) (179.25) (191.61)
As at 30 April 2023 there are no potentially dilutive shares in issue and the
earnings per share therefore equate to those shown above (2022: 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 2023 Year ended
£'000 30 April 2022
£'000
Opening book cost 2,253,434 2,199,334
Opening investment holding gains 557,646 1,043,700
Opening fair value 2,811,080 3,243,034
Analysis of transactions made during the year
Purchases at cost 2,236,802 2,639,004
Sales proceeds received (2,300,898) (2,817,264)
Losses on investments held at fair value (106,807) (253,694)
Closing fair value 2,640,177 2,811,080
Closing book cost 2,058,477 2,253,434
Closing investment holding gains 581,700 557,646
Closing fair value 2,640,177 2,811,080
Of which:
Listed on a recognised Stock Exchange 2,640,177 2,811,080
The Company received £2,300,898,000 (2022: £2,817,264,000) from disposal of
investments in the year. The book cost of these investments when they were
purchased was £2,431,759,000 (2022: £2,584,904,000). 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 £1,055,000 (2022:
£1,005,000). Included in proceeds of disposals are sales costs of £1,231,000
(2022: £1,182,000). These costs primarily comprise commission.
(ii) Changes in derivative financial instruments Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Valuation at 1 May 6,479 4,090
Additions at cost 42,594 47,194
Proceeds of disposal (46,536) (39,006)
Gains/(losses) on disposal 5,019 (10,212)
Valuation (losses)/ gains (4,985) 4,413
Valuation at 30 April 2,571 6,479
The derivative financial instruments represent the call and put options, which
are used for the purpose of efficient portfolio management. As at 30 April
2023, the Company held NASDAQ 100 Stock Index put option and the market value
of these open put option position was £1,559,000 (2022: NASDAQ 100 Stock
Index put options with a market value of £6,431,000). The Company also held
Microsoft Corp call options and the market value of these open call option
position was £1,012,000 (2022: Apple Inc. call options with a market value of
£48,000).
(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.
Year ended 30 April 2023 Year ended
£'000 30 April 2022
£'000
Equity Investments and derivative financial instruments
Level 1 2,641,189 2,817,559
Level 2 1,559 -
Level 3 - -
2,642,748 2,817,559
The NASDAQ 100 Stock Index put options held at the year ended 30 April 2023
have been classified as level 2 due to the absence of regular trading activity
levels closer to the measurement date. All other options held at the current
and prior year end have been classified as level 1.
There has been no further transfer between Levels 1, 2 and 3 during the year
ended 30 April 2023.
(iv) Unquoted investments
As at 30 April 2023, the portfolio comprised no unquoted investment (30 April
2021: same):
The carrying values of other receivables approximate their fair value.
14. CASH AND CASH EQUIVALENTS 30 April 2023 30 April 2022
£'000 £'000
Cash at bank 148,682 211,940
Cash held at derivative clearing houses - 7,463
Money market funds 90,414 91,960
Cash and cash equivalents 239,096 311,363
As at 30 April 2023, the Company held BlackRock's Institutional Cash Series
plc - US Treasury Fund with a market value of £90,414,000 (30 April 2022:
£91,960,000), 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
2023 2022
£'000 £'000
Allotted, Called up and Fully paid:
Ordinary shares of 25p each
Opening balance of 132,356,426 (30 April 2022: 136,544,764) 33,089 34,136
Repurchase of 6,070,882 (30 April 2022: 4,188,338) ordinary shares into (1,518) (1,047)
treasury
Allotted, called up and fully paid: 126,285,544 (30 April 2022: 132,356,426) 31,571 33,089
ordinary shares
of 25p ordinary shares of 25p
ordinary shares of 25p
of 25p
11,029,456 (2022: 4,958,574) ordinary shares held in treasury 2,758 1,240
At 30 April 2023 34,329 34,329
During the year, there were no ordinary shares issued to the market (2022:
same). A total of 6,070,882 (2022: 4,188,338) ordinary shares were repurchased
into treasury at a cost of £117,078,000 (2022: £98,639,000).
Subsequent to the year end, and to 13 July 2023 (latest practicable date),
1,229,369 ordinary shares were repurchased into treasury at an average price
of 2,151.43p 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 2023 were £21,918,000 (2022: £28,281,000) of
which £1,827,000 (2022: £6,374,000) was outstanding and accrued at the year
end.
There was no performance fee payable in respect of the year nor outstanding at
the year end (2022: same).
In addition, the research costs and the first £200,000 of marketing costs per
annum are borne by the Manager.
The new investment management agreement which came into force on 1 May 2022
agreed lower rates of the management base fee, simplified the structure of the
base fee to three tiers and calculated on the daily net asset value. The
Manager also agreed an increased contribution to the marketing costs payable
by the Company to the first £200,000 per annum. Details 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 2023 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
2023 2022
Undiluted:
Net assets attributable to ordinary Shareholders (£'000) 2,828,141 3,050,985
Ordinary shares in issue at end of year 126,285,544 132,356,426
Net asset value per ordinary share (pence) 2239.48 2305.13
As at 30 April 2023, there were no potentially dilutive shares in issue (2022:
there was no dilution).
18. POST BALANCE SHEET EVENT
Subsequent to the year end, and to 13 July 2023, 1,229,369 ordinary shares
were repurchased and placed in the Treasury at an average price of 2,151.43p
per share.
There are no other significant events that have occurred after the end of the
reporting period to the date of this report which require disclosure.
.
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