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Polar Cap Tech Tst (PCT)

Polar Cap Tech Tst

Final Results
RNS Number : 8800S
Polar Capital Technology Trust PLC
14 July 2020
 

POLAR CAPITAL TECHNOLOGY TRUST PLC

 

AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2020

 

 

FINANCIAL HIGHLIGHTS

FINANCIAL SUMMARY

 

As at

30 April 2020

As at

30 April 2019

Movement

Total net assets

£2,308,597,000

£1,935,646,000

19.3%

Net Asset Value (NAV) per ordinary share

1715.59p

1446.40p

18.6%

Benchmark (see below)

2415.42

2045.12

18.1%

Price per ordinary share

1774.00p

1354.00p

31.0%

Premium/(Discount) of ordinary share price to the NAV per ordinary share~

3.4%

(6.4%)

 

Ordinary shares in issue*

134,566,000

133,825,000

0.6%

*The issued share capital on 10 July 2020 (latest practicable date) was 137,265,000 ordinary shares.

KEY DATA

 

For the year to 30 April 2020

Local Currency %

Sterling Adjusted %

Benchmark

 

Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes)

14.3

18.1

Other Indices over the year (total return)

 

FTSE World

-4.2

-0.7

FTSE All-Share

 

-16.7

S&P 500 Composite

0.9

4.6

Nikkei 225

-7.2

-0.5

Eurostoxx 600

-10.2

-9.2

 

 

As at 30 April

EXCHANGE RATES

 

2020

2019

US$ to £

1.2614

1.3037

Japanese Yen to £

134.88

145.19

Euro to £

1.1516

1.1632

 

 

For the year to 30 April

EXPENSES

2020

2019

Ongoing charges ratio # ~

0.93%

0.95%

Ongoing charges ratio including performance fee # ~

0.99%

1.33%

 

Data supplied by Polar Capital LLP and HSBC Security Services.

# Ongoing charges ratio represent the total expenses of the Company, excluding transaction costs, interest payments, tax and non-recurring expenses, expressed, as a percentage of the average daily net asset value, in accordance with guidance issued by the AIC. Prior year ongoing charges calculations include the research cost borne by the Company from 1 May 2018 until 31 December 2018. With effect from 1 January 2019 all research costs have been paid by the Investment Manager.

~ Alternative performance measure see below.

HISTORIC PERFORMANCE

As at 30 April

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Net Assets (£m)

398.6

468.7

503.3

528.8

606.6

793.0

801.3

1,252.5

1,551.6

1,935.6

2,308.6

Share price (pence)

306.8

373.5

387.0

398.5

442.0

592.0

566.0

947.0

1148.0

1354.0

1774.0

NAV per share (pence)

315.1

368.7

392.6

412.4

458.4

599.2

605.5

945.4

1159.7

1446.4

1715.6

Indices of Growth1

 

 

 

 

 

 

 

 

 

 

 

Share price

100

121.7

126.1

129.9

144.1

193.0

184.5

308.7

374.2

441.3

578.2

NAV per share2

100

117.0

124.6

130.9

145.5

190.2

192.2

300.0

368.0

459.0

544.5

Dow Jones World Technology Index 3

100

104.7

113.4

120.2

135.9

175.9

175.7

269.5

315.4

383.1

452.4

 

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 2010.

2 The NAV per share growth is based on NAV per share as adjusted for warrants and subscription shares.

3 Dow Jones World Technology Index (total return, Sterling adjusted) and from April 2013 with the removal of relevant withholding taxes.

 

All data sourced from Polar Capital LLP.

 

 

 

For further information please contact:

Ben Rogoff

Ed Gascoigne-Pees

Polar Capital Technology Trust PLC

Camarco

Tel: 020 7227 2700

Tel: 020 3757 4984

 

 

STRATEGIC REPORT

CHAIR'S STATEMENT

INTRODUCTION

 

Dear Shareholder,

 

The summer of 2019 seems in many ways a long time ago. Shareholders may remember particularly the election of Boris Johnson as Conservative Party leader, Brexit negotiations, and Climate change protests in response in part to large scale fires in Australia and the Amazon. Sino-US relations were poor and trade war concerns worsening.

 

A lot has happened since then, and your Investment Manager's report below describes events in considerable detail and provides a very useful record.

 

Almost all Shareholders will have been affected in some way by the COVID-19 pandemic and some Shareholders will have experienced great difficulty and maybe loss. We should not pass this moment without noting your Board's concern and sympathy for those who have been so affected. I should also note that your Board has been in very regular and careful touch with its Investment Manager, other suppliers and infrastructure during these times, and has transferred to remote working with no observable detriment.

Part of the purpose of this report is to put the 12 month period  in a longer term context, given that your Company publishes a daily NAV and its shares are listed on the London Stock Exchange. For the year under review, your Company's net asset value rose by 18.6% and your Company's share price provided a total return of +31.0% percent, compared with the benchmark return of 18.1%. All these returns are stated in UK Sterling, which weakened against other currencies, 3.2% of the benchmark return came from Sterling depreciation against the US dollar.  This follows three previous years of very strong returns (from April 2016), since when the market capitalisation of your Company has risen from £749m to £2,387m. Over the last 10 years, with a starting point two years on from the Global Financial Crisis, your Company's NAV has risen by more than five times, or 19.2% annualised, from a starting NAV of £398.6m.

 

Such returns are spectacular and unusual. They do however mask considerable volatility and we would expect that volatility to continue. We worry about valuations and we worry that the sector has become a media favourite in some ways. At the same time, the longer term trends which guide our investment approach remain very robust, and in some ways the pandemic has given further strength to those trends. In a world where some sectors are in turmoil, we understand the attractions of ours.

 

DISCOUNTS, PREMIA AND SHAREHOLDER RELATIONS

Last year, we noted that the discount had widened from 1.0% to 6.4%. At that stage, there seemed to be no significant selling from major Shareholders. We suggested that we wished gently to diversify our Shareholder base over time as we consider that Polar Capital Technology is a reasonable way for individual Shareholders to invest in such a volatile sector, should they wish. However, we did indicate that we did not wish to attract a sudden rush of new investors all at once. We are pleased therefore to see that the discount has narrowed and for the last two months of the financial year and generally since then, the shares have been trading at a premium. This change has resulted in the share price total return for the financial year noted above. Although it's always difficult to point to a single cause for such a change, we suggest that the work the Investment Manager has put in to develop website communication, together with changes in individual investor preferences, have resulted in a gentle diversification of the Shareholder base. Currently, some 18.8% of the Shareholder base is held on retail execution only platforms, and hence we assume by individual investors, compared with 16.7% at the end of last year.

 

We have continued to seek to engage with our larger Shareholders. We held a further event for our wealth manager Shareholders in December 2019, reaching representatives of over 40% of the Shareholder base. I have also contacted representatives of our six largest Shareholders during the COVID-19 lockdown to seek views (if any) in changing times and had helpful comments from some of those in return.

We have issued shares in response to market demand. We have sought to avoid spikes in the premium to net asset value at which the shares trade but at the same time, protecting the interests of existing Shareholders by taking care over both the amount of funds coming into the Company at any one time, and the level relative to net asset value at which shares are issued.

 

ESG

We have been discussing and developing the way ESG ('environmental, social and governance') issues affect our sector, and indeed had a specific Board discussion about this. We are a bit wary of some of the more box ticking approaches but are acutely aware that there are real issues affecting the companies in which we invest. These may range from the possibility of government action, on which we had a specialist session on anti-trust moves in the US, to CO2 emissions, to governance issues in companies with strong founder Shareholders. On some measures, the risks in the tech sector seem lower than in others, and the Investment Manager does not have an approach which restricts investment on ESG grounds alone. However, ESG risks are important to the overall consideration of individual stock investment and further information on the Company's approach and consideration of ESG is given below.

 

THE BOARD

Peter Hames, who is our Senior Independent Director, and I reached nine years of service in June. In accordance with the Board succession plan as outlined in the 2019 Annual Report and later here, Peter retired from the Board with effect from 8 July 2020.

 

Further, in accordance with the Board's policy on the tenure of the Chair, it was agreed that I could remain on the Board and as Chair for up to three years but it would be likely that I would retire at the AGM in 2022, in the absence of any reason not so to do. Neither Peter nor I took part in the Nomination Committee's decisions relating to these matters. All Non-executive Directors, including myself, are subject to annual re-election by Shareholders.

 

I express my thanks to Peter who has been an incredible support to the Board for the past nine years and we will miss his contribution, particularly in relation to Asian markets and given his great experience in investment matters. I am delighted to confirm that Tim Cruttenden agreed to assume the role of Senior Independent Director and Chairman of the Remuneration Committee with effect from 8 July 2020. In this role Tim presents his first report to you in the Annual Report.

 

PERFORMANCE FEE

For the third year running, I am pleased to confirm that we are paying a performance fee, this year of £1.1m, (2019: £6.6m, 2018: £11.2m). As detailed in the 2019 Annual Report, the terms of the management and performance fees were re-negotiated with Polar Capital and following discussions with Shareholders, these arrangements took effect on 1 May 2019. Additional payment conditions were incorporated into the performance fee terms with the participation rate lowered from 15% of outperformance to 10%. The Investment Manager can accrue a performance fee by outperforming in a down market, but the payment of a performance fee requires both positive absolute returns and outperformance of the Benchmark. Full details of this fee are in Note 8 to the Financial Statements.

 

ANNUAL GENERAL MEETING (AGM)

The AGM is scheduled to be held on 2 September 2020. A notice of AGM will be provided to all Shareholders and will be available on the Company's website. This will include details of how the AGM will be held this year.

 

The health and welfare of our Shareholders, service providers and wider stakeholders is our primary concern.

The restrictions that were originally put in place by the UK Government on 23 March in respect of social distancing, movement of individuals and of course gatherings of individuals from outside of the same household, have been reduced somewhat in recent weeks. However, there remain restrictions and concern surrounding large gatherings of individuals and in particular gatherings indoors, and of those with contra-indications or of advancing age groups (including me).

 

For this reason, following the very recent passing of the Corporate Insolvency and Governance Act 2020 which

provides temporary provisions to companies to use alternative methods to fulfil statutory requirements, we

have decided to hold a virtual AGM. We do appreciate and think important open interaction with Shareholders and believe engagement with Shareholders is paramount to the essence of the Company. We do think that a virtual AGM is another way of engaging with Shareholders and will be interested to see how it works. We will therefore endeavour to facilitate Shareholder engagement in an electronic way.

 

While we appreciate this is not ideal, and may be awkward for some, we also think it may be easier for others, and a better alternative, now that it is available, to closed door AGMs. We feel this is the best and safest option available to us in current circumstances.

 

OUTLOOK

These are particularly uncertain times. As the economist F.H Knight, argued, - there is a distinction between conditions where risks can be identified, in which the possible outcomes are known and percentage probabilities can be assigned to those outcomes, but you just don't know which is going to happen, and those conditions of uncertainty - where you just don't know what's going on. We seem to have political turmoil in the world's largest economy, trade and political tensions between China and the US persist, Brexit hasn't gone away and the impact of the COVID-19 pandemic and the measures taken (both physical and economic) in reaction will surely last for years. At the same time, some of the tech trends which have been in place for some while, have been accelerating and are already evident in some technology company results.  Thus, the sector offers an opportunity to invest in the continuation of the trends to cloud computing, containerisation (noted last year) remote working, online social and shopping activity and so on, whereas trends elsewhere may be less attractive.

 

Sarah Bates

Chair

13 July 2020

 

 

FINANCIAL AND PERFORMANCE REVIEW FOR THE YEAR ENDED 30 APRIL 2020

 

This year, we have sought to provide more detailed information about the financial results included in this report, following requests at last year's AGM.

 

The net asset value per share increased to 1715.59p as at 30 April 2020 from 1446.40p at the start of the year, which represents an 18.6% increase. The Company's total net assets increased to £2,308.6m as at 30 April 2020, from £1,935.6m at 30 April 2019, as a result of strong investment performance as discussed further in the Investment Manager's Report below.

 

TOTAL RETURN

The Company generates returns from both capital growth and dividend income. For the year ended 30 April 2020, the total return was £360.1m (2019: £383.6m), of which there was a £365.5m gain (2019: £389.9m gain) from capital and a £5.4m loss (2019: £6.3m loss) on our "income account" taking dividend income and offsetting all expenses against that dividend income. Full details of the total return can be found in the Statement of Comprehensive Income below. We choose as a matter of policy not to allocate our expenses, between capital and income, (the performance fee is allocated to capital). The Company's allocation of expenses is described in Note 2(d) to the Financial Statements and the allocation methodology is considered on an annual basis. The total net earnings per share were 269.06p, showing a slight reduction of 6.1% from the previous year. The total net return per share was made up of 273.12p from capital return and a loss of 4.06p from revenue return. This decline was related to the slight reduction in the gain in investments held (excluding derivatives and currency) in this year of £348.1m compared to last year of £393.2m.

 

REVENUE RETURN

The investment income of £15.8m (2019: £12.0m) represents dividend income derived from listed investments. The increase in investment income of 32% for the year was driven by changes in holdings, dividend rates and FX rate change as the Company's revenue is generally are denominated in currencies other than Sterling. In addition, we have received some funds from our withholding tax reclaims. The other operating income of £1.1m (2019: £1.1m) was derived from bank interest and Money Market Fund interest. We have introduced holdings in the US Treasury money market fund to diversify our deposit risk, as described below.

 

CAPITAL RETURN

The investment portfolio was valued at £2,218.3m (2019: £1,803.2m) at the year end 30 April 2020. The investment portfolio delivered a realised return on disposals of £33.7m (2019: £93.6m) and valuation gains on investment of £314.4m (2019: £299.6m) for the year ended 30 April 2020. The Company has one small unquoted investment, Herald Ventures, which was valued at £0.05m. The Company's valuation approach is described in note 2 (f) below. The derivative gains of £13.2m (2019: £1.5m) represent the call and put options which are used to facilitate efficient portfolio management, including some portfolio protection. Full details of the derivative gains are set out in the note 6 to the Financial Statements. For some years, the Investment Manager has used options to provide some protection in the event of a sharp market fall, and in the last year, this strategy did indeed provide an amount of protection in the falls seen in March.

 

PORTFOLIO TURNOVER

Portfolio turnover (purchases and sales divided by two) totalled £1,843.7m equating to 87% (2019: 70%) of average net assets over the year. Details of the investment strategy and portfolio are given in the Investment Manager's Review below. This level of turnover is a little higher than usual given the Investment Manager's response to the COVID-19 crisis, but lower than in the period following the Global Financial Crisis.

 

EXPENSES

The total expenses amounted to £21.5m (2019: £24.1m) and include: investment management fees of £18.3m (2019: £15.3m), administrative expenses of £0.9m (2019: £1.1m) and finance costs of £1.2m (2019: £1.1m). The performance fee of £1.1m (2019: £6.6m) was charged wholly to capital. The new investment management agreement which came into effect from 1 May 2019, included the removal of any contribution by the Company to research costs and provided for a reduction in marketing spend by the Company; this resulted in a 19.8% reduction in administrative expenses for the year. Had the previous performance fee agreement been in place, the amount payable would have been £0.5m higher.

 

ONGOING CHARGES

The ongoing charges ratio, as calculated in line with the AIC recommended methodology, represents the total expenses of the Company, excluding finance costs, expressed as a percentage of the average daily net asset value. This ratio shows Shareholders the annual percentage reduction in net asset value as a result of recurring operational expenses (i.e. the expected cost of managing the portfolio) which, whilst based on historical information, provides an indication of the likely level of costs that will be incurred in managing the Company in the future. The ongoing charges ratio for the year to 30 April 2020 was 0.93%, a slight reduction from the previous year of 0.95%. The ongoing charges ratio including the performance fee for the year to 30 April 2020 was 0.99%, a reduction from previous year of 1.33%.

 

CASH AND CASH EQUIVALENTS

Over the year, the Company maintained a relatively high level of cash, closing the year with £146.7m (2019: £194.2m). As part of its cash diversification strategy, the Company invested 50% of its USD cash balance into a USD Treasury Money Market Fund. As at 30 April 2020, the Company held the BlackRock Institutional Cash Series - US Treasury Fund with a market value of £37m.

 

GEARING

The Company can use gearing for investment purposes and as stated below, bank loans held as at the year-end amounted to £57.0m (2019: £53.7m). The finance arrangements are made up of two, two-year, fixed rate term loans with ING Bank N.V (JPY 5.2 bn and USD23.3m). Both loans fall due for repayment on 2 October 2020. The repayment of both loans would equate to 39% of the cash and cash equivalents readily available to the Company at 30 April 2020. Consideration to the level of borrowings required by the Fund Manager is under review and replacement facilities will be negotiated accordingly with ING Bank N.V. or another provider in due course. Details of any replacement facilities will be announced similarly.

 

FOREIGN EXCHANGE

The majority of the Company's assets and revenue are denominated in currencies other than Sterling. The Company's total return and net assets can be affected by the currency translation and movements in foreign exchange. Note 27 (a)(ii) within the Annual Report analyses the currency risks and the management of such risks.

 

CONCLUSION

This is the first time we have set out a finance report. Should Shareholders find this interesting and helpful, or not, do please let us know by writing to us at the Company's registered office or by emailing the Company Secretary. Both addresses can be found in the Shareholder Information section of the Annual Report.

 

Sarah Bates

Chair

13 July 2020

 

 

INVESTMENT MANAGER'S REPORT

 

MARKET REVIEW

At the headline level, global equities fell modestly over the year to 30 April 2020 with the FTSE World TR Index falling 1.5% in Sterling terms. However, moribund returns belied one of the most remarkable years in living memory as COVID-19 changed the world as we knew it, ending the 11-year US equity bull market in the process. The first two thirds of our financial year was dominated by trade war machinations and Brexit, with related uncertainty weighing on corporate confidence and global growth. In May, US ten-year Treasury yields fell below 2% in for the first time since 2016. Lack of tangible trade-related progress and elevated political risk relating to Iran, Brexit (a more belligerent approach adopted by PM Boris Johnson) and an impeachment enquiry into President Trump weighed heavily on growth. Third-quarter China GDP at 6% y/y was the weakest showing in 30 years while in August, US manufacturing recorded its first contraction since 2009.

 

However, markets began to price in demand policy easing by the world's central banks. The US Federal Reserve ('Fed') responded, delivering its first rate cut since 2008, lowering rates by 25bps in August, followed by two subsequent cuts in September and October. In Europe, the ECB cut interest rates too and restarted its own quantitative easing ('QE') programme. Although Fed Chair Jerome Powell insisted that its actions should not be viewed as a resumption of QE, the Fed also began injecting liquidity into money market funds from September following a spike in overnight lending rates. These repo operations were expanded in October while the Fed also began purchasing Treasury bills at $60bn/month. This 'stealth QE', together with three interest rate cuts successfully un-inverted the US yield curve. Confidence was further buttressed by progress in trade negotiations with a 'phase one' deal agreed by the US and China in December. The combination of monetary easing and trade progress had the desired effect on global growth with the Global Manufacturing PMI crossing back into expansion territory in January.

 

This nascent recovery, together with any residual celebrations associated with the UK general election and the end of (the first phase of) Brexit, proved fleeting. News in January of a coronavirus outbreak in Wuhan - at the time, a relatively unknown Chinese city despite its 11m population - presaged tight travel restrictions within China. Outside of Asia, investors were relatively sanguine; the novel coronavirus presented in a similar way to the SARS epidemic of nearly two decades earlier which affected 8,000 people across 37 countries. As such, the risk it posed was considered contained - a nasty flu-like condition that would disrupt supply chains and restrict travel within China. Tragically wide of the mark, this early interpretation was supported by the World Health Organisation (WHO) who in January, advised "against the application of any travel or trade restrictions on China".

 

Everything changed in February once it became apparent that the virus had spread to more than 60 countries with the likes of South Korea, Iran and Italy all experiencing soaring infection rates. The WHO declared a global health emergency, while a new and menacing name for the virus - COVID-19 - better reflected the threat it posed. Markets plunged - US stocks suffered their worst weekly decline since the financial crisis in late February, while global equities entered a bear market in March. From February highs, it took just 16 days for the S&P 500 to lose more than 20% in local terms, the quickest descent into a bear market

on record. The oil price also plunged in record fashion, falling 47% in March, following a breakdown in talks between Saudi Arabia and Russia at the worst possible moment. The following month, an exhaustion of storage capacity drove the May WTI crude oil contract to a negative price for the first time in history, reaching a low of -$37.63 per barrel. Having begun 2020 at 13.8, the VIX index (a market fear gauge which measures implied volatility on the S&P 500) surged to 82.7 in mid-March.

 

Leaning on the recent experience of the Chinese (and the earlier Spanish Flu) governments across the world introduced stay at home / social distancing measures designed to reduce interpersonal contact and mortality rates and 'flatten the curve'. Strict travel restrictions were imposed and non-essential economic activity was curtailed, resulting in an almost unprecedented contraction in global GDP. US unemployment reached a record 14.7% in April, while analysts predicted that the US economy could shrink 30% annualised in Q2 - the largest quarterly contraction since the Great Depression. Thankfully, and in stark contrast to that earlier period, policymakers acted swiftly with massive monetary and fiscal stimulus, together with emergency legislation to support the economy and financial system. Where early efforts did not have the desired effect - such as the 50bp US interest rate cut and $700bn QE programme in early March - policymakers simply delivered more stimulus in order to prevent a cashflow crunch from developing into a financial crisis. In the US, this saw the Fed cut rates by 150bps and introduce unlimited QE while in Europe, the ECB launched its own €750bn programme. Governments have been equally forthcoming; in the US, the planned fiscal stimulus was $2.6trn (more than 10% of GDP) while total announced German aid was equivalent to c.60% of 2019 GDP. This support, together with the tentative reopening of certain European economies, saw markets rally into our financial year end as focus shifted towards the perceived duration of the downturn, rather than its depth.

 

Record gains for US stocks during April (the S&P rallying more than 11% in local terms, its best month since 1987) proved a fitting end to another year of US exceptionalism. While most markets registered total returns between 0 and -11% in Sterling terms, the S&P 500 delivered +4.5% with much of the divergence explained by the outperformance of the technology sector (and more broadly, growth over value) as investors gravitated towards stocks able to deliver growth against a more uncertain economic backdrop and during the final third of the year, sectors perceived to win (or lose less) from COVID-19 disruption.

 

TECHNOLOGY REVIEW

The technology sector enjoyed an outstanding year of absolute and relative returns with our benchmark, the Dow Jones World Technology index, advancing 18.1% in Sterling terms. Technology outperformance was at odds with weakening sector fundamentals as IT spending increased by only 0.4% y/y during 2019, while sector revenues and earnings grew just 2.8% and 0.8% y/y respectively. However, this obscured the growing divergence between next-generation and legacy companies, as well as the impact of negative earnings from cyclical subsectors. However, it was painfully apparent at the sector level with the performance of software (+23%) and semiconductors (+20%) in contrast to hardware (-3%) and networking (-11%). Regional performance was also bifurcated with US large-caps, as measured by the Russell 1000 technology index, delivering almost twice the returns (+21%) of the Dow Jones World Technology ex US index (+11.5%). The final months of our year proved a boon for the sector as stay at home / social distancing acted as a massive accelerant to a number of key secular themes.

 

Next-generation software and payments stocks continued to deliver exceptional growth during the year, although strong share price performance was punctuated by an arguably overdue period of valuation compression between July and December reflecting profit-taking, higher bond yields and the debacle at WeWork which caused a scare in long duration assets. Despite this, the digital transformation imperative continued to drive demand for a plethora of SaaS (software as a service) solutions including unified communications (UCaaS), workflow automation, collaboration and real-time monitoring. Microsoft continued to execute flawlessly, solidifying its status as a new cycle winner. While strategic M&A slowed during the year, private equity interest remained robust with Sophos, LogMeIn, Instructure and Cision all acquired by financial buyers which buttressed software valuations. Payment stocks enjoyed a solid year, with Visa (+13%) and Mastercard (+12%) benefitting from the transition from cash to card as well as eCommerce-related growth.

 

The semiconductor sector suffered its first cyclical correction this cycle during 2019, declining 12%, although excluding memory (where pricing was weak) the contraction was c.2%. There were pockets of strength including CMOS image sensors, MEMS microphones and microprocessors (due to hyperscale capex and a PC refresh cycle), but the most significant development during the year was the permanent bifurcation of the global semiconductor supply chain discussed in the outlook section. Hopes for a trade deal, together with excitement around 5G and a better 2020 saw semiconductor stocks post some of the strongest returns driven almost entirely by multiple expansion.  

 

5G related excitement and trade deal hope also helped Apple (+54%) enjoy a remarkable year following its January 2019 profit warning, its first in over a decade. During the year, the stock benefited from a massive re-rating due to a number of positive developments including stabilisation of smartphone supply chain data, a better than expected iPhone 11 launch and continued growth and focus on its services business. In addition, Apple's accessories business posted strong growth, driven by AirPods (Bluetooth wireless earbuds) that became mainstream with c.60m sold during 2019. In addition, investors began to focus on prospects for a significant iPhone replacement cycle in 2020 driven by the expected introduction of 5G handsets.

 

Internet stocks experienced a mixed year with returns for most of the year in stark contrast with robust fundamentals. Regulatory risk became a reality as both the Department of Justice (DoJ) and Federal Trade Commission (FTC) announced formal antitrust investigations of the leading Internet platforms in June. In the same month, Senator Elizabeth Warren - at the time a leading contender for the Democrat nomination - raised the spectre of "breaking up Big Tech" if she became President while in August, France passed a 3% digital tax on sales for large Internet companies. Despite these adverse developments, fundamentals at the leading platforms remained strong, evidenced by online advertising which grew 16% y/y in 2019. E-commerce trends also remained strong; Alibaba's Singles Day event saw gross merchandise value (GMV) increase 26% y/y while in the US, Black Friday online sales grew c.20% y/y. Fundamentals and stock prices converged during the final (coronavirus) phase of the year as the Internet subsector proved one of the greatest beneficiaries of stay at home / social distancing orders.

 

PORTFOLIO PERFORMANCE

Our total return performance came in modestly ahead of our benchmark, our own net asset value (NAV) per share rising 18.6% during the year versus a 18.1% gain in the Sterling-adjusted benchmark. In the US, the most significant positive contribution to performance was made once again by AMD (+96%) as the company continued to execute on its product roadmaps, achieving its highest server CPU market share since 2013. In addition, the portfolio benefited from its overweight exposure to SaaS companies which delivered strong growth against a more challenging economic backdrop. Strongest performance was reserved for those with solutions that helped facilitate work from home (WFH) such as RingCentral (+104%), Everbridge (+56%) and Five9 (+54%).

 

The need to support remote workers also benefited next-generation security companies such as Cloudflare (+39%) and CrowdStrike (+32%) while social distancing measures helped the likes of Amazon (+33%), HelloFresh (+84%), PayPal (+20%) and Netflix (+18%). Stock selection was positive across all major regions and nearly all marketcapitalisation tiers with the exception of small-caps, which accounted for <2% of the portfolio. Relative performance was also positively impacted by underweight/zero positions in a number of index constituents including Cisco, Broadcom, SAP, Oracle and DXC Technology which struggled with cloud migration, cyclical sensitivity and/or leverage. The portfolio also benefited directly from one corporate action following the purchase of Tableau Software by Salesforce.com at a 42% premium. This, together with a number of private equity transactions helped support software valuations during the year.

 

In terms of negatives, the most significant detractors were our large but still underweight positions in both Apple (+54%) and Microsoft (+44%). Apple enjoyed a banner year driven by AirPods, services and a better than expected iPhone 11 launch while Microsoft benefited from Office365 and Azure growth, with remote work driving rapid adoption of Teams, its unified communication and collaboration platform. In addition, a number of 2019 IPOs such as Pinterest (-31%) and Uber (-37%) performed poorly as a result of inconsistent growth and a loss of investor appetite for long-duration assets. Relative performance was also hindered by a number of other individual stock moves due to disappointing earnings progress and/or valuation deratings such as Arista Networks, 8x8 and Pagseguro Digital. Finally, our cash position (which averaged 5.5%) also detracted from performance in what ended up being another strong year for technology stocks. However, this drag was almost entirely offset during the period of market turbulence by strong gains in our NASDAQ put options that contributed nearly 100bps to portfolio performance. During the year, there was a significant divergence between large (+21%) and small-cap (-3%) US technology stocks as measured by the Russell 1000 and 2000 technology indices.

 

Our thematic exposure was relatively stable for much of the year, with most of the variation explained by adjustments for stock-specific, 'bottom-up' reasons. The largest positive thematic change was in mobility where we continued to increase our 5G exposure via a combination of new purchases, such as Marvell and Keysight, and the adding to of our Apple position. In contrast, we decreased our exposure to industrial automation towards the end of the 2019, taking profits in a number of stocks against the backdrop of economic and end market (auto / smartphone) weakness. However, in February / March, we made significant changes to our portfolio to better position it for COVID-19 disruption. While not abandoning every stock with economic sensitivity, we rotated away from cyclical areas, including travel, payments, small and medium-sized business (SMB) and advertising, as well industrial/ automotive and associated robotics and semiconductor stocks. We also reduced and/or sold stocks we felt might be negatively impacted by behavioural changes, such as online dating, cinema, and rideshare, as well as 'big ticket' software stocks with long implementation cycles. We rotated into 'stay at home' beneficiaries within ecommerce and cloud infrastructure such as Alibaba, Amazon, Netflix and Spotify while purchasing several next-generation security stocks including Cloudflare and CrowdStrike. We also added further to 5G, while reducing our underweight exposure to the PC and server markets, with remote work likely to drive near-term demand at home and in the data centre. Towards year end, we began to transition the portfolio towards stocks and themes that should fare well as restrictions are eased and/or in the 'new normal'. This saw us rebuild some of our industrial automation and payments exposure at the expense of some of the early 'lockdown' winners such as video gaming, as well as software as a service companies, especially where valuations had fully recovered.

 

MARKET OUTLOOK

At the time of writing there have been more than 5.8m cases of COVID-19 and more than 360,000 deaths reported globally, although the case curve peaked or flattened in several of the worst affected regions during April. The global economy is currently experiencing its most severe contraction in modern history as governments across the world have instigated lockdowns to slow the spread of COVID-19, better prepare health systems and save lives. In the words of Fed Chairman Powell, the "scope and speed of this downturn are without modern precedent (and) significantly worse than any recession since World War II". In April, the US economy lost an unprecedented 20.5m jobs taking the unemployment rate to 14.7% while in the UK, 7.5m people have been furloughed. The economic damage from containment measures will be fully felt during Q2 with the US economy expected to contract by as much as 40%, while in India, the virtual shutdown has seen the services PMI fall to just 5.4, catastrophic given that services account for more than 50% of India's economic output. Globally, GDP is expected to contract by c. 9.8% in Q2'20, similar in scale to but arguably broader in reach than the Global Financial Crisis (GFC) of 2007-2009. Current IMF forecasts for 2020 expect the global economy to contract by 3% before rebounding +5.8% in 2021 as economic activity normalises. However, the economic outlook is "highly uncertain and subject to significant downside risks"

 

Our own outlook is broadly in-line with the current consensus which (we believe) assumes a limited lockdown period (2-3 months) that is followed by a recovery hampered by social distancing restrictions ahead of a vaccine in 2021 beyond which things 'normalise'. During this time, policymakers are likely to do whatever is required to preserve the financial system. Their efforts thus far have been nothing short of spectacular. Interest rates have been slashed to zero in nearly all developed economies, while central banks have already expanded their collective balance sheet by an estimated $4trn, led by $2.4tr from the Federal Reserve (Fed). By the end of 2021, the G4 plus China are expected to have increased their balance sheets by $13tr with the Fed and the ECB balance sheets exceeding 50% of GDP. Unlimited QE from the Fed, the world's lender of last resort, has effectively taken on private sector credit risk. Fiscal stimulus has also been "eye popping" with US efforts estimated at $2.6trn, close to double anything seen in over a century with its flagship Coronavirus Aid, Relief and Economic Security (CARES) Act worth c.9% of GDP and double the size of the intervention following the financial crash in 2008. While different countries have adopted varied approaches, total worldwide stimulus has been estimated at $15tr to date, equivalent to c.17% of the global economy last year.

 

We cannot know if this will prove sufficient, not least because we have limited conviction in the recovery timeline and trajectory. However, we fall back on our confidence in policymakers and their desire to prevent a temporary paralysis from causing a Steinbeckian downward spiral.

 

With interest rates at zero, and the proverbial 'monetary bazooka' already unleashed, there is some nascent concern that central banks could run out of ammunition. Having heard this argument before during the GFC, we believe that more firepower will be found if required even though the Fed has emphatically ruled out negative interest rates, much to President Trump's dissatisfaction. That leaves forward guidance, QE and yield curve control within the Fed 'toolkit' but with markets already pricing in the zero-lower bound (ZLB) for the next c. 5 years, only QE is a viable option today. Thankfully, it appears to be working well with Treasury buying already declining by 90% from its daily peak of $70bn.

 

As the world moves out of a lockdown phase, governments will have to balance the risks of further escalations in COVID-19 infection rates with the risks of curtailing economic activity. They must do this within the realms of what is politically possible (which changes over time as well as differing by place), using imperfect and sometimes contradictory information. The bridge between the economic "medically-induced coma" that lockdowns necessarily precipitated and some semblance of a 'back-tonormal' economy is still a work in progress. However, economics and crucially, a much lower infection fatality rate (IFR) than initially believed, means that the lockdowns must end. We are closely monitoring approaches around the globe and have currently positioned our portfolio for a staggered reopening of the global economy. This involves a balance of positions in companies that will benefit from working and living at home (such as digital entertainment and remote work) and those that will see trends accelerate as the economy opens and evolves (for example industrial automation and food delivery).

 

This approach reflects our reluctance to wade into the 'shape' of the recovery debate ('V','U','W' etc.) although we suspect that the V-shape recovery in equity markets is unlikely to be matched by economies as they reopen, a view supported thus far by the experience of China, which was first in, and first out of lockdown. There, a combination of job losses, ongoing social distancing measures, continuing concerns over health and higher precautionary savings rates appear to be partially offsetting pent-up demand. The CEO of McDonald's recently acknowledged that they were "not seeing a V-shaped recovery in China", sentiment echoed by Fed Chair Powell when he stated that there was "a growing sense that the economy may recover more slowly than we would like". Instead, a "swoosh shaped" recovery trajectory seems most likely to capture the lingering effects of social distancing driven either by regulation or self-enforcement. In addition, there are likely to be significant changes to daily life that persist well after lockdown has ended, some of which may prove permanent. Many of these involve accelerated technology adoption to replace real-world activities that are no longer possible nor desirable, a topic to which we return later.

 

The persistence of this so-called 'new normal' depends greatly on what happens next. If a vaccine is discovered tomorrow, most of the COVID-19 related behavioural changes will disappear as rapidly as they arrived to be remembered fondly in years to come like wartime recipes for making cakes without eggs. However, the longer it takes for a vaccine or antidote to be discovered, the less likely it will be that we ever return to the world as it was. The current consensus on when a vaccine might be discovered is between 12-18 months, a timeline reiterated recently by the top infectious disease expert on President Trump's coronavirus taskforce. Under normal circumstances, this timeline would be considered ambitious at best given that it takes on average four years to develop an entirely new vaccine. However, these are not normal times with at least 254 therapies and 95 vaccines currently being explored while the Gates Foundations and others are trying to address inevitable manufacturing bottlenecks ahead of schedule. Unfortunately, the experience of HIV - a virus that also permanently changed social behaviour - is sobering given there is still no successful vaccine after 40 years of effort.

 

Our base case is that a vaccine or antidote is discovered in 2021, but this may just be wishful thinking on our part, akin to the popular view held in 1914 that 'war would be over by Christmas'. However, should the timeline slip, all is not lost as the HIV experience shows because despite the lack of vaccine today, a "litany of antiviral drugs" has seen "a disease that was once a death sentence become a chronic condition". Put differently, COVID-19 may be something we cannot eliminate but as long as we adhere to a suitable regimen it can be managed until a vaccine is found or herd immunity achieved. That regimen will lean heavily on social distancing, morbidity-related policy and living healthier lives (given the strong link between obesity and COVID-19 outcomes). Although we do not know what final form the 'new normal' will take, we are hopeful that our species will prove adaptable. So far, the evidence is hugely encouraging.

 

Underpinning this relatively sanguine view is a creeping realisation that COVID-19 is perhaps less deadly than initially believed. Not so for older individuals and people with co-morbidities but for the general population, and in particular younger people. A recent WHO study suggested that up to 3% of the world's population may have already had the disease, 9-10x more than the number of reported cases. Although this remains a long way from the 60% said to be required for herd immunity, it significantly changes infection fatality rate (IFR) calculations. In February, the team at Imperial College estimated the IFR at c.1% but more recent studies suggest IFRs of 0.66% and 0.16% respectively.

 

More importantly, they reveal the clear age-related severity of the disease with over 60s more than 20x greater to die from COVID-19 than those under 60. This is supported by data that suggests that 95% of Italian deaths occurred in those aged 60 and over, while 80% of the deaths in people aged 40 or less had serious pre-existing conditions. This data strongly supports lifting restrictions on an age-related basis and suggests that, with social distancing in place and health systems better prepared, that risk associated with a 'second wave' is likely overstated.

 

COVID-19 represents one of those generational moments when normality is suspended. Usually, these are deeply personal moments when the passage of time is interrupted by news of serious illness or an unexpected development that changes everything. Once life restarts, for some it simply snaps back to its earlier state. But for many, the timeout allows them to recalibrate and focus on what really matters to them. Our sense is that COVID-19 will result in societal recalibration - permanent changes that persist long after the pandemic - many of which will seem obvious in the fullness of time. The success of work from home (WFH) together with challenges to mass transit systems posed by social distancing means that many of us are unlikely to work as we did previously. This may have a profound and lasting impact on demand for commercial property, coffee shops (as a 'third space'), business travel and even the role of cities. Rather than trying to move people at high speed in and out of business hubs (with HS2 expected to cost more than £106bn) perhaps infrastructure spending should be redirected to providing nationwide high-speed Internet. If we came to dominate the world because sapiens were the only animal able to assemble and cooperate flexibly in large numbers, then in a socially distanced world the case for universal internet access has never looked stronger.

 

In time, remote work could allow companies and people alike to relocate anywhere with a good Internet connection, akin to how containerisation eliminated the need for factories to operate near ports. Hard fought freedoms may be surrendered in order to contain future outbreaks with thermal cameras, quarantine and state-level surveillance becoming the norm. Myriad industries (travel, hospitality, retail, manufacturing, sport and fitness, communal worship) may need to be reimagined in order to comply with social distancing. The use of physical cash, how we greet friends and strangers and perhaps most importantly, our relationship with our planet all appear subject to change too. Perhaps the stark reality of COVID-19 will allow us to address issues seemingly impossible today, with the UK Prime Minister's own experience presaging a renewed focus on obesity and healthier living. We are also likely to see an acceleration in the trend of deglobalisation and reshoring because synchronised demand for critical items such as PPE and paracetamol, exposed frailties associated with global supply chains. Relying on India and China for 84% of the world's paracetamol now not only looks incredibly reckless but may embolden those who believe capitalism requires closer supervision.

 

MARKET RISKS

The principal near-term risk to our base case is a material setback in the recovery timeline that challenges the critical assumption that policymakers will do whatever is required to prevent another Great Depression. This could come in many forms - widespread corporate failure and job losses, a more aggressive mutation of the virus or a deadlier 'second wave' of infections as was the experience during the Spanish Flu. Any loss of confidence in the ability of policymakers to deliver economic safe passage would be catastrophic and difficult to reverse. Recent travails in energy markets are a good reminder that some COVID related imbalances lie beyond the scope and remit of central banks and monetary policy. The absence of 'light at the end of the tunnel' would force investors to refocus on the present. This could result in inequality-driven social unrest as the impact of COVID-19 falls disproportionately on lower-paid workers and potentially result in significantly more social unrest.

 

We should also consider elevated equity valuations that might already capture much of the recovery upside. The combination of negative earnings revisions and rebounding equity markets has taken the forward PE on US stocks to 20.3x (2019: 16.8x), well above five (16.7x ) and ten-year averages (15.1x). With current estimates for revenue and earnings growth in 2021 at 8.6% and 27.3% respectively, another key risk relates to an earnings recovery that falls short of expectations. This could happen for macro reasons - worse than expected job losses and corporate failures - but also because companies have to absorb new costs associated with social distancing / WFH or decide to pay their workers more. Others (like Amazon) look to invest the upside associated with the crisis in order to do 'the right thing' or perhaps reduce the risk of potential windfall taxes.

 

The resumption of trade war uncertainty also represents a very significant risk to the recovery. While neither side will want to jeopardise their phase one deal until the global economy is on firmer footing, President Trump has been highly critical of China's response to COVID-19, referencing it as the "China Flu" or worse. The Trump Administration is said to have drawn up a long-term plan to punish China for allegedly concealing the virus from the world. While measures are said to potentially include sanctions and cancelling US debt obligations, thus far the US has simply dusted off its trade-war playbook. However, its recent requirement that overseas chipmakers using US technology will need to seek government approval before shipping to Huawei represents a significant escalation in trade tensions which are unlikely to dissipate while the gulf between the US and Chinese experience continues to grow, evidenced by a US death toll now 15x greater than China's.

With a number of other countries including Australia, Brazil and the UK are clearly angered by Chinese obfuscation, there will be an inevitable longer-term recalibration of the world's relationship with China. This may be limited, or it could be part of a wider process of deglobalisation with the crisis not only exposing the frailties of comparative advantage but also exploding the myth of global cooperation. In contrast to the global financial crisis when G20 leaders pledged not to resort to protectionism, COVID-19 has been characterised by the ungainly pursuit of national interests. Open borders have been shut and international cooperation suspended. Supranational organisations such as the WHO have been found wanting, neutered, like the United Nations (UN), by the need to reach an international consensus. The commandeering of PPE laden lorries heading to the UK by the French will have done little to smooth ongoing Brexit negotiations. Likewise, the ability of the British to print "helicopter money" - an option not available to Italy or Spain - will not have been lost on other eurozone members.

 

Having already withdrawn from a number of high-profile UN organisations, the recent US decision to withhold funding for the WHO and suspend the issuance of 'green cards' looks increasingly reminiscent of the 1930s isolationism which also followed economic dislocation. US withdrawal from the world stage would (intentionally) upset the status quo, create trade friction and heighten political risk with vacuums left by US disengagement likely to be filled by China, Russia, Turkey or Iran. Much depends on the outcome of the US Presidential elections in November; while a Biden victory would ameliorate this risk, it would introduce others including higher taxes to pay for an Obama-style healthcare plan costed at $750bn over ten years. At the time of writing, President Trump is still expected to win re-election, but that could change in the coming months.

 

There are a number of other downside risks to consider. These include a potential future inflation shock following record monetary financing of government budget deficits. While this would certainly be one way to alleviate the record amount of debt that exists today, the record stimulus is offsetting haemorrhaging demand while inflation expectations are currently languishing near record lows. As such, deflation continues to represent the greater threat with Japanification - a low growth world swimming in debt cheap to service but unlikely to ever be repaid - looks more likely than hyperinflation, but that might have also been the prevailing thought in Germany after WWI. Wages could surprise to the upside due to deglobalisation and/or lower levels of future migration, while post-war experiences have often seen labour demand more of the economic spoils. And then there is the thorny question of who is going to foot the bill for the $10trn of stimulus.

 

There are also upside risks to consider. The early discovery of a vaccine would result in rapid normalisation which, together with unprecedented stimulus could result in a melt-up. Although equity valuations may appear to capture much of the upside, it is difficult to know what the right price for something is when US risk free rates are near zero with ten-year US Treasuries yielding less than 100bps at time of writing. On a relative basis, equities look attractive compared to bonds and cash where negative real returns appear highly likely. We may also be positively surprised by the recovery trajectory with only 10% of investors currently expecting a 'V-shaped' recovery. Likewise, with more than two-thirds of investors characterising current market strength as merely a bear market rally, current positioning appears to confirm that the proverbial 'pain trade' remains up.

 

TECHNOLOGY OUTLOOK

After a difficult 2019 for IT spending, hopes for a better 2020 were cut short by COVID-19 and the global downturn. In January, growth had been pegged at +3.5% y/y but today, worldwide IT spending is expected to fall to $3.4trn in 2020, representing an 8% y/y decline in dollar terms. Likewise, technology revenues and earnings that made little overall progress in 2019 are expected to increase by 2.3% and 1.4% respectively in 2020. However, this is significantly better than forecasts for the S&P 500 with revenues and earnings expected to decline by 3.8% and 20.3% respectively.

First-quarter earnings season has been supportive of this bifurcation with 73% of technology companies delivering revenues ahead of expectations compared to 57% for the S&P 500. Relative technology strength is expected to continue in Q2 (when the impact of COVID-19 will be more fully felt) with technology revenue growth pegged at -1.2% y/y compared to -11.3% for the broader market. The combination of positive sector returns and negative earnings revisions saw the technology sector continue to rerate over the past year leaving it trading on a forward PE of 22.5x as compared to 18.9x at the previous year end. This represents one of the highest forward multiples enjoyed by the sector since 2005 and is well ahead of five (17.8x) and ten-year (15.4x) averages. However, the sector's relative rating represents only a c.5% premium to the broader market (2019: 8%), ignoring its balance sheet strength. In early February, this premium exceeded 20% but has been ameliorated by subsequent earnings revisions that have been less negative than the broader market. Today's modest premium looks well supported by the sector's relative earnings profile, profitability (net margins that in Q1 were twice that of the S&P at 20.8% and 9.4% respectively) and balance sheet strength. As in previous years, the technology sector is unique in boasting net cash.

 

Our view last year that a Nifty Fifty type market would persist was borne out as investors continued to be drawn to growth stocks against the backdrop of a sub-par global economy and lower risk-free rates. This remains our view for the same key reasons, with COVID-related disruption creating an even greater distinction between winners and losers from technology disruption. The market may feel uncomfortably thin and there are definite pockets of valuation exuberance emerging, but this is entirely consistent with our view that leadership rarely changes during a late-stage bull market. The remarkably flat yield curve should also continue to support technology outperformance versus financials. Finally, there is the real possibility of a 'melt-up' scenario with COVID-19 delivering the regulatory and behavioural change (social distancing) that accelerates adoption of next-generation technologies, propelling valuations of stocks that perfectly capture the zeitgeist into new and potentially uncomfortable territory.

 

ACCELERATED INNOVATION

Thus far the technology sector has fared relatively well during the crisis, initially due to its defensive characteristics - strong balance sheets, high margins and recurring revenues. However, the sector has also proved its criticality to the global economy in the gloomiest of circumstances while ameliorating the economic and social consequences of COVID-19. This is hugely gratifying, particularly as we recently passed the inauspicious milestone of the 20-year anniversary of the bursting of the dotcom bubble in March 2000. After that false start, the Internet has delivered on its earlier promise as a general purpose technology creating massive new market opportunities and widespread disruption, with COVID-19 and associated social distancing accelerating both. With budgets pressured, CIOs have moved to something akin to a 'war footing' prioritising 'mission-critical' spending in order to support remote work and changing user behaviour.

 

There is nothing quite like a crisis to spur innovation, necessity being the mother of invention. During the Second World War - arguably one of the most analogous periods to the present one - technology innovation was greatly advanced across myriad fields. Healthcare was forever altered by the mass production of penicillin, as well as mass immunisation for tetanus. The world's first digital computer - the Colossus I - was deployed by the enigma code breakers at Bletchley Park. Jet engines used in fighter aircraft revolutionised aviation while advances in rocketry presaged the Space Race. Radar technology led to more accurate weather forecasting while Motorola's backpack walkie-talkie was born on the battlefield, alongside synthetic rubber, morphine, EpiPens and blood plasma.

 

Just as that early crisis accelerated technology innovation and the roll-out of modern infrastructure, so we expect COVID-19 to drive rapid adoption of cloud computing upon which modern software and Internet services sit. The kernel of the new technology cycle, the public cloud had become the default platform for compute and storage well before COVID-19 accounting for (we estimate) between 20-25% of workloads. While public cloud growth had been pegged at between 21-31% over the next three years, the need to support remote work and learning, telemedicine, over-the-top video, streaming gaming and an e-commerce boom has left these forecasts looking stale. In Q1, market leader AWS grew revenues by 37% y/y, Microsoft Azure saw sales increase 61% y/y in constant currency, while the combination of Google Cloud and G-Suite grew 52% y/y. Accounting for just 4-5% of total IT spending today, cloud infrastructure and software are likely to take substantial share over the coming years*. This will come at the expense of legacy technologies that are unable to support or secure remote work while exploding the myth of hybrid cloud (the idea that cloud and on-premise compute coexist) the de facto state of computing today.

 

In previous years, we have used parallel developments in other industries to (hopefully) bring to life the changes occurring within technology today. Last year, we used cars and horse-drawn carriages in the early 1900s to highlight how coexistence is merely a temporary state during which time new technologies complement before replacing legacy ones. We also charted the history of shipping containerisation in order to convey how modern software architectures would change the scale, speed and scope of technology. This year we draw on the parallel of television which we have explored in the "TV Guide" sent to Shareholders with the Annual Report.

 

Internet stocks have proved one of the most significant beneficiaries from COVID-19 although this benefit has not been evenly distributed. Worldwide e-commerce sales were expected to increase 19% y/y in 2020. However, with normal life curtailed, virtual alternatives have never been more attractive resulting in average online transaction volume rising 74% in March. Few companies were better positioned than Amazon; it reported a 26% increase in Q1 revenues while adding 175,000 employees to help meet soaring demand. In China, Alibaba grew revenues by 22% y/y while reaching $1trn of gross merchandise value (GMV) in the year to March. Categories that have benefited most include clothing, furniture and food delivery. Nascent categories such as online grocery (c.2% penetrated prior to COVID-19) and connected fitness have fared particularly well, with social distancing not only accelerating adoption but also potentially expanding addressable markets. During Q2, gym closures helped Pelaton grow sales 66% y/y, Ocado retail revenue increased more than 40% y/y while 41% of US shoppers that bought food online early during the lockdown had never done so before. Brands are following their customers online and building ecommerce-enabled websites that allow them to control the retail experience and establish direct-to-consumer (DTC) relationships.

 

However, not all categories have benefited. Online travel -a vertical we had avoided due to its relative maturity - has been ravaged by the lockdown. Both Booking.com (not held) and Airbnb (private) have seen revenues decline by c.85% y/y with "minimal" evidence of recovery thus far according to Mastercard May travel volumes. Faced with an "existential struggle", travel companies have tapped capital markets to shore up balance sheets while valuations have plunged. This includes former darling Airbnb said to have recently raised money at a $18bn valuation having been expected to be worth $42bn at IPO this year. Weaker travel trends have also significantly hurt ride-share companies such as Uber and Lyft, delaying Uber's timeline to profitability while both companies have announced large workforce reductions. Data from reopened markets suggest that any travel recovery will be gradual and likely to involve different consumption habits (e.g. more domestic travel via car) until confidence is fully restored and/or a vaccine is found. We continue to sport large absolute positions in flagship e-commerce companies Alibaba and Amazon augmented with smaller holdings. These include those held before the crisis - Ocado, Meituan Dianping, Peloton and Uber as well as new purchases such as Autotrader, TripAdvisor and Zalando.

 

We have also added exposure to media content with the lockdown accelerating adoption of streaming video and music. Intensifying OTT competition that dominated the headlines in 2019 was soon forgotten as video streaming "became everyone's favourite pastime during quarantine". Consumers streamed 13.2bn hours in Q1'20, an increase of 49% y/y while Netflix added 15.8m subscribers in Q2, well ahead of the 11m expected by the Street. Having won the attention of Generation Z, short-form video has captured the zeitgeist of the lockdown with Tik Tok (owned by China's ByteDance) experiencing more than 200m downloads during Q1'20 with weekly average usage reaching 6 hours per week. In contrast, prime-time TV viewing fell 18% y/y among 18-34-year olds between March and April suggesting that 'cord-cutting' is accelerating. The pandemic has also exploded the myth that video is a 'winner takes all' market with the second wave of

competition arguably accelerating the demise of linear TV.

 

The same might also be said for music with stay-at-home orders leading to a surge in listening hours which, according to Sonos, increased 48% y/y in April while Spotify added 10m premium subscribers during Q1, taking its total to 130m. We continue to gain media exposure via mediumsized positions in both Netflix and Spotify and via Alphabet, which owns YouTube.

 

Unsurprisingly, the outlook for online advertising is less positive reflecting the slowdown in overall consumer spending, especially within the travel vertical. However, declines have been shallower than feared to date, aided by relative strength in direct response advertising (echoing the shift to ecommerce) and significantly higher usage of social media and messaging platforms. At Facebook, monthly active users (MAUs) across its 'family of apps' reached 3bn for the first time in March while in countries hardest hit by the virus, messaging and voice/video calling increased by more than 50% and 100% respectively. Soaring usage allowed advertisers to achieve higher ROIs and Facebook to deliver constant currency (cc) revenue growth of 19% y/y. Alphabet (Google) also performed better than feared with constant currency revenue growth of 15% y/y, aided by search usage which at its peak was four times the peak of Super Bowl search activity.

 

The resilience of both platforms highlighted how under-monetised they are now that millions of companies need to find customers online. At Facebook, there are 140m small businesses using free tools but only 8m that currently advertise on the platform. Without a similar surfeit of would-be advertisers, smaller platforms like Pinterest and Twitter struggled to monetise strong engagement trends. While we expect the advertising outlook to remain highly uncertain, we have been pleasantly surprised by relative strength at Facebook and Google and have added back to each, as well as to Tencent, the leading social networking platform in China. We are also excited about the potential of so-called social commerce as social networks move away from lead generation towards the final transaction, a trend likely accelerated by COVID-19.

 

While the pandemic has benefited the Internet subsector, we remain alive to the regulatory risks that could yet overshadow robust fundamentals. These risks relate to a number of different areas such as data protection, with the California Consumer Privacy Act (CCPA) the latest attempt to strengthen consumer rights relating to data collection. While this may (like GDPR) again benefit the platforms with the largest daily audiences at the expense of smaller players, antitrust risk is aimed squarely at the internet giants. This risk took shape in July 2019 when the DoJ formally announced it had opened a broad antitrust review of market-leading online platforms while Facebook later revealed that the FTC had launched a similar investigation into the company in June. Potential implications range from fines, new regulations on business practices or a breakup in a worst-case scenario, although this outcome appears less likely now with Biden as Democratic candidate for President. A series of long and drawn out inquiries look inevitable. Higher taxes represent another risk with the OECD having proposed a new international corporate tax system in October in order to prevent countries such as France and the UK unilaterally applying digital sales taxes. Finally, labour laws that tighten the definition of independent contractor, such as the California Assembly Bill 5 (AB5) legislation which went into effect on 1 January 2020 may threaten the "two-way flexibility" essential to the so-called Gig Economy.

 

We remain relatively sanguine about most of these risks. While the 'second Gilded Age' argument was always beguiling, it is fallacious to simply compare the market shares enjoyed by Google today with Standard Oil in the early 1880s, a view strongly supported by the current crisis. Not only have the large technology platforms greatly ameliorated the impact of COVID-19, but many have done everything possible to avoid profiting from it. In Q2, Amazon prioritised lower margin 'essential' products while reinvesting all of its operating income on COVID-19 related costs, including higher wages, PPE and testing capabilities. Likewise, Google Classroom - a free educational tool - was used by 100m students and educators in March. Even as the munificence of technology companies fades in the minds of policymakers, the crisis has revealed how network effects can quickly create natural monopolies by design or otherwise. Should Google be applauded for helping to keep schools open, or castigated for competing unfairly with free products? Likewise, will Zoom be investigated in years to come for offering free videoconferencing to hundreds of millions of people during the crisis? After two furious decades that have seen the internet radically rewire our societies, we may be overdue a period of consolidation and some recalibration. But this will not be easy for policymakers to deliver, particularly as the US internet giants represent the vanguard of American efforts to stay ahead of the Chinese in any potential 'technological cold war'. They may have to settle for higher taxes.

 

The crisis is likely to represent a turning point for the payments industry, accelerating secular trends in banking and digital payments at the expense of cash and incumbents. While previous crises have typically resulted in people hoarding cash, COVID-19 has seen consumers and businesses eschew it and the physical contact it requires. In the UK, cash usage halved in just a few days during March replaced by safer and quicker contactless payments that now account for nearly half of all in-store transactions between £30-50. The rapid adoption of e-commerce has also been hugely beneficial, with Adyen (not held) posting a 34% surge in Q1 revenue while PayPal saw payment volumes increase by more than 20% y/y during April. Greater use of digital services and fintech alternatives have also led consumers to reappraise their relationship with banks. Over time, this could leave traditional banks as 'dumb balance sheets', fit only to provide capital via a customer relationship owned by the fintech companies..

 

The recent inclusion of Square, PayPal and other non-bank finance companies in disbursing rescue loans for small businesses is testament to their unparalleled reach and speed, Square Capital was able to get a loan to a business in under 24 hours. Square has also experienced skyrocketing demand for its peer to peer payment app such that the term Cash App is now included in more than 2000 hip hops songs! However, COVID-19 has been far from unequivocally positive, hurting remittance and cross-border volumes (an important profit pool for the payment networks) and reducing overall spending. It may also accelerate the arrival of new competition in the form of 'big tech' with their large and engaged users bases and strong technology capabilities. Despite this, we remain excited about payment pure plays, our enthusiasm moderated only by elevated valuations that already embed some of the post pandemic opportunity. We currently hold PayPal, Mastercard, Visa, and Square while our positions in Tencent and Alibaba provide exposure to the two most important Chinese mobile payment assets, WeChat Pay and AliPay.

 

Videogaming has been one of the more obvious beneficiaries of stay-at-home orders, with Steam (the leading PC video game distribution service) recording its peak concurrent player record in early February (18.8m). Likewise, Activision Blizzard's free-to-play Call of Duty Warzone released in early March reached 30m players in just 10 days. Any doubt about whether soaring engagement would prove monetizable was answered emphatically in April when NPD revealed US spending on video games had increased 73% y/y. While strong Q1 results from most of the major publishers was accompanied by lukewarm guidance, this may prove conservative as elevated levels of spending have continued into mid-May. Although we cannot know what usage reverts to post-lockdown, there are a number of secular drivers yet to fully unfold. These include margin-rich full game downloads while Sony and Microsoft are due to launch new consoles for the first time since 2013. Streaming gaming may not yet be ready for primetime (evidenced by a mixed start for Alphabet's Stadia) but may prove a hidden beneficiary of WFH-related investments in broadband and home networking given that user experience is beholden to the stability and speed of one's internet connection. In time, streaming could dramatically increase the addressable market for publishers by opening-up AAA titles to more than 2.5bn mobile gamers.

 

Although esports and virtual reality (VR) have long represented incremental medium-term opportunities, COVID-19 and the shuttering of live sport and entertainment represents a unique 'break-out' opportunity for both technologies. Unlike conventional sport, esports have continued largely uninterrupted, helping Twitch grow its audience by an estimated third in March alone. It has also seen a blurring of real world and esports; this year the Grand National was digitally simulated and watched by almost 5m viewers while Formula 1 has hosted virtual Grand Prix (GP) in lieu of scheduled events. More interesting still are crossover events that have pitted virtual racers against real-life ones. This blurring is most evident at Fortnite which recently hosted a Travis Scott concert within a violence-free map called "Party Royale" viewed by 12.3m concurrent players and screened a preview of Christopher Nolan's upcoming movie Tenet. Both events demonstrate that "online games can be places too", particularly with stadiums and cinemas closed. For VR, the COVID-related opportunity could not be coming at a better time with current headsets finally beginning to deliver on the promise that led Facebook to acquire Oculus for $2.3bn in 2014.

 

With only 5.5m units sold in 2019 (flat y/y) it is easy to understand why early euphoria has been replaced with healthy scepticism. However, VR may be on the cusp of a second coming. In April, almost a million new people registered with SteamVR following the release of Half-Life: Alyx, a VR AAA first-person shooter in March. Game reviews have been outstanding with motion-sickness and fatigue associated with VR seemingly absent. Facebook's VR business has also exploded higher in Q1 with nonadvertising revenue "driven largely by sales of Oculus products" increasing c.80% y/y. Rumours that Apple plans to roll out its own VR headset in 2021 or 2022 were followed by news in May that it had acquired NextVR, a live event broadcasting platform. In our opinion, VR represents a way for live entertainment to reach an audience while physical venues remain shut, or severely restricted. However, as Fortnite has demonstrated, in time these virtual audiences could dwarf anything that the real-world might deliver. We currently hold several videogaming plays (Activision, Nintendo, Take-Two, Tencent) while Facebook and smallcap Tobii Technology (maker of eye-tracking systems) provide us with VR exposure.

 

Much has already been written about the so-called work from home (WFH) beneficiaries, those companies and technologies without which remote work would have been impossible. While COVID-19 triggered "the world's biggest work-from-home experiment', the foundations for this 'experiment' were laid during the past decade which has seen remote work increase 400% thanks to the internet, the advent of cloud software and changing attitudes of employers. Before this crisis began, more than one third of US employees worked remotely at least once a week, up from less than 10% in 2010. Just as 9/11 saw companies completely rethink their disaster recovery plans, so COVID-19 is likely to have profound ramifications for patterns of work. These will play out over different timeframes much as deeper changes post 9/11 (such as greater state-level surveillance) continue to reverberate today.

 

The most significant WFH winners are likely to prove cloud software companies focused on communication and collaboration, epitomised by videoconferencing company Zoom (not held) which has seen its number of daily participants soar from 10m in December to 300m in May. Other platforms have also witnessed dramatic growth including Microsoft Teams with 75m daily active users (+70% m/m in April) and Google Meet which recently reached 100m daily meeting participants. These numbers are remarkable given that there are said to be 1.25bn knowledge workers worldwide. Cloud communications platform Twilio (which allows developers to add voice, video and messaging to their applications) has been another notable beneficiary growing revenues 57% y/y while RingCentral, a leading unified communications vendor increased Q1 sales by 33% y/y. Twilio's success reflects the even more pressing need for companies to engage digitally with their customers with traditional channels closed.

 

Despite a usage-based model that should have left it exposed to an economic downturn, the company instead beat expectations as new use-cases emerged for its platform. These include telemedicine, with Twilio winning the likes of Epic who "built and scaled its video client at unprecedented speed" to facilitate virtual / remote communication between patients and physicians. With COVID-19 forcing the issue, telemedicine in the US is now expected to grow at a 38% CAGR through 2025. Other areas that have defied expectations thus far include contact centre software where cloud-based solutions have allowed companies to handle massive inbound call volumes despite disruption to their physical call centres.

 

Adoption also appears to be inflecting positively in nextgeneration security (as compute shifts beyond the firewall), critical event communication (enabling companies and countries to communicate with their employees and citizens), and in the use of digital signatures. There are also a number of legacy areas such as VPN and remote access that are enjoying a second wind as some companies revert to well-known technologies able to support the surge in remote workers.

 

However, these may prove little more than stop-gap solutions should work patterns remain permanently altered by the pandemic, as seems likely. Instead of snapping back to its previous state, the "unexpected success" of WFH has shown people can work remotely and remain productive. Employees appear to have 'enjoyed' the experience too, no longer having to commute, saving time (59 minutes per day on average in the UK) and money while helping the environment. A recent Gartner survey revealed that nearly three-quarters of CFOs plan to shift at least 5% of previously on-site employees to permanently remote positions post-COVID 19. However, this belies significantly greater change within a segment of the market with nearly a quarter of respondents expecting to move at least 20%. Several US technology companies have gone further still with Mark Zuckerberg predicting that 50% of Facebook employees could be working remotely within the next 5-10 years while Twitter has announced that anyone not required to be physically present in an office would be able to work from home permanently.

 

While the future of work is unlikely to follow a model set by Twitter, it may borrow heavily from technology companies. A wholesale move to the cloud will be required to support next-generation applications and significantly more remote workers with next-generation content delivery networks (CDNs) such as Cloudflare helping to accelerate and secure the additional Internet traffic. Security will move increasingly beyond the corporate firewall. Collaboration tools from the likes of Atlassian - commonly used by software developers - are likely to become more widely deployed in order to coordinate work across teams separated by distance and time-zones. Business processes will be streamlined and increasingly automated, helping the likes of ServiceNow. Remote workers will need access to fast broadband at home, just as commuters require cars or access to public transport. However, the critical role played by software in facilitating remote work has not gone unnoticed with high growth SaaS valuations currently trading at c.20x forward sales. While we remain structurally overweight, software is unlikely to prove immune to a downturn. As such we have pared our exposure into strength in favour of cheaper 'new normal' alternatives.

 

One of these appears to be robotics and the broader industrial automation (IA) space. After a difficult 2019 that saw the global industrial robotics market shrink by 6.1% y/y there are a number of potential drivers that could reinvigorate growth. Near-term, the shift toward ecommerce and omni-channel retail should continue to support demand for automated warehouses. Likewise, the need to restart work while complying with social distancing may prove a boon for machine vision, collaborative robots and automated guided vehicles. In addition, supply chains are being rethought as a result of the pandemic with the PPE debacle and trade-war concerns likely to drive further reshoring well after COVID-19. This will require more IA in order to ameliorate the impact of higher labour costs.

 

We are also intrigued by the role that thermal cameras (able to track people's temperature from a distance) will play in restarting the economy. Not just in warehouses where Amazon has been an early adopter, but also in offices, shops, stadiums, hotels and airports where they may be linked with access control systems. Not only are current trends encouraging - some factory automation companies have seen demand increase 30% y/y - but history suggests that recessionary periods tend to speed up the process of labour automation. We have added a number of new positions including Fanuc, FLIR Systems, Teradyne and Yaskawa Electric to long-held favourites - Cognex, Fuji Corp, Harmonic Drive and Keyence.

 

Like robotics, the semiconductor sector should continue to benefit from a number of secular tailwinds as well as a recovery in the global economy. We are particularly excited about AI-infused growth in data processing power. To date, the prohibitive cost of data processing has resulted in only 1% of data created by human beings being analysed. However, machine learning (ML) is significantly lowering the cost of analysing unstructured data such that Gartner expects computational resources used in AI to increase 5x from 2018 to 2023. We have exposure to this rare multi-year structural growth story via NVIDIA, Samsung, TSMC and Xilinx. 5G represents another key driver, and in our minds the next frontier for the semiconductor industry as the enabler of new applications based on machine-to-machine and machine-to-human communication. Ultra-low latency intrinsic to 5G will enable the proliferation of the Internet of Things (IoT), dramatically challenging the convention of how data is created, stored and analysed. Gartner believes that 5G represents a $30bn incremental revenue opportunity for the semiconductor industry between 2019-23 which we hope to access via our positions in Advantest, Hirose, Mediatek, Xilinx and Qualcomm.

 

We also continue to favour companies that benefit from Moore's Stress such as AMD which has continued to take market share from Intel in the all-important server market. We also like its foundry partner TSMC and the lead it now enjoys over Intel in leading-edge geometries. Semiconductor production equipment (SPE) vendors are likely to continue to benefit from rising capital intensity associated with Moore's Stress too. However, SPE fundamentals are likely to more closely track the bifurcation of the global semiconductor supply chain which began in earnest last year. China's semiconductor ambitions were made clear in 2015 when it launched Made in China 2025 long before trade tensions began. Designed to achieve self-sufficiency for its domestic semiconductor industry, the end of Moore's Law presented China with the opportunity to narrow the technology gap. However, escalating technology rivalry has become a fault-line in US-Sino relations and last year, led to the Trump administration placing Huawei and other Chinese technologies companies on the Entity List. COVID-19 has rekindled the issue, with the US now requiring foreign chipmakers using US capital equipment to get a licence in order to sell to Huawei, and TSMC - presumably avoiding having to 'choose sides' - announcing it would build a $12bn leading-edge fab in Arizona.

 

We expect worst case scenarios to be avoided, with both the US and China instead creating their own distinct supply chains. However, in time this may set the scene for a "technological cold war" just as British and German rearmament was a prerequisite for WWII. For now, Huawei is likely stockpiling chips like it did in 2019 contributing to heightened inventory levels which, at the end of the first-quarter, equalled 60 days - a ten-year record for Q1. While the creation of twin supply chains is likely boosting overall demand today, it poses significant medium-term risks to some of the structural improvements made by the industry including the lower revenues and EPS declines in downturns driven by supply consolidation and pricing discipline. We are also mindful of the challenging macroeconomic backdrop and the maturity of a number of key end markets leaving us underweight the subsector.

 

The most important of these is smartphones which last year accounted for c.1/4 of the overall semiconductor market. In 2019, smartphone units declined 2% y/y as a stronger than expected iPhone 11 cycle was insufficient to offset longer replacement cycles and greater sales of refurbished devices. Trade-war uncertainty (particularly the US ban on Huawei) and a pause ahead of 5G handsets due in 2020 played a part too. However, moribund fundamentals were shrugged off by investors as focus shifted to 5G and the potential for an 'overdue' upgrade cycle. Unfortunately, early expectations for +3% unit growth in 2020 have been revised sharply lower with units now expected to decline by as much as 23% this year. However, replacement cycles look set to extend further to 45 months which could set up 2021 as a strong recovery year. Much depends on the 5G timeline and how much resonance the devices have. Current expectations are for c. 210m units this year, rising to 1.15bn by 2024, although disappointing sales of the flagship 5G Samsung Galaxy S20 do not auger well. Industry maturation leaves us underweight smartphones with most of our exposure explained by Apple and Samsung who between them are believed to capture nearly 100% of industry profits.

 

Apple remains one of the most remarkable companies we have ever encountered, a view reinforced last year as the company managed to add $557bn to its market capitalisation despite smartphone units declining y/y for the first time. This reflected ongoing success in reducing its sensitivity to iPhone sales similar to the experience of Microsoft which years ago changed how it licensed its software to sever the link with new PC sales. While stock gains were driven by a re-rating, it was accompanied by revenues that have become more recurring in nature. Not just in terms of 'services' (which continued to grow nicely) but in the form of an estimated 60m AirPods that shipped during the year (+100% y/y). This reminded investors of Apple's ability to create (and dominate) new product categories to sell to its adoring, mass-affluent audience with regularity. The Apple ecosystem was alive and well running into a 5G iPhone upgrade cycle.

 

Unfortunately, supply chain disruption presaged Apple's second profit-warning in as many years which morphed into a demand issue as the coronavirus crisis deepened. However, the company was still able to grow revenues last quarter (+0.5% y/y) despite iPhone sales declining by 7%, driven by further AirPod strength and services that increased +17% y/y. While COVID-19 has seen Apple stop providing guidance, it has continued to return capital to its Shareholders via dividends and share buybacks unlike many others, reflecting its unusually strong balance sheet and ability to generate cash. Over the past five years, the company has returned more than $300bn while reducing its share count by c.20%. Although we have some reservations about the size and age of the iPhone installed base (due to a large portion of devices being second-hand or hand-medown) we are positive about the upcoming 5G cycle, even if mass production is delayed modestly. We are also excited about Apple's positioning in areas where trust is critical such as e-health and payments where Apple Pay already accounts for 4-5% of global card transactions, as well as optionality associated with emerging technologies such as VR and AR. However, Apple's medium-term growth rate is likely to trail our portfolio average, while its disproportionate China exposure represents a significant risk should relations between the US and China sour over trade, COVID-19 or the status of Hong Kong. As such, we expect to maintain our large, but underweight Apple position.

 

In the years ahead, we expect Artificial Intelligence (AI) to increasingly take on the baton from the cloud and smartphone, driving innovation and disruption across myriad industries. As such, AI remains highly strategic, evidenced by another record year for M&A and fund-raising with 231 AI-related deals consummated while 2,235 transactions raised $26.6bn for AI start-ups. AI continues to advance at an astonishing pace with a major milestone reached in natural language understanding (NLU) when a model from the Google AI Brain team achieved 'superhuman' performance in June 2019. Since then, other teams from the likes of Baidu, Alibaba, Microsoft and Facebook have done the same. In natural language processing (NLP), Microsoft has been working on a transformer-based generative language model (T-NLG) aiming to let machines generate words to complete unfinished sentences based on context, respond to a question with direct answers and summarise an article precisely like humans. In order to achieve this, its model features 17bn parameters to learn from essentially all of the text published on the internet, compared to c.26m used in a typical image recognition model.

 

Requiring extremely low latency during the inference process given the response gap in natural conversation is only 200ms, Microsoft's model has already surpassed human performance, achieving 98% grammatical correctness and 96% factual correctness. The implications are profound; today, the relative scarcity and cost of collecting data required to train machines is preventing wider adoption of real-time analytics. However, transformer-based models have the potential to transform myriad industries (and redistribute their profit pools).

 

Significant progress has also been made using AI to solve complex games building on DeepMind's AlphaGo victory over Lee Sodol in 2016. In the field of poker, Plurius an AI engine designed by Carnegie Mellon and Facebook beat 12 professional players over more than 10,000 hands. By playing millions of hands of poker against copies of itself, Plurius was able to use a limit look-ahead algorithm, rather than playing to the end through decision trees. This allowed it to 'solve' for poker in just eight days using a single 64-core server and just 28 cores during live play - remarkable when one considers that DeepMind's AlphaGo victory used 1920 CPUs and 280 GPUs. In October, Googleowned DeepMind's StarCraft 2 AI reached grandmaster status in the real-time strategy game, besting 99.8% of humans. It was trained by watching videos of professionals, then from simulated game play against itself over 44 days, equivalent to 200 human years playing the game.

 

More recently, NVIDIA has used a generative adversarial network (GAN) to recreate PAC-MAN without an underlying game engine. Rather than relying on actual gameplay, two competing neural networks instead created 50,000 episodes of content "convincing enough to pass for the original" allowing the AI to learn the rules of the game.

 

However, there is still much work to do. In the case of PAC-MAN, the neutral networks were so good at playing the game that they trained themselves incorrectly with ghosts closely trailing, rather than making contact with the titular protagonist. More worryingly, GANs have been exploited to create 'deepfakes' seen on social media where faces have been transposed or voices transformed to give the impression that someone did or said something they did not. Last year, Nancy Pelosi was the target of a deepfake with her speech appearing slow and slurred in a video shown on Facebook leading Rudy Guiliani to question her mental state. This issue is so serious that several US states have passed laws banning the use of deepfakes to interfere with elections. Likewise, persistent privacy concerns have led to lawmakers in San Francisco outlawing the use of facial recognition technologies. The industry will also have to address the lack of traceability (i.e. which factors have played key roles) making it difficult to justify outcomes and apply specific AI algorithms to different datasets. Despite these challenges, we are comforted by the fact that controversy often accompanies rapid diffusion of new technologies and that in time, appropriate governance will be established to facilitate the rapid and healthy development of AI, one of most powerful technologies in decades.

 

The current crisis has shown the modern world is built on technology. Trends we have witnessed and written about for many years have accelerated during the crisis, and many will remain at structurally higher levels once the crisis recedes. The self-induced nature of the downturn together with unprecedented fiscal stimulus that in the UK has seen 8.4m jobs furloughed has frustrated the 2008/9 'playbook' and leaves us hopeful that recovery may positively surprise us too. Our process and experienced team of nine dedicated investment professionals (including two new additions during the past year) remain well-positioned to assess and invest in this ongoing structural change, and we look forward to many more years of growth for the technology sector.

 

Ben Rogoff & Team

13 July 2020

 

 

 

ESG ISSUES

Environmental, social and governance issues have become more prominent in the technology sector in recent years. Technology has reshaped society and the economy, and the speed and scale of that change has brought great friction. Overall, we feel that while the sector may have contributed to many environmental, social and governance problems, it also has the singular capacity to alleviate many of them. Banks are unlikely to improve financial inclusion. Hospitals themselves are not going to build scalable telehealth products. Oil and gas companies are not going to solve climate change. This is not to diminish any of their efforts, but simply to point out that the technology sector is best positioned to provide the innovation at scale required to meet such existential challenges.

Taking climate change as a pressing example, The International Energy Agency's 2040 'Sustainable Development Scenario' suggests that ~80% of the reduction in cumulative CO2 emissions will come from greater energy efficiency (~44%) and greater use of renewables (~36%).The performance of renewables and energy efficiency improvements are driven by technological advances at the semiconductor and software levels. This can range from Silicon Carbide chips to improve the efficiency of the power electronics in electric vehicles to powerful computer-aided design (CAD) software to make better products with less material. When aluminum beverage cans were introduced 60 years ago they weighed about 60 grams; today they weigh about 13 grams. The Met Office will create an enormous 'digital twin' of the atmosphere and be able to forecast climate change with far greater accuracy and granularity.

 

E: THE ENVIRONMENTAL IMPACT OF THE TECHNOLOGY SECTOR

In spite of a trillion-fold improvement in the energy efficiency of computation since 1946, datacentres and data transmission networks already consume ~2% of the world's energy or ~360TWh per year - about the same as the global aviation industry. Perhaps surprisingly, the absolute energy draw of datacentres has remained flat over the past 5 years even as workloads have tripled and traffic has quintupled.

T his is because computation has shifted from traditional corporate datacentres to more energy-efficient 'hyperscale' cloud datacentres run by Amazon, Microsoft and Google. Hyperscale cloud operators can run dramatically more efficiently than on-premise due to higher server utilisation and more energy-efficient infrastructure. A case study from Berkeley suggested that moving common software applications to the cloud could reduce energy usage by 87%.

 

DEMATERIALISATION

 

As human society industrialised, the economy's demand for natural resources of all kinds rose in lockstep with economic growth. This voracious growth may have liberated most of mankind from a subsistence-style existence, but it came at a huge environmental cost; technology and capitalism provided tools that destroyed the planet.

 

But this is not the whole story. The nature of economic growth has changed. Until about 1970 resource use and real GDP moved in lockstep as the economy grew. A larger economy consumed more resources. The first Earth Day festival in 1970 marked the peak of this trend as fears of overpopulation and a new Malthusian crisis appeared imminent to some. How could the planet provide enough resources to support this growth? It was, in hindsight, at this point the US economy began to change in nature. The economy continued to grow, but the amount of physical materials it consumed to support that growth began to decline.

 

A detailed study of 100 commodities in the US from 1900 to 2000 showed that "36 have peaked in absolute use… another 53 have peaked relative to the size of the economy". The chart included in the Annual Report, shows how the usage of a wide range of materials and energy grew with real GDP through until 1970 (all data indexed to 1970 = 1.0). Then, the correlation broke down quite abruptly during the 1970s, as the economy continued to grow, but the resources used to support that growth did not. A similar phenomenon has been documented in the UK.

 

This phenomenon was itself driven by a process of dematerialisation, whereby technology made physical things digital (movies, music, correspondence etc), and better design software and more advanced materials meant physical goods could be made with less physical 'stuff'. The smartphone is perhaps the ultimate example of this process of dematerialisation: a telephone, camera, computer, camcorder, Filofax, newspaper, Walkman, calculator, answering machine, clock, photo album, CD collection, stopwatch, notebook - all in one small package. The iPhone uses vastly less metal, plastic, glass and silicon than the products and processes it has replaced.

 

S: THE SOCIAL IMPACT OF THE TECHNOLOGY SECTOR

 

The 'social impact of technology on the world' is too broad to cover fully in this report. As with technology's environmental impact, we see a complex picture of harmful and supportive forces. Electronic learning and 'fake news' are two strands in the same thread: the democratization of both the production and consumption of information. We have online bullying and online support groups. There are YouTube videos to show how to fix a car and how to make a bomb. Technology companies have rightly come under immense pressure to demonstrate they are working to keep their platforms as clear as possible of factually untrue or potentially harmful information and we have engaged with company representatives to understand how they are doing this. One trend is becoming clearer: the apparatus of government and evolution of social attitudes have struggled - or even failed - to keep pace with technological change. 61% of respondents in a recent survey agreed with the statement that 'Government does not understand emerging technologies enough to regulate them effectively', and fully 74% agreed that 'CEOs should take the lead on change rather than waiting for government to impose it'.

 

We consider 'Social' factors in our investment decision-making process insofar as they are likely to impact a company's long-term prospects. This can include considering the tradeoffs required for a new technology to move up (or fail to move up) an adoption curve as soon we expect. For example, the growth and profitability of online advertising relies on users giving up some privacy if ads served to them are to become more effective over time. It is sometimes overlooked that both behaviour and survey data suggests that the 'silent majority' of internet users are fairly relaxed about this tradeoff, and that trust in the technology sector remains the highest of any sector.

 

G: GOVERNANCE ISSUES IN THE TECHNOLOGY SECTOR

 

We have always considered governance as part of our investment approach and have voted against board resolutions on many occasions, especially in Asia where governance tends to be weakest. We provide both formal and informal advice where we feel it is appropriate and on occasion have written formally to the boards of our holdings. We are actively engaged around executive pay and the use of stock option awards is something we discuss in many of our company meetings. This is an area we are very focused on given the financial - as well as moral - impact associated with stock issuance as some company management teams enrich themselves excessively at the expense of investors via excessive equity dilution.

 

OUR ESG APPROACH

 

We have recently introduced a new ESG analysis/scoring framework across Polar Capital which ranks each of our holdings (AAA to CCC) on each factor relative to similar technology companies enabling us to better challenge the underperformers and/or make more informed decisions. This report is included and treated as part of our monthly risk reporting process, and changes in a company's ESG rating will be investigated by the analyst responsible for it.

 

Whilst our investment process is not driven by ESG our aim is to improve the behaviour of our companies and avoid the worst offenders (any highlighted CCC in ESG scoring must be challenged on the areas of most concern). Longer term we believe this also benefits performance because companies which disregard ESG factors are often not good investments as either public opinion or regulation eventually catches up with them.

 

At a firm level we exclude all companies that are linked to the production and/or marketing of controversial weapons (cluster munitions, antipersonnel mines, depleted uranium etc.). We also exclude EU and UN Sanctioned entities and entities on the US OFAC list.

 

Alastair Unwin

13 July 2020

 

PORTFOLIO REVIEW

 

Breakdown of Investments by Region

As at

30 April 2020

As at

30 April 2019

US & Canada

71.1%

68.7%

Asia Pacific (ex-Japan)

13.5%

12.5%

Japan

6.2%

5.5%

Europe (inc-UK)

4.8%

6.3%

Other Net Assets

3.9%

6.8%

Middle East & Africa

0.5%

0.2%

 

Market Capitalisation of Underlying Investments

As at

30 April 2020

As at

30 April 2019

>$10bn

81.5%

77.6%

$1bn-$10bn

17.6%

21.2%

<£1bn

0.9%

1.2%

 

All data sourced from Polar Capital LLP.

 

CLASSIFICATION OF INVESTMENTS*

as at 30 April 2020

 

 

North

America %

Europe

%

Asia Pacific (inc. Middle East)

%

Total

30 April

2020

%

Total

30 April

2019

%

Benchmark Weightings as at 30 April

2020

Software

 

 

 

 

24.2

0.4

0.3

24.9

27.7

28.4

Semiconductors & Semiconductor Equipment Equipment

10.5

2.3

5.1

17.9

15.9

18.8

Interactive Media & Services

12.8

0.2

3.2

16.2

16.9

18.7

Technology Hardware, Storage & Peripherals

7.3

0.1

2.7

10.1

7.9

17.8

Internet & Direct Marketing Retail

3.8

1.0

4.1

8.9

6.9

4.1

Electronic Equipment, Instruments & Components

2.1

-

2.8

4.9

3.8

0.6

IT Services

4.5

-

0.1

4.6

5.6

6.5

Entertainment

2.4

0.6

0.6

3.6

2.3

0.6

Communications Equipment

1.9

-

-

1.9

1.5

3.4

Machinery

0.1

-

1.3

1.4

1.0

-

Aerospace & Defense

0.6

-

-

0.6

0.7

-

Healthcare Equipment & Supplies

0.3

-

-

0.3

0.9

-

Leisure Products

0.3

-

-

0.3

-

-

Diversified Telecommunication Services

0.3

-

-

0.3

-

0.3

Electrical Equipment

-

0.2

-

0.2

-

-

Healthcare Technology

-

-

-

-

0.8

0.6

Diversified Consumer Services

-

-

-

-

0.5

-

Life Sciences Tools & Services

-

-

-

-

0.4

-

Auto Components

-

-

-

-

0.2

-

Road & Rail

-

-

-

-

0.2

-

Total investments (£2,218,307,000)

71.1

4.8

20.2

96.1

93.2

 

Other net assets (excluding loans)

3.4

1.1

1.9

6.4

9.6

 

Loans

(0.8)

-

(1.7)

(2.5)

(2.8)

 

Grand total (net assets of £2,308,597,000)

73.7

5.9

20.4

100.0

-

 

At 30 April 2019 (net assets of £1,935,646,000)

74.7

6.4

18.9

-

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.

 

BENCHMARK

The Company uses the Dow Jones World Technology Index (total return, in Sterling with the removal of relevant withholding taxes), ('the Benchmark ') as the benchmark against which net asset value performance is measured for the purpose of assessing performance fees.

 

As at 30 April 2020 the Dow Jones World Technology Index was calculated as a market capitalisation based index of 691 technology companies worldwide. 73.7% of the index weighting is in North America, 6.3% in Europe and 16.9% in Asia Pacific (ex-Japan). By market capitalisation 90.9% is represented by large companies, 8.5% by mid-caps and 0.6% by smaller companies.

 

Shareholders should be aware that the Company's portfolio is actively managed and is not designed to closely track any particular benchmark, index or market. Given the dynamic nature of technology markets and the rapid changes in share prices of technology shares favoured by the Investment Manager, the performance of the portfolio can vary from the Benchmark performance, at times considerably.

 

Although the Company has a benchmark, this is neither a target nor an ideal investment strategy. The purpose of the Benchmark is to set a reasonable return for Shareholders above which the Investment Manager is entitled to a share of the extra performance the Investment Manager has delivered.

 

 

FULL PORTFOLIO as at 30 April 2020

 

 

 

 

 

 

Value of holding

% of net assets

Ranking

 

 

 

30

April

2020

30

April

2019

30 April 2020

30 April 2019

2020

2019

Stock

Sector

Region

 '000

 '000

 %

 %

1

(1)

Microsoft

Software

North America

236,529

170,736

10.2

8.8

2

(2)

Alphabet

Interactive Media & Services

North America

181,039

149,210

7.8

7.7

3

(4)

Apple

Technology Hardware, Storage & Peripherals

North America

168,615

85,862

7.3

4.4

4

(3)

Facebook

Interactive Media & Services

North America

95,587

91,458

4.1

4.7

5

(5)

Alibaba

Internet & Direct Marketing Retail

Asia Pacific

87,073

64,772

3.8

3.3

6

(6)

Tencent

Interactive Media & Services

Asia Pacific

74,327

55,788

3.2

2.9

7

(7)

Amazon.com

Internet & Direct Marketing Retail

North America

71,522

54,350

3.1

2.8

8

(8)

Samsung Electronics

Technology Hardware, Storage & Peripherals

Asia Pacific

62,654

52,421

2.7

2.7

9

(13)

Advanced Micro Devices

Semiconductors & Semiconductor Equipment

North America

50,291

28,936

2.2

1.5

10

(30)

Nvidia

Semiconductors & Semiconductor Equipment

North America

49,804

15,165

2.2

0.8

Top 10 investments

 

 

1,077,441

 

46.6

 

11

(9)

Taiwan Semiconductor

Semiconductors & Semiconductor Equipment

Asia Pacific

43,321

42,654

1.9

2.2

12

(12)

Salesforce.com

Software

North America

42,538

29,987

1.8

1.6

13

(50)

Intel

Semiconductors & Semiconductor Equipment

North America

40,165

9,920

1.7

0.5

14

(17)

ASML

Semiconductors & Semiconductor Equipment

Europe

34,081

22,787

1.5

1.2

15

(10)

ServiceNow

Software

North America

32,541

37,452

1.4

2.0

16

(14)

PayPal

IT Services

North America

31,514

28,133

1.4

1.5

17

(11)

Adobe

Software

North America

30,095

37,303

1.3

1.9

18

(19)

Toyko Electron

Semiconductors & Semiconductor Equipment

Asia Pacific

24,102

20,269

1.0

1.0

19

(-)

MediaTek

Semiconductors & Semiconductor Equipment

Asia Pacific

22,416

-

1.0

-

20

(73)

Cognex

Electronic Equipment, Instruments & Components

North America

21,884

6,828

1.0

0.4

Top 20 investments

 

 

1,400,098

 

60.6

 

21

(16)

Texas Instruments

Semiconductors & Semiconductor Equipment

North America

21,360

23,814

1.0

1.2

22

(-)

Activision Blizzard

Entertainment

North America

21,302

-

0.9

-

23

(25)

Visa

IT Services

North America

21,042

16,460

0.9

0.9

24

(89)

Netflix

Entertainment

North America

20,307

4,830

0.9

0.2

25

(28)

Qualcomm

Semiconductors & Semiconductor Equipment

North America

19,374

15,645

0.8

0.8

26

(65)

Splunk

Software

North America

19,124

7,434

0.8

0.4

27

(58)

Lumentum

Communications Equipment

North America

19,108

8,755

0.8

0.4

28

(21)

Mastercard

IT Services

North America

18,893

18,298

0.8

0.9

29

(15)

Zendesk

Software

North America

18,759

26,100

0.8

1.3

30

(-)

CrowdStrike

Software

North America

17,895

-

0.8

-

Top 30 investments

 

 

1,597,262

 

69.1

 

31

(52)

RingCentral

Software

North America

17,077

9,636

0.7

0.5

32

(-)

Taiyo Yuden

Electronic Equipment, Instruments & Components

Asia Pacific

16,809

-

0.7

-

33

(-)

Cloudflare

Software

North America

16,807

-

0.7

-

34

(36)

Advantest

Semiconductors & Semiconductor Equipment

Asia Pacific

16,273

12,845

0.7

0.7

35

(46)

HubSpot

Software

North America

16,058

10,358

0.7

0.5

36

(54)

Everbridge

Software

North America

15,333

9,369

0.7

0.5

37

(-)

Grubhub

Internet & Direct Marketing Retail

North America

15,149

-

0.7

-

38

(-)

Ciena

Communications Equipment

North America

14,879

-

0.7

-

39

(22)

Xilinx

Semiconductors & Semiconductor Equipment

North America

14,576

17,572

0.6

0.9

40

(82)

Take-Two Interactive Software

Entertainment

North America

14,117

5,813

0.6

0.3

Top 40 investments

 

 

1,754,340

 

75.9

 

41

(31)

Axon Enterprise

Aerospace & Defense

North America

13,883

14,774

0.6

0.7

42

(-)

Lattice Semiconductor

Semiconductors & Semiconductor Equipment

North America

13,638

-

0.6

-

43

(40)

Spotify Technology

Entertainment

Europe

13,506

12,633

0.6

0.7

44

(-)

Nintendo

Entertainment

Asia Pacific

12,856

-

0.6

-

45

(-)

FLIR Systems

Electronic Equipment, Instruments & Components

North America

12,743

-

0.6

-

46

(27)

Synopsys

Software

North America

12,574

16,009

0.5

0.8

47

(84)

Ocado

Internet & Direct Marketing Retail

Europe

11,966

5,495

0.5

0.3

48

(77)

Okta

IT Services

North America

11,889

6,268

0.5

0.3

49

(42)

Proofpoint

Software

North America

11,717

11,313

0.5

0.6

50

(78)

TDK

Electronic Equipment, Instruments & Components

Asia Pacific

11,414

6,014

0.5

0.3

Top 50 investments

 

 

1,880,526

 

81.4

 

51

(-)

Siltronic

Semiconductors & Semiconductor Equipment

Europe

11,133

-

0.5

-

52

(-)

Fanuc

Machinery

Asia Pacific

11,074

-

0.5

-

53

(-)

Keysight Technologies

Electronic Equipment, Instruments & Components

North America

11,013

-

0.5

-

54

(-)

Power Integrations

Semiconductors & Semiconductor Equipment

North America

10,985

-

0.5

-

55

(-)

Twitter

Interactive Media & Services

North America

10,770

-

0.5

-

56

(64)

Alteryx

Software

North America

10,761

7,562

0.5

0.4

57

(61)

Harmonic Drive Systems

Machinery

Asia Pacific

10,579

8,297

0.4

0.4

58

(57)

Fuji Machine Manufacturing

Machinery

Asia Pacific

10,314

8,835

0.4

0.5

59

(41)

Pinterest

Interactive Media & Services

North America

9,908

12,390

0.4

0.6

60

(66)

Keyence

Electronic Equipment, Instruments & Components

Asia Pacific

9,291

7,425

0.4

0.4

Top 60 investments

 

 

1,986,354

 

86.0

 

61

(-)

Hirose Electric

Electronic Equipment, Instruments & Components

Asia Pacific

9,276

-

0.4

-

62

(-)

SolarEdge Technologies

Semiconductors & Semiconductor Equipment

Asia Pacific

9,252

-

0.4

-

63

(91)

Anaplan

Software

North America

8,738

4,703

0.4

0.2

64

(-)

SAP

Software

Europe

8,672

-

0.4

-

65

(35)

Ansys

Software

North America

8,621

12,928

0.4

0.7

66

(37)

Twilio

IT Services

North America

8,488

12,814

0.4

0.7

67

(-)

Medallia

Software

North America

8,411

-

0.4

-

68

(-)

Dexcom

Healthcare Equipment & Supplies

North America

7,812

-

0.3

-

69

(43)

Aixtron

Semiconductors & Semiconductor Equipment

Europe

7,747

11,200

0.3

0.6

70

(-)

Meituan-Dianping

Internet & Direct Marketing Retail

Asia Pacific

7,540

-

0.3

-

Top 70 investments

 

 

2,070,911

 

89.7

 

71

(-)

Cadence Design Systems

Software

North America

7,476

-

0.3

-

72

(-)

Akamai Technologies

IT Services

North America

7,463

-

0.3

-

73

(-)

Applied Materials

Semiconductors & Semiconductor Equipment

North America

7,458

-

0.3

-

74

(-)

Samsung Electro-Mechanics

Electronic Equipment, Instruments & Components

Asia Pacific

6,949

-

0.3

-

75

(-)

Smartsheet

Software

North America

6,727

-

0.3

-

76

(-)

Veeco Instruments

Semiconductors & Semiconductor Equipment

North America

6,565

-

0.3

-

77

(20)

Arista Networks

Communications Equipment

North America

6,549

19,368

0.3

1.0

78

(71)

Shimadzu

Electronic Equipment, Instruments & Components

Asia Pacific

6,492

7,103

0.3

0.4

79

(-)

Bandwith

Diversified Telecommunication Services

North America

6,438

-

0.3

-

80

(-)

Zalando

Internet & Direct Marketing Retail

Europe

6,410

-

0.3

-

Top 80 investments

 

 

2,139,438

 

92.7

 

81

(-)

Dynatrace

Software

North America

6,397

-

0.3

-

82

(-)

Peloton Interactive

Leisure Products

North America

6,351

-

0.3

-

83

(-)

Ping Identity

Software

North America

6,084

-

0.3

-

84

(-)

Just Eat

Internet & Direct Marketing Retail

Europe

5,941

-

0.2

-

85

(45)

8X8

Software

North America

5,886

10,806

0.2

0.6

86

(18)

Analog Devices

Semiconductors & Semiconductor Equipment

North America

5,380

20,943

0.2

1.1

87

(59)

Yaskawa Electric

Electronic Equipment, Instruments & Components

Asia Pacific

4,845

8,725

0.2

0.4

88

(-)

Atlassian

Software

Asia Pacific

4,611

-

0.2

-

89

(69)

Square

IT Services

North America

4,512

7,280

0.2

0.4

90

(-)

Auto Trader

Interactive Media & Services

Europe

4,414

-

0.2

-

Top 90 investments

 

 

2,193,859

 

95.0

 

91

(-)

BlackLine

Software

North America

4,120

-

0.2

-

92

(-)

NEL ASA

Electrical Equipment

Europe

3,992

-

0.2

-

93

(94)

Ememory Technology

Semiconductors & Semiconductor Equipment

Asia Pacific

3,022

3,842

0.1

0.2

94

(-)

Protolabs

Machinery

North America

2,975

-

0.1

-

95

(105)

Zuken

IT Services

Asia Pacific

2,746

1,649

0.1

0.1

96

(104)

Tobii

Technology Hardware, Storage & Peripherals

Europe

1,899

1,858

0.1

0.1

97

(98)

Mix Telematics

Software

Asia Pacific

1,846

2,990

0.1

0.2

98

(103)

KVH Industries

Communications Equipment

North America

1,332

1,897

0.1

0.1

99

(-)

Impinj

Semiconductors & Semiconductor Equipment

North America

1,320

-

0.1

-

100

(107)

Seeing Machines

Electronic Equipment, Instruments & Components

Asia Pacific

1,144

1,540

-

0.1

Top 100 investments

 

 

2,218,255

 

96.1

 

101

(111)

Herald Ventures Limited Partnership

Other

Europe

52

55

-

-

 

Total equities

2,218,307

96.1

 

 

Other net assets

90,290

3.9

 

 

Total net assets

2,308,597

100.0

 

 

Note: Asia Pacific includes Middle East.

 

 

STRATEGIC REPORT

 

The Strategic Report section of this Annual Report comprises the Chair's Statement, the Investment Manager's Report, including information on the portfolio, and this Strategic Report. It has been prepared to provide information to Shareholders on the Company's strategy and the potential for such to succeed, including a fair review of the Company's performance during the year ended 30 April 2020, the position of the Company at the year end and a description of the principal risks and uncertainties. The Strategic Report section contains certain forward looking statements, made by the Directors in good faith based on the information available to them at the time of their approval of this Report. Such statements should be treated with caution due to inherent uncertainties, including both economic and business risk factors underlying any such forward-looking information.

 

INTRODUCTION AND BUSINESS MODEL

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 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.

 

Further information on the operation of the business is set out in the Directors' Report contained within the Company's 2020 Annual Report .

Polar Capital LLP also provides company secretarial services and assists with providing general administration including liaison with directly appointed third party suppliers.

 

INVESTMENT OBJECTIVE AND POLICY

While observing the Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes) as the Benchmark against which NAV performance is measured, Shareholders should be aware that the portfolio is actively managed and is not designed to track any particular benchmark index or market. The performance of the portfolio can vary from the Benchmark performance, at times considerably.

 

Over the last four decades the technology industry has been one of the most vibrant, dynamic and rapidly growing segments of the global economy. Technology companies offer the potential for substantially faster earnings growth than the broader market.

 

Investments are selected for their potential Shareholder returns, not on the basis of technology for its own sake. The Investment Manager believes in rigorous fundamental analysis and focuses on:

 

• management quality;

• the identification of new growth markets;

• the globalisation of major technology trends; and

• exploiting international valuation anomalies and sector volatility.

 

Objective

The Company's Investment Objective has been since formation, and will continue to be, to maximise long-term capital growth by investing in a diversified portfolio of technology companies around the world.

 

Policy

At the Annual General Meeting in 2012 the Investment Policy, as detailed below and available on the
Company's website, was approved. The Portfolio has been managed in accordance with the Policy in the year to 30 April 2020.

 

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.

 

Risk Diversification

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.

 

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 (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.

 

Borrowing, Cash and Derivatives

The Company may borrow money to invest in the Portfolio over both the long and short-term. Any commitment to borrow funds is agreed by the Board and the AIFM.

 

The Company's Articles of Association permit borrowings up to the amount of its paid up share capital plus capital and revenue reserves but any net borrowings in excess of 20% of the Company's net assets at the time of drawdown will only be made with the approval of the Board.

 

The Investment Manager may also use from time to time derivative instruments, as approved by the Board, such as financial futures, options, contracts-for-difference and currency hedges. These are used for the purpose of efficient portfolio management. Any such use of derivatives will be made in accordance with the Company's policies on spreading investment risk as set out in this investment policy and any leverage resulting from the use of such derivatives will be subject to the restrictions on borrowings.

 

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 of its Investment Policy.

 

INVESTMENT STRATEGY GUIDELINES AND BOARD LIMITS

The Board has established guidelines for the Investment Manager in pursuing the Investment Policy. The Board uses these guidelines to monitor the portfolio's exposure to different geographical markets, sub-sectors within technology and the spread of investments across different market capitalisations.

 

These guidelines are kept under review as cyclical changes in markets and new technologies will bring certain sub-sectors or companies of a particular size or market capitalisation into or out of favour.

 

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% of the Portfolio

• Europe up to 40% of the Portfolio

• Japan and Asia up to 55% of the Portfolio

• Rest of the world up to 10% of the Portfolio

 

The Board has set specific upper exposure limits for certain countries where they believe there may be an elevated risk.

 

Cash

The Company may hold cash or near 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.

 

Gearing

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.

 

During the year the Company had two, two-year loan facilities with ING Bank NV: One for 23.3m US Dollars at a fixed rate of 4.235% pa and one for 5.2bn Japanese Yen at a fixed rate of 0.8% pa, both of which were drawn down on 2 October 2018. These loans fall due for repayment on 2 October 2020. It is anticipated that the loan facilities will be replaced on expiry. These loans replaced the previously held three year loans of which expired on 2 October 2018 and the revolving credit facility which expired on 2 October 2019. Details of the loans are set out in Note 17 to the Financial Statements.

 

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 be proposing the five-yearly continuation vote of the Company at the Annual General Meeting to be held in September 2020; the Board are supportive of the Company continuing in it's current form and will be recommending the resolution to Shareholders. 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.

 

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 and administrative services, including accounting, portfolio valuation and trade settlement which it has arranged to deliver through HSBC Securities Services ('HSS'). HSS have also been appointed as the Company's Custodian and Depository.

 

The Company also contracts directly with a number of third parties for the provision of regularly required services:

 

· Stifel Nicolaus Europe Limited as Corporate Broker;

· Equiniti Limited as Registrar;

· KPMG LLP as independent Auditors;

· Camarco as PR advisors; and

· Emperor as website designers, internet hosting services and designers and printers for Shareholder communications.

 

REGULATORY ARRANGEMENTS

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 through a primary information provider. Statements from the Depositary and the AIFM can be found on the Company's website.

 

The Company seeks to manage its portfolio in such a way as to meet the tests in Section 1158 and 1159 of the Corporation Tax Act 2010 (as amended by Section 49(2) of the Finance Act 2011) and continue to qualify as an investment trust. This qualification permits the accumulation of capital within the portfolio without any liability to UK Capital Gains Tax. Further information is provided in the Directors' Report.

 

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, 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 growth and relative performance against the Benchmark.

 

The Board reviews the performance of the portfolio in detail and hears the views of the Investment Manager at each meeting.

At 30 April 2020 the total net assets of the Company amounted to £2,308,597,000 (2019: £1,935,646,000). The Company's NAV has, over the year to 30 April 2020, outperformed the Benchmark. The NAV per share rose by 18.6% from 1446.40p to 1715.59p while the Benchmark rose 18.1% in Sterling terms over the same period. As at 30 April 2020 the portfolio comprised 101 (2019: 111) investments.

 

Investment performance is explained in the Chair's Statement and the Investment Manager's Report.

 

Over the longer-term, as shown by the historic performance data shown above, growth in the NAV has exceeded the Benchmark.

 

Monitoring and reacting to issues created by the discount or premium of the ordinary share price to the NAV per ordinary share with the aim of reduced discount volatility for Shareholders.

 

The Board receives regular information on the composition of the share register including trading patterns and discount/premium levels of the Company's ordinary shares.

 

The Board is aware of the vulnerability of a sector specialist investment trust to a change in investor sentiment to that sector. While there is no formal discount policy the Board discusses the market factors giving rise to any discount or premium, the long or short-term nature of those factors and the overall benefit to Shareholders of any actions. The market liquidity is also considered when authorising the issue or buy back of shares when appropriate market conditions prevail.

 

A daily NAV per share, diluted when appropriate, calculated in accordance with the AIC guidelines, is issued to the London Stock Exchange.

The discount/premium of the ordinary share price to NAV per ordinary share (diluted when appropriate) has been as follows:

 

Financial year to 30 April 2020

• Maximum premium over year: 5.3%

• Maximum discount over year: 15.9%

• Average discount over year: 4.4%

 

The Company has not bought back any shares in the year to 30 April 2020 and has issued 741,000 shares when the issue was NAV enhancing to existing

Shareholders.

 

Over the previous five financial years ended 30 April 2020

• Maximum premium over period: 5.3%

• Maximum discount over period: 15.9%

• Average discount over period: 2.9%

 

Over the previous five financial years ended 30 April 2020 the Company has not bought back any shares and in the same period, has issued 2,229,841 as a result of market demand.

 

To qualify and continue to meet the requirements for Sections 1158 and 1159 of the Corporation Tax Act 2010 ('investment trust status').

The Board receives regular financial information which discloses the current and projected financial position of the Company against each of the tests set out in Sections 1158 and 1159.

This has been achieved for every year since launch in 1996.

 

HMRC has approved investment trust status subject to the Company continuing to meet the relevant eligibility conditions and ongoing requirements.

 

The Directors believe that the tests have been met in the financial year ended 30 April 2020 and will continue to be met.

 

Efficient operation of the Company with appropriate investment management resources and services from third party suppliers within a stable and risk controlled environment.

The Board considers annually the services provided by the Investment Manager, both investment and administrative, and reviews on a cycle the provision of services from

third parties including the costs of their services.

 

The annual operating expenses are reviewed and any non-recurring project related expenditure approved by the Board.

The Board has received and considered satisfactory the internal controls report of the Investment Manager and other key suppliers including contingency arrangements to facilitate the ongoing operations of the Company in the event of withdrawal or failure of services.

 

The ongoing charges of the Company for the year ended 30 April 2020 excluding the performance fee were 0.93% of net assets (2019: 0.95%). The ongoing charges including the performance fee payable in respect of the year ended 30 April 2020 were 0.99% (2019: 1.33%) 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 Audit Committee carries out, at least annually, a robust assessment of the principal risks and uncertainties with the assistance of the Investment Manager, continually monitors identified risks and meets to discuss both long-term and emerging risks outside of the normal cycle of Audit Committee meetings.

 

A Risk management process has been established to identify and assess various risks, their likelihood and the possible severity of impact then, considering both internal and external controls and factors that could provide mitigation, a post mitigation risk impact score is determined. The Audit Committee has identified the key risks faced by the Company which are those classified as having the highest risk impact score post mitigation. The key risks are detailed below with a high-level summary of the management through mitigation and status arrows to indicate any change in assessment over the past financial year.

 

The Audit Committee has also considered the risks posed by COVID-19, which has been considered as a Black Swan event. As discussed in the Chair's Statement and Investment Manager's Report, the ramifications of COVID-19 thus far has not led to a deterioration in the Company's performance, which has remained robust. In the medium to long term when the societal and economic results of COVID-19 materialise, it is expected that the risks that arise from COVID-19 will become clearer and will feature in the Committee's consideration of global geopolitical risk and its potential effect on the risk of failure to achieve the investment objective or performance that is satisfactory to our Shareholders. Further information on how the Committee has considered COVID-19 when assessing its effect on the Company's ability to operate as a going concern and the Company's longer-term viability can be found in the Strategic Report and the Report of the Audit Committee within the Annual Report. This also includes the Company's forthcoming continuation vote.

 

 

Principal Risks and Uncertainties

Management of risks through Mitigation and Controls

PORTFOLIO RISK

//

Failure to achieve Investment Objective; Breach of lenders covenants or AIFMD limits; and Portfolio management errors including breach of investment policy.

Investment mandate falls out of favour and or the Investment Manager is unable to deliver the Investment Objective. Leading to poor performance against the benchmark or other metric, persistent discount in excess of Board or Shareholder acceptable levels, shrinkage of assets or loss of liquidity.

Breach of covenants and/or limits may create a forced liquidation of the portfolio to repay debt and result in the inability to renew borrowing facilities. Error or breach may cause regulatory investigation leading to fines, reputational damage and risk to investment trust status.

Fundamental risk of investors seeking alternative investments or lower risk strategies.

 

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.

Detailed reports containing financial information including gearing and cash balances are provided to each Board meeting and are used to assess portfolio construction and the degree of risk which the Investment Manager incurs to generate investment returns. The Board regularly considers, in comparison to the sector and peers, 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.

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 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 next continuation resolution will be proposed at the AGM to be held in September 2020. The Chair and Directors meet with Shareholders through various events and bespoke meetings through the year.

OPERATIONAL RISK

>> 

Failure in services provided by the Investment Manager, Custodian, Depositary or other service providers; Accounting, Financial or Custody Errors; IT failure and Cyber Risk or 'Black Swan' Event

Failure of services resulting in regulatory investigation or financial loss, failure of trade settlement or potential loss of Shareholder assets.

Cyber-attack causing disruption to or failure of operational and accounting systems and processes provided by the Investment Manager creating an unexpected event and / or adverse impact on personnel or the portfolio.

Material accounting errors or misstatements, including inaccurate fee calculations. Mis-valuation of investments or the loss of assets.

Incomplete or inaccurate financial information potentially causing failure to meet investment trust status. Company is unable to recover losses or make-good Shareholder value.

Financial loss due to unexpected natural event disrupting the ability to operate.

 

The Board carry out an annual review of internal control reports from suppliers which includes the Investment Manager's cyber protocols and disaster recovery procedures. The Company has a disaster recovery plan in place along with a Black Swan Committee. Due diligence and service reviews are undertaken with third-party service providers including the Custodian and Depository.

The number, severity and success rate of cyber-attacks have increased considerably over recent years, controls are however in place and the Board proactively seeks to keep abreast of developments through a series of meetings with relevant service providers. In light of the COVID-19 pandemic and the lockdown measures introduced by the UK Government, the Audit Committee sought assurance from each of the Company's service providers on the resilience of their business continuity arrangements whilst the majority of their employees worked remotely. 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.

A full review of the internal control framework is carried out at least annually. Regular reporting is received by the Investment Manager on behalf of the Board from the Depositary on the safe custody of the Company's assets. The Board undertakes independent reviews of the Depositary and external Administrator services and additional resources have been put in place by the Investment Manager. Management accounts are produced and reviewed monthly, statutory reporting and daily NAV calculations are produced by the external Administrator and verified by the Investment Manager. Accounting records are tested, and valuations verified independently as part of the year-end financial reporting process.

REGULATORY RISK

//

Breach of Statutes and Regulations including failure to keep up with legislative changes; failure to communicate significant events to Shareholders

Failure to comply with the FCA's Listing Rules and Disclosure Guidance and Transparency Rules; not meeting the provisions of s1158/1159 of the Corporation Tax Act 2010, the Companies Act 2006 and other UK, European and overseas legislation affecting UK companies including MiFID II and the GDPR. Not complying with accounting standards could result is a suspension of listing or loss of investment trust status, reputational damage and Shareholder activism.

Further risks arise from not keeping abreast of changes in legislation and regulations which have in recent years been substantial.

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 (both UK and EU) 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.

ECONOMIC AND GEOPOLITICAL RISK

>> 

Global geopolitical risk; 'Brexit'

There is significant exposure to the economic cycles and political movements of the markets in which the underlying investments are listed.

The fluctuations of exchange rates may have a material impact on Shareholder returns. Political change affecting economic stability may have an adverse effect on underlying valuations.

Uncertainty surrounding the impact of any eventual exit of the UK from the European Union.

Changes in trade and tariff arrangements may affect valuations.

Potential for the exit arrangements to adversely impact investee companies.

 

The Board regularly discusses the global geo-political issues and general economic conditions and developments. Note 27 to the Financial Statements within the Annual Report describes the impact of changes in foreign exchange rates. The Company's largest exposure is to the level of US $ holdings.

Political changes in the US, Europe and UK continue the uncertainty and volatility in financial markets. The medium and longer term impacts of COVID-19 on this risk, for example the unprecedented levels of fiscal stimulus and travel restrictions will continue to be assessed by the Audit Committee in light of how they may affect the Company's portfolio and the economic and geopolitical environment in which the Company operates within overall.

The potential consequences of Brexit continue to be monitored through existing control systems. Due to the high level of US investments (71.1%) and the low level of UK investments (0.71%) the Board does not believe that there is likely to be any significant or direct impact on the operation of the Company or the structure of the portfolio.

The Company has a varying level of cash which is primarily held in US Dollars and also has loan facilities in Japanese Yen and US Dollars. Fluctuations in exchange rates are monitored which may impact investor returns. An analysis of currency is given in Note 27 to the Financial Statements within the Annual Report.

KEY STAFF RISK

//

Loss of Investment Manager or other key management professionals; Insufficient resource or experience on the Board

 

Impact on investor confidence leading to widening of the discount and/or poor performance creating a period of uncertainty and potential termination of the Investment Management Agreement.

Inactivity by the Board when action is required leading to loss of Shareholder value causing risk of Shareholder activism.

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.

The Investment Manager has implemented BCP arrangements as a result of COVID-19 with staff working remotely with no loss of service.

Respected recruiters are used to source suitably experienced candidates for non-executive directors. 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.

 

//No change

>>Increased

<<Decreased

 

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.

 

Investment team

The Investment Manager is Polar Capital LLP ('Polar Capital'), which is authorised and regulated by the Financial Conduct Authority.

 

Under the terms of the investment management agreement Polar Capital provides investment management, and provides and procures accounting, company secretarial and administrative services.

 

Polar Capital provides a team of technology specialists led by Ben Rogoff. Each team member focuses on specific areas while Ben has overall responsibility for the portfolio. Polar Capital also has other specialist and geographically focused investment teams which may contribute to idea generation. The team's biographies can be found in the Annual Report and on the Company's website.

 

Termination arrangements

The investment management agreement may be terminated by either party giving 12 months' notice, but under certain circumstances the Company may be required to pay up to one year's management charges if immediate notice is given and compensation will be on a sliding scale if less than 12 months' notice is given.

 

Fee arrangements

On 15 April 2019 the Company announced revised fee arrangements which came into force on 1 May 2019.

 

Performance periods will coincide with the Company's accounting periods. In the event of a termination of the investment management agreement, the date the agreement is terminated will be deemed to be the end of the relevant performance period and any performance fee payable shall be calculated as at that date.

 

Management fees of £18,273,000 (2019: £15,341,000) have been paid for the year to 30 April 2020 of which £nil (2019: £3,876,000) was outstanding at the year end. A performance fee of £1,050,000 has been earned for the year to 30 April 2020 (2019: £6,644,000), and the whole of this amount (2019: whole amount) was outstanding at the year end.

 

Management fee

The base management fee, which is paid by the Company quarterly in arrears to the Manager, is calculated on the Net Asset Value ('NAV') on a per share basis as follows:

 

Tier 1

1 per cent. for such of the NAV as exceeds £0 but is less than or equal to £800 million;

Tier 2

0.85 per cent. for such of the NAV as exceeds £800 million but is less than or equal to £1.6 billion;

Tier 3

 

0.80 per cent. for such of the NAV as exceeds £1.6 billion but is less than or equal to £2 billion; and

Tier 4

0.70 per cent. for such of the NAV as exceeds £2 billion.

 

Any investments in funds managed by Polar Capital are wholly excluded from the base management fee calculation. In addition to the base management fee, the Investment Manager may be entitled to receive a performance fee as detailed below.

 

Performance fee

The performance fee participation rate is 10 per cent. of outperformance above the Benchmark, subject to a cap on the amount which may be paid out in any one year of 1 per cent. of NAV. Any amount over the 1 per cent. payment is written off.

 

Calculation

A notional performance fee entitlement ('NPFE') is calculated and accrued daily (if positive) having made up all past underperformance; however, it is only at the financial year end that the payment of the performance fee is tested.

 

The calculation period starts at the end of the financial year in which the last performance fee was paid and is open until the end of the financial year that the next performance fee is paid.

 

The 1 per cent. cap is applied as part of the NAV calculation so the performance fee accrual will never exceed 1 per cent. of the NAV.

 

All underperformance must be made good before a fee may be paid.

 

Payment conditions

On the final day of each financial year the NPFE will be tested.

 

If the NPFE is positive, then a performance fee may be paid to the Manager if the following conditions have been achieved:

 

· There has been outperformance of the Benchmark in the financial year;

· The NAV per share at the financial year end is equal to or higher than the NAV per share when the last performance fee was paid; and

· The NAV per share at the financial year end is equal to or higher than the NAV per share at the beginning of the financial year.

 

If the NPFE is negative, then no performance fee is paid, and the calculation period remains open. If the NPFE is negative, then no performance fee is paid, and the calculation period remains open.

 

Other

In addition to the above, the Investment Manager is responsible for the first £100,000 of marketing costs and all research costs.

 

CONTINUED APPOINTMENT OF INVESTMENT MANAGER

The Board, through the Management Engagement Committee, has reviewed the performance of the Investment Manager in managing the portfolio over the longer-term. The review also considered the quality of the other services provided by the Investment Manager, including the strength of the investment team, the depth of the other services provided by the Investment Manager and the resources available to provide such services.

 

We are pleased to see the continued recruitment into the teams to support the Company, which includes the organisation on the Company's behalf of thirdparty suppliers, and the quality of the Shareholder communications.

 

The Board, on the recommendation of the Management Engagement Committee, has concluded that on the basis of longer-term performance, it is in the best interests of Shareholders as a whole that the appointment of Polar Capital LLP as Investment Manager is continued on the terms agreed on 12 April 2019, effective 1 May 2019.

 

LONGER-TERM VIABILITY

In accordance with the AIC Code of Corporate Governance, the Company is required to make a forward-looking longer-term viability statement. The Board has considered and addressed the ability of the Company to continue to operate over a period significantly beyond the twelve-month period required for the going concern statement. The Board has considered the industry and market in which the Company operates and the continued appetite for technology investment. The Board continues to use five years as a reasonable term over which the viability of the Company should be viewed; Shareholders have the opportunity to vote on the continuation of the Company every five years, therefore the outlook for the next five-year period incorporates the continuation vote which will be put to Shareholders at the AGM in 2020. The process and matters considered in establishing the longer-term viability are detailed within the Audit Committee Report in the Annual Report.

 

In establishing the positive outlook for the Company over the next five years to 30 April 2025, the Board has taken into account:

 

The ability of the Company to meet its

liabilities as they fall due

The financial position of the Company and its cash flows and liquidity position are described in the Strategic Report and the Financial Statements. Note 27 to the Financial Statements within the Annual Report, includes the Company's policies and process for managing its capital; its financial risk management objectives; details of financial instruments and hedging activities. Exposure to credit risk and liquidity risk are also disclosed.

 

The portfolio comprises investments traded on major international stock exchanges, there is a spread of investments by size of company.

 

The assessment took account of the Company's current financial position, its cash flows and its liquidity position, the principal risks as set out above, and the Committee's assessment of any material uncertainties and events that might cast significant doubt upon the Company's ability to continue as a going concern. The assessment was then subject to a sensitivity analysis over a five-year period, which stress tested a number of the key assumptions underlying the forecasts both individually and in aggregate for normal, favourable and stressed conditions and considered whether financing facilities will be renewed. COVID-19 was also factored into the key assumptions made by assessing its impact on the Company's key risks and whether the key risks had increased in their potential to affect the normal, favourable and stressed market conditions.

 

99.93% 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.

 

Repayment of the bank facilities, drawn down at the year end, and due in October 2020, would equate to approximately 39% of the cash or cash equivalents available to the Company at 30 April 2020, 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 the AGM in September 2020

 

Under the AIC SORP, where Shareholders have the opportunity to vote in favour or against a company continuing in existence, it will normally be the case that Shareholders will have to vote in favour of a liquidation before it can occur. It is reasonable to believe that if good performance is achieved over the period until the next continuation vote Shareholders will vote in favour of continuation.

 

The Board, Investment Manager and Corporate Broker have sought Shareholder's views on the Company and its proposed continuation. No comments adverse to the continuation of the Company were received and the Shareholders who provided feedback indicated that they would vote in favour of the resolution for the Company to continue. Further details on the engagement with Shareholders can be found in the s172 Statement below.

Factors impacting the forthcoming

years

The Strategic Report section, comprising the Chair's Statement, the Investment Manager's Report and the Strategic Report provide a comprehensive review of factors which may impact the Company in forthcoming years. In making its assessment, the Board considered these factors alongside the Principal Risks and Uncertainties, and their corresponding mitigation and controls, as set out above.

 

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.

 

That the business model of being a closed ended investment fund will continue to be wanted by investors and the investment objective will continue to be desired and achievable.

 

Further, the Board recognises that there has been considerable growth in the technology sector and immense change in what is deemed to be a technology company which broadens the universe for potential investment. Technology remains a specialist sector for which there continues to be a need for independent specialist sector investment expertise. In the light of the COVID-19 pandemic technology has become the backbone of society, with the majority of people moving to remote working situations relying on technology, not only for day to day requirements but for communications across a variety of platforms. It is anticipated that many of the new practices put in place, utilising technology, may remain in place long after the pandemic has abated.

 

The Board therefore believe it appropriate to confirm their assessment for the longer-term viability of the Company for the next five years to 30 April 2025.

 

GOING CONCERN

The Board has also considered the ability of the Company to adopt the Going Concern basis for the preparation of the Financial Statements.

 

Consideration included the Company's current financial position, its cash flows, its liquidity position and its assessment of any material uncertainties and events that might cast significant doubt upon the Company's ability to continue as a going concern. In conjunction with the financial considerations taken into account when reviewing the longer-term viability, the Board considered the Company's performance (net assets +18.6%), outperformance of the benchmark (+0.5%); the liquidity of the portfolio (an estimated 99.93% can be liquidated over seven days) and the opportunity for investment and reinvestment of funds. The Board believe that the Company is able to continue in operation and meet its liabilities as they fall due over the next twelve-month period from the date of this Report and it is appropriate to present the Company and the Financial Statements as a Going Concern.

 

As highlighted in the Longer-Term Viability and s172 Statements, the Board has considered the likelihood of the Company's continuation vote being passed at the AGM. In consideration of the Company's performance and the views collated from Shareholders, the Board are in agreement that the continuation vote does not impact the Company's ability to prepare the Financial Statements on a going concern basis.

 

In reaching these conclusions and those in the Longer-Term Viability Statement, the stress testing conducted also featured consideration of the effects of COVID-19. This is discussed further in the Report of the Audit Committee in the Annual Report.

 

CORPORATE RESPONSIBILITY

 

Environment and Greenhouse Gas Emissions

The Company's core activities are undertaken by its Investment Manager which seeks to limit the use of non renewable resources and reduce waste where possible.

 

The Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013 require companies listed on the Main Market of the London Stock Exchange to report on the greenhouse gas ('GHG') emissions for which they are responsible. The Company is an investment trust, with neither employees nor premises, nor has it any financial or operational control of the assets which it owns. Consequently, it has no GHG emissions to report from its operations nor does it have responsibility for any other emissions.

 

Diversity and Human Rights

The Company has no employees and the Board is comprised of two female and three male Non-executive Directors.

 

When new appointments are made to the Board, the Board will continue to have regard to the benefits of diversity, including gender, when seeking to make any such appointments. The Board's Diversity Policy is discussed further in the Report on Corporate Governance in the Annual Report.

 

The Company has not adopted a policy on human rights as it has no employees or operational control of its assets.

 

Modern Slavery Act

As an investment company, the Company does not provide goods or services in the normal course of business and does not have any customers. Accordingly, the Company does not meet the criteria requiring it to produce a statement under the Modern Slavery Act 2015.

 

Anti-bribery, Corruption and Tax Evasion

The Board has adopted a zero-tolerance policy (which is available on the Company's website) to bribery, corruption and the facilitation of tax evasion in its business activities. The Board uses the principles of the policies formulated and implemented by the Investment Manager and expects the same standard of zero-tolerance to be adopted by third-party service providers.

 

Directors' Duties

SECTION 172 OF THE COMPANIES ACT 2006

 

The statutory duties of the Directors are listed in s171-177 of the Companies Act 2006. Under s172, Directors have a duty to promote the success of the Company for the benefit of its members (our Shareholders) as a whole and in doing so have regard to the consequences of any decision in the long term, as well as having regard to the Company's stakeholders amongst other considerations. The fulfilment of this duty not only helps the Company achieve its Investment Objective but ensures decisions are made in a responsible and sustainable way for Shareholders.

 

To ensure that the Directors are aware of, and understand, their duties, they are provided with an induction, including details of all relevant regulatory and legal duties as a Director when they first join the Board, and continue to receive regular and ongoing updates on relevant legislative and regulatory developments. They also have continued access to the advice and services of the Company Secretary and, when deemed necessary, the Directors can seek independent professional advice. The Schedule of Matters Reserved for the Board, as well as the Terms of Reference of its committees are reviewed annually and further describe Directors' responsibilities and obligations and include any statutory and regulatory duties.

 

The Board seeks to understand the needs and priorities of the Company's stakeholders and these are taken into account during all of its discussions and as part of its decision-making. As an externally managed investment company, the Company does not have any employees or customers, however the key stakeholders and a summary of the Board's consideration and actions where possible in relation to each group of stakeholders are described below.

 

SHAREHOLDERS

Engagement

The Directors have considered this duty when making the strategic decisions during the year that affect Shareholders, including the renewal of the gearing facilities, the continued appointment of the Investment Manager and the recommendation that Shareholders vote in favour of the resolutions for the Company to continue and to renew the allotment and buy back authorities at the AGM. The Directors have also engaged with and taken account of Shareholders' interests during the year.

 

A number of meetings have been held over the last year, and in particular, one event in December 2019 attracted representatives of over 40% of the Shareholder base, this event was first held in 2018 and was expected to be held again in 2020, however given current guidance from the UK government in respect of gatherings of people we expect that it may not be possible this year. In addition, the Chair writes to the Company's largest Shareholders following the publication of the Annual Report and Financial Statements offering the opportunity to have a meeting. In 2018/19 the Chair received one response to this contact and no concerns were raised.

 

Since the year end, and given the continued measures in place in relation to social distancing and COVID-19, the Directors have carefully considered the viability of an open forum AGM. As detailed in the Chair's Statement the safety and wellbeing of all involved is of the highest priority while expressing that Shareholder engagement is of utmost importance to the Directors. It has therefore been decided that the AGM will be held in a virtual manner for this year with every effort being made to ensure Shareholders will be able to participate and engage with both the Board and the Investment Manager. Full details will be provided in the Notice of AGM.

 

Relations with Shareholders

The Board and the Manager consider maintaining good communications and engaging with Shareholders through meetings and presentations a key priority.

 

The Board regularly considers the share register of the Company and receives regular reports from the Manager and the Corporate Broker on meetings attended with Shareholders and any concerns that are raised in those meetings. The Board also reviews correspondence from Shareholders and may attend investor presentations.

 

Shareholders are able to raise any concerns directly with the Board without using the Manager or Company Secretary as a conduit. The Chair or other Directors are available to Shareholders who wish to raise matters either in person or in writing. The Chair and Directors may be contacted through the registered office of the Company.

 

Shareholders are kept informed by the publication of annual and half year reports, monthly fact sheets, access to commentary from the Investment Manager via the Tech Talk section of the Company's website and attendance at events in which the Investment Manager presents.

 

The Board is also keen that the AGM be a participative event for all Shareholders who attend. The investment manager gives a presentation and the Chairs of the Board and of the Committees attend and are available to respond to questions and concerns from Shareholders.

Should any significant votes be cast against a resolution, the Board will engage with Shareholders. Should this situation occur, the Board will explain in its announcement of the results of the AGM the actions it intends to take to consult Shareholders in order to understand the reasons behind the votes against. Following the consultation, an update will be published no later than six months after the AGM and the Annual Report will detail the impact the Shareholder feedback has had on any decisions the Board has taken and any actions or

resolutions proposed.

 

The Company, through the sales and marketing efforts of the Investment Manager, encourages retail investor platforms to engage with underlying Shareholders in relation to Company communications and enabling 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

 

Share Issuance

In order to satisfy demand for the Company's shares that the secondary market is unable to meet, the Company has used the authority granted by Shareholders to allot shares fully paid for cash. This assists with ensuring the Company's share price does not reach an excessive premium to its net asset value per share and provides the Investment Manager with further capital to invest in line with the stated Investment Policy. Further information on the shares issued during the year can be found in the Directors' Report and the Notes to the Financial Statements in the Annual Report.

 

The Company also has the facility to conduct share buy backs when, in normal market conditions, it is in the best interests of Shareholders to do so.

 

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 October 2020 and consideration will be given to the renewal of or the replacement of the term loans if it is deemed to be in the best interests of the Company's Shareholders in maximising returns. In October 2019, the Company's one year revolving credit facility expired and was not renewed or replaced.

 

Continuation Vote

Following consultation with Shareholders, the Board considers that it is in Shareholders' best interests to vote at the AGM in favour of the Company. The Company's performance has been strong and provides Shareholders with exposure to the technology sector as set out in the Investment Objective. The Board, Investment Manager and Corporate Broker sought 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 feedback received was positive and highlighted the contact between the Investment Manager and Shareholders, the long term investment of many Shareholders, the diversification of the Company's register of Shareholders and the Company's inclusion on many buy lists at private wealth managers and retail platforms.

 

In arriving at this decision, the Board also had regard to its service providers, including the Investment Manager and the outlook for the sector as a whole.

 

Directors Remuneration

The new Remuneration Policy, which is subject to approval by Shareholders at the AGM, has been drafted in consideration of the need to attract and retain the necessary calibre of Director for the Company. More information on the Policy and the Directors' rationale for the level of fees set can be found in the Remuneration Implementation Report in the Annual Report.

 

THE INVESTMENT MANAGER

Engagement

Through the Board meeting cycle, regular updates and the work of the Management Engagement Committee reviewing the services of the Investment Manager twice yearly, the Board is able to safeguard Shareholder interests by:

 

- Ensuring adherence to the Investment Policy;

- Ensuring excessive risk is not undertaken in the pursuit of investment performance;

- Ensuring adherence to the Investment Management Policy and reviewing the agreed management and performance fees;

- Reviewing the Investment Manager's decision making and consistency in investment process; and

- Considering the succession plans for the Technology Team in ensuring the continued provision of portfolio management services.

 

Maintaining a close and constructive working relationship with the Manager is crucial as the Board and the Investment Manager both aim to continue to achieve consistent, long-term returns in line with the Investment Objective. The culture which the Board maintains to ensure this involves encouraging open discussion with the Investment Manager; recognising that the interests of Shareholders and the Investment Manager are aligned, providing constructive challenge and making Directors' experience available to support the Investment Manager. This culture is aligned with the collegiate and meritocratic culture which Polar Capital has developed and maintains.

 

Outcomes and strategic decisions during the year

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).

 

The Technology 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. During the year ended 30 April 2020, votes were cast at 96.4% of investee company general meetings held. At 52.68% of those meetings a vote was either cast against management recommendation, withheld or abstained from. In terms of total proposals, votes in line with management recommendation totaled 85.37% and 14.63% against management recommendation.

 

Further information on how the Investment Manager considers ESG in its engagement with investee companies can be found above.

 

Outcomes and strategic decisions during the year

During the year the Board discussed the impact of ESG and how the Investment Manager factors it into its decision making. The Board also considered the views of Shareholders on the topic at the event held in December 2019.

 

SERVICE PROVIDERS

Engagement

The Directors have frequent engagement with the Company's other service providers through the annual cycle of reporting and due diligence meetings or site visits. 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.

 

Outcomes and strategic decisions during the year

The reviews of the Company's service providers, including Equiniti and Stifel Nicolaus have been positive and the Directors believe their continued appointment is in the best interests of the Company.

 

The services of HSBC Securities Services (HSS) are contracted through Polar Capital and provided to the Company under the terms of the IMA. The Board however continue to conduct due diligence service reviews in conjunction with the Company Secretary and is satisfied that the service received continues to be of a high standard.

 

PROXY ADVISORS

Engagement

The support of the major institutional investors and proxy adviser agencies are 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 Director consider the recommendations of these various proxy voting agencies when contemplating decisions that will affect Shareholders and also when reporting to Shareholders through the Half Year and Annual Reports.

 

Recognising the principles of stewardship, as promoted by the UK Stewardship Code, the Board welcomes engagement with all of its investors. The Board recognises that the views, questions from, and recommendations of many institutional investors and proxy adviser agencies provide a valuable feedback mechanism and play a part in highlighting evolving Shareholders' expectations and concerns.

 

Prior to AGMs, the Company engages with these agencies to fact check their advisory reports and clarify any areas or topics that the agency requests. This ensures that whilst the proxy advisory reports provided to Shareholders are objective and independent, the Company's actions and intentions are represented as clearly as possible to assist with Shareholders' decision making when considering the resolutions proposed at the AGM.

 

Outcomes and strategic decisions during this year

The Nomination Committee considers the time commitment required of Directors and the Board considers each Directors' independence on an ongoing basis. The Directors have also considered the proxy adviser agencies policies on overboarding when Directors' request approval for additional appointments and when recruiting new Directors. The Board have confirmed that all Directors remain independent and able to commit sufficient time in fulfilling their duties, including those listed on s172 of the Companies Act. Accordingly, all Directors, with the exception of Peter Hames who retired from the Board on 8 July 2020, are standing for re-election at the Company's AGM.

 

THE AIC

Engagement

The Company is a member of the AIC and has also supported lobbying activities such as the consultation on the 2019 AIC Code. The Directors also cast votes in the AIC Board Elections each year and regularly attend AIC events.

 

 

Approved by the Board on 13 July 2020

By order of the Board

 

Tracey Lago, FCG

Polar Capital Secretarial Services Limited

Company Secretary

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report and 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 are required to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union ('EU').

 

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 and prudent;

 

· state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements;

 

· 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 Company, together with a description of its principal risks and uncertainties.

 

We consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

 

Sarah Bates

Chair

13 July 2020

 

 

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 2020 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 2020 have not yet been delivered to the Registrar of Companies. The figures and financial information for the year ended 30 April 2019 are extracted from the published Annual Report and Financial Statements for the year ended 30 April 2019 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements for the year ended 30 April 2019 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 2020

 

 

Notes

Yearended30April2020

Yearended30April2019

Revenuereturn

£'000

Capital return

£'000

Total return

£'000

Revenue return

£'000

Capital return

£'000

Total return

£'000

Investmentincome

3

15,761

-

15,761

11,965

-

11,965

Otheroperatingincome

4

1,125

-

1,125

1,105

-

1,105

Gainsoninvestmentsheldat fair value

5

-

348,118

348,118

-

393,226

393,226

Gainsonderivatives

6

-

13,214

13,214

-

1,470

1,470

Othercurrencygains

7

-

5,251

5,251

-

1,913

1,913

Totalincome

16,886

366,583

383,469

13,070

396,609

409,679

Expenses

 

 

Investmentmanagementfee

8

(18,273)

-

(18,273)

(15,341)

-

(15,341)

Performancefee

8

-

(1,050)

(1,050)

-

(6,644)

(6,644)

Otheradministrativeexpenses

9

(951)

-

(951)

(1,140)

-

(1,140)

Totalexpenses

(19,224)

(1,050)

(20,274)

(16,481)

(6,644)

(23,125)

(Loss)/profitbeforefinancecostsandtax

(2,338)

365,533

363,195

(3,411)

389,965

386,554

Financecosts

 

(1,260)

-

(1,260)

(1,090)

-

(1,090)

(Loss)/profitbeforetax

(3,598)

365,533

361,935

(4,501)

389,965

385,464

Tax

 

(1,833)

-

(1,833)

(1,827)

-

(1,827)

Net (loss)/profit for the year and total comprehensive (expense)/income

(5,431)

365,533

360,102

(6,328)

389,965

383,637

(Losses)/earningspershare (basic anddiluted)(pence)

11

(4.06)

273.12

269.06

(4.73)

291.41

286.68

 

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.

 

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

 

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 2020

 

 

 

Share capital

Capital redemption reserve

Share premium

Special non- distributable reserve

Capital reserves

Revenue reserve

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Totalequityat 30 April 2018

 

3,449

12,802

157,477

7,536

1,428,230

(87,883)

1,551,611

Total comprehensive income/(expense):

 

 

 

 

 

 

 

 

Profit/(loss)fortheyearto   30April 2019

 

-

-

-

-

389,965

(6,328)

383,637

Transactions with owners, recorded directly to equity:

 

 

 

 

 

 

 

 

Issueof ordinaryshares

12

7

-

391

-

-

-

398

 

 

 

 

 

 

 

 

 

Totalequityat30 April 2019

 

33,456

12,802

157,868

7,536

1,818,195

(94,211)

1,935,646

Total comprehensive income/(expense):

 

 

 

 

 

 

 

 

Profit/(loss) for the year to 30 April 2020

 

-

-

-

-

365,533

(5,431)

360,102

Transactions with owners, recorded directly to equity

 

 

 

 

 

 

 

 

Issueofordinaryshares

12

185

-

12,664

-

-

-

12,849

Totalequity at30April2020

 

33,641

12,802

170,532

7,536

2,183,728

(99,642)

2,308,597

 

The notes below form part of these Financial Statements.

 

 

BALANCE SHEET

as at 30 April 2020

 

 

 

Notes

30April2020

£'000

30April2019

£'000

Non-current assets

 

 

Investmentsheldatfairvaluethroughprofitorloss

 

2,218,307

1,803,242

Current assets

 

 

Receivables

 

47,186

36,494

Overseastaxrecoverable

94

69

Cashandcashequivalents

10

146,677

194,544

Derivativefinancialinstruments

 

3,391

150

 

197,348

231,257

Totalassets

2,415,655

2,034,499

Current liabilities

 

 

Payables

 

(50,034)

(44,775)

Bank loans

 

(57,024)

-

Bankoverdraft

10

-

(391)

 

 

(107,058)

(45,166)

Non-current liabilities

 

 

 

Bank loans

 

-

(53,687)

Net assets

2,308,597

1,935,646

Equity attributable to equity Shareholders

 

 

Sharecapital

12

33,641

33,456

Capitalredemptionreserve

 

12,802

12,802

Sharepremium

 

170,532

157,868

Specialnon-distributablereserve

 

7,536

7,536

Capitalreserves

 

2,183,728

1,818,195

Revenuereserve

 

(99,642)

(94,211)

Total equity

2,308,597

1,935,646

Net asset value per ordinary share (pence)

14

1715.59

1446.40

 

The Financial Statements were approved and authorised for issue by the Board of Directors on 13 July 2020 and signed on its behalf by:

 

 

Sarah Bates

Chair

 

The notes below form part of these Financial Statements.

 

Registered number 3224867

 

 

CASH FLOW STATEMENT

for the year ended 30 April 2020

 

 

 

 

Notes

2020

£'000

2019

£'000

Cashflowsfromoperatingactivities

 

 

 

Profitbeforetax

 

361,935

385,464

Adjustments:

 

 

 

Gainsoninvestmentsheldatfairvaluethroughprofitorloss

5

(348,118)

(393,226)

Gainsonderivativefinancialinstruments

6

(13,214)

(1,470)

Proceedsofdisposaloninvestments

 

1,803,352

1,228,104

Purchases of investments

 

(1,862,499)

(1,145,393)

Proceedsondisposalofderivativefinancialinstruments

 

66,075

23,134

Purchasesofderivativefinancialinstruments

 

(56,102)

(19,445)

Increase in receivables

 

(241)

(329)

Decreasein payables

 

(9,444)

(773)

Overseastax

 

(1,858)

(1,877)

Foreignexchange gains

7

(5,251)

(1,913)

Netcash (used in)/generated fromoperatingactivities

 

(65,365)

72,276

 

 

 

 

Cash flows from financing activities

 

 

 

Loans repaid

 

-

(36,471)

Loans drawn

 

-

52,847

Issue of ordinaryshares

 

9,301

398

 

 

 

 

Net cash generated from financing activities

 

9,301

16,774

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(56,064)

89,050

 

 

 

 

Cash andcashequivalents at thebeginning of theyear

 

194,153

101,156

Effectofmovementinforeignexchangeratesoncashheld

7

8,588

3,947

 

 

 

 

Cash and cash equivalents at the end of the year

10

146,677

194,153

 

 

 

 

 

 

 

Notes

2020

£'000

2019

£'000

Reconciliation of cash and cash equivalents
to the Balance Sheet is as follows:

 

 

 

 

Cash at bank

10

109,715

194,153

BlackRock's Institutional Cash Series plc
(US Treasury Fund), money market fund

10

36,962

-

 

 

 

 

Cash and cash equivalents at the beginning of the year

10

146,677

194,153

 

The notes below form part of these Financial Statements.

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 April 2020

 

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 Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS and IFRIC guidance.

 

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 October 2019 is consistent with the requirements of IFRS, the Directors have sought to prepare the Financial Statements on a basis compliant with the recommendations of the SORP.

 

Following the guidance of the revised SORP, issued in October 2019, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 13 to the Financial Statements in the Annual Report, with no impact to the net asset value or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.

 

The financial position of the Company as at 30 April 2020 is shown in the balance sheet above. As at 30 April 2020 the Company's total assets exceeded its total liabilities by a multiple of over 22. The assets of the Company consist mainly of securities that are held in accordance with the Company's Investment Policy, as set out above 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 2 October 2020. The Directors have considered a detailed assessment of the Company's ability to meet its liabilities as they fall due. The assessment took account of the Company's current financial position, its cash flows and its liquidity position. In addition to the assessment the Company carried out stress testing, including for the impact of COVID-19, which used a variety of falling parameters to demonstrate the effects in the Company's share price and net asset value. In light of the results of these tests, the Company's cash balances, and the liquidity position, the Directors consider that the Company has adequate financial resources to enable it to continue in operational existence. Further, based on the Company's performance and the views collated from Shareholders, the Board are in agreement that the continuation vote does not impact the Company's ability to prepare the Financial Statements on a going concern basis. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Company's Financial Statements.

 

(B) PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME

In order to reflect better the activities of an investment trust company and in accordance with the guidance set out by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. The results presented in the revenue return column is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 1158 of the Corporation Taxes Act 2010.

 

(C) INCOME

Dividends receivable from equity shares are taken to the revenue return column of the Statement of Comprehensive Income on an ex-dividend basis.

 

Special dividends are recognised on an ex-dividend basis and may be considered to be either revenue or capital items.

 

The facts and circumstances are considered on a case by case basis before a conclusion on appropriate allocation is reached.

 

Where the Company has received dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised in the revenue return column of the Statement of Comprehensive Income. Any excess in value of shares received over the amount of the cash dividend foregone is recognised in the capital return column of the Statement of Comprehensive Income.

 

Unfranked income includes the taxes deducted at source.

 

Bank interest, money market fund interest and other income receivable are accounted for on an accruals basis and is recognised in the period in which it was earned.

 

Interest outstanding at the year end is calculated on a time apportioned basis using the market rates of interest.

 

(D) EXPENSES AND FINANCE COSTS

All expenses, including finance costs, are accounted for on an accruals basis.

 

All indirect expenses have been presented as revenue items per the non-allocation method except as follows:

 

· any performance fees payable are allocated wholly to capital, reflecting the fact that, although they are calculated on a total return basis, they are expected to be attributable largely, if not wholly, to capital performance.

 

· transaction costs incurred on the acquisition or disposal of investments are expensed either as part of the unrealised gain/loss on investments (for acquisition costs) or as a deduction from the proceeds of sale (for disposal costs).

 

Finance costs are calculated using the effective interest rate method and are accounted for on an accruals basis.

 

(E) TAXATION

The tax expense represents the sum of the overseas withholding tax deducted from investment income, tax currently payable and deferred tax.

 

The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

 

In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Statement of Comprehensive Income is the 'marginal basis'. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Statement of Comprehensive Income, then no tax relief is transferred to the capital return column.

 

Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

 

Investment trusts which have approval as such under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.

 

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised based on tax rates that have been enacted or substantively enacted at the balance sheet date.

 

Deferred tax is charged or credited in the Statement of Comprehensive Income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

(F) INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

When a purchase or sale is made under contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date and are initially measured at fair value.

 

On initial recognition the Company has designated all of its investments as held at fair value through profit or loss as defined by IFRS.

 

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 £36,962,000 (2019: nil) 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 IFRS. 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) 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

 

(P) SEGMENTAL REPORTING

Under IFRS 8, 'Operating Segments', operating segments are considered to be the components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker has been identified as the Manager (with oversight from the Board).

 

The Board is of the opinion that the Company is engaged in a single segment of business, namely by investing in a diversified portfolio of technology companies from around the world in accordance with the Company's Investment Objective, and consequently no segmental analysis is provided.

 

In line with IFRS 8, additional disclosure by geographical segment has been provided in note 26 to the Financial Statements within the Annual Report.

 

Further analyses of expenses, investment gains or losses, profit and other assets and liabilities by country have not been given as either it is not possible to prepare such information in a meaningful way or the results are not considered to be significant.

 

(Q) KEY ESTIMATES AND ASSUMPTIONS

Estimates and assumptions used in preparing the financial statements are reviewed on an ongoing basis and are based on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of these estimates and assumptions form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.

 

The majority of the Company's investments are in US Dollars, the level of which varies from time to time. The Board considers the functional currency to be Sterling. In arriving at this conclusion the Board considered that Sterling is most relevant to the majority of the Company's Shareholders and creditors and the currency in which the majority of the Company's operating expenses are paid.

 

The only estimates and assumptions that may cause material adjustment to the carrying value of assets and liabilities relate to the valuation of unquoted investments and investments for which there is an inactive market. These are valued in accordance with the techniques set out in note 2(f) above. At the year end, such investments represent less than 0.01% of net assets and consequently, the Board does not believe these to represent an area of significant judgement or estimation.

 

(R) NEW AND REVISED ACCOUNTING STANDARDS

There were no new IFRSs or amendments to IFRSs applicable to the current year which had any significant impact on the Company's financial statements.

 

The following standards became effective on 1 January 2019 and the adoption of the standards and interpretations have not had a material impact on the financial statements of the Company.

 

IFRS 16 Leases

As the Company neither holds, trades or has any lease obligations of any type, the provisions of this standard are not expected to have a material impact on the financial statements.

 

IFRS 9 (Amended) Prepayment Features with Negative Compensation

Negative compensation arises where the contractual terms permit a borrower to prepay the instrument before its contractual maturity, but the prepayment amount could be less than unpaid amounts of principal and interest. The Company has no such terms in any of its loan agreements in place and the amendment are not expected to have any impact on the financial statements.

 

IFRIC 23 Uncertainty over Income Tax Treatments

The interpretation provides guidance on considering uncertain tax treatments in relation to taxable profit or loss and does not add any new disclosures. The Company complies with all relevant tax laws where applicable and the provisions of this interpretation are not expected to have a material impact on the financial statements.

 

IAS 19 (amended) Employee Benefits

As the Company has no employees, the amendment to this standard are not expected to have any impact on the financial statements.

 

IAS 28 (amended) Investments in Associates and Joint Ventures

As the Company has no investment in associates or joint ventures, the amendment to this standard are not expected to have any impact on the financial statements.

 

Annual Improvement Cycles 2015-2017 (Amendments)

This makes narrow-scope amendments to four IFRS Standards: IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Incomes Taxes and IAS 23 Borrowing costs. These limited amendments are not expected to have any impact on the financial statements.

 

At the date of authorisation of the Company's financial statements, the following new IFRSs that potentially impact the Company are in issue but are not yet effective and have not been applied in the financial statements:

 

Effective for periods commencing on or after 1 January 2020:

 

IFRS 3 Business Combinations (amended)

The IASB has made narrow-scope amendments to improve the definition of a business in order to help companies determine whether an acquisition made is of a business or a group of assets. These amendments are not expected to have any impact on the financial statements.

 

IFRS 9, IAS 39 and IFRS 17: Interest Rate Benchmark Reform (amended)

The IASB has issued amendments to IFRS 9, IAS 39 and IFRS 7 that provide certain reliefs in connection with interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that IBOR reform should not generally cause hedge accounting to terminate. These amendments are not expected to have any impact on the financial statements.

 

IAS 1 and IAS 8 Definition of Material (amended)

The definition of material has been amended to state that "information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity." This new definition is not expected to change how materiality judgements are currently made by the Company nor have any impact to the material information inclusive in the Annual Report.

 

References to the Conceptual Framework in IFRS Standards (amended)

The Amendments to References to the Conceptual Framework in IFRS Standards was issued to support transition to the revised Conceptual Framework for companies that develop accounting policies using the Conceptual Framework when no IFRS Standard applies to a particular transaction. This amendment is not expected to have any impact to the financial statements.

 

Effective for periods commencing on or after 1 January 2021:

 

IFRS 17 Insurance Contracts

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

Yearended 30April2020

£'000

Year ended

30 April 2019

£'000

Revenue:

 

 

Franked:Listedinvestments

 

 

Dividend income

21

76

Unfranked:Listedinvestments

 

 

Dividend income

15,740

11,889

 

15,761

11,965

 

All investment income is derived from listed investments.

 

 

4.  OTHER OPERATING INCOME

Yearended 30April2020

£'000

Yearended

30April2019

£'000

Bank interest

772

1,099

Money market fund interest

353

-

Other income

-

6

 

1,125

1,105

 

 

5.  GAINS ON INVESTMENTS HELD AT FAIR VALUE

Yearended 30April2020

£'000

Yearended

30April2019

£'000

292,086

291,338

Transferondisposalofinvestments

(258,368)

(197,726)

Gains on disposal of investments basedoncarryingvalue atpreviousbalancesheetdate

33,718

93,612

Valuationgainsoninvestmentsheldduringtheyear

314,400

299,614

 

348,118

393,226

 

 

6.  GAINS ON DERIVATIVES

Yearended 30April2020

£'000

Yearended

30April2019

£'000

28,339

2,361

Lossesonrevaluationofderivativesheld

(15,125)

(891)

 

13,214

1,470

 

The derivative financial instruments represent the call and put options, which are used for the purpose of efficient portfolio management. As at 30 April 2020, the Company held NASDAQ 100 Stock Index put options and the market value of the open put option position was £2,668,000 (30 April 2019: NASDAQ 100 Stock Index put options with a market value of £150,000). As at 30 April 2020, the Company held Intel Corporation call options and the market value of the open call option position was £723,000 (30 April 2019: No call option was held).

 

 

7.  OTHER CURRENCY GAINS

Yearended

30April2020

£'000

Yearended

30April2019

£'000

Exchangegainsoncurrencybalances

8,588

3,947

Exchange losses on settlement of loan balances

-

(5,850)

Exchange (losses)/gains ontranslationofloanbalances

(3,337)

3,816

 

5,251

1,913

 

 

8.  INVESTMENT MANAGEMENT AND PERFORMANCE FEE

 

Yearended 30April2020

£'000

Yearended 30April2019

£'000

Investmentmanagementfeepayable toPolarCapital(chargedwhollyto

revenue)

18,273

15,341

Performancefeepayable toPolarCapital(chargedwhollytocapital)

1,050

6,644

 

The new investment agreements which came into effect on 1 May 2019 includes a reduction in the base management fee above certain sizes of net asset value and a reduced percentage of outperformance payable to the Manager. In addition, the cap on any such performance fee payable was also reduced. 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 13 below.

 

The management fee and performance fee for year ended 30 April 2019 were calculated based on the fee basis prior to 1 May 2019, the details of which is set out in the Annual Report for the year ended 30 April 2019.

 

The quarterly investment management fee is calculated on the net asset value on the last day of the prior quarter. The increase in the management fee for the year ended 30 April 2020 is mainly due to the 19% increase in net asset value which took place over the year to 30 April 2020.

 

 

9.  OTHER ADMINISTRATIVE EXPENSES

 

Yearended

30April2020

£'000

Yearended 30April2019

£'000

Directors'fees1

196

190

NationalInsuranceContributions

16

14

Depositaryfee2

160

137

Registrarfee

46

47

Custodyand other bank charges3

219

159

UKLAandLSElistingfees

96

83

Legal & professionalfees and other financial services4

12

35

AICfees

21

21

Auditors'remuneration - for audit of the financial statements

35

25

Directors'andofficers'liabilityinsurance

9

9

AGMexpenses

10

10

Corporatebrokers'fee5

37

56

PR, websiteandmarketingexpenses6

-

43

Shareholdercommunications

44

49

Research costs 6

-

238

Otherexpenses

50

24

 

951

1,140

 

1.  Full disclosure is given in the Directors' Remuneration Report contained within the Company's 2020 Annual Report.

2.  Depositary fee is based on the value of the net assets. The net assets increased by 19% during the year under review.

3.  Fee determined on the pre-approved rate card with HSBC and the additional custody charge relates to the Money Market Fund which came into effect 1 October 2019.

4.  Prior year includes costs relating to the new fee arrangements and the arrangement of the new loan facilities.

5.  Prior year includes costs relating to the review of the new fee arrangements.

6.  The new investment management agreement which came into effect from 1 May 2019, included removal of any contribution by the Company to research costs and reduction in marketing spend by the Company. Details of the investment management agreement are disclosed in the Strategic Report above.

 

 

10.  CASH AND CASH EQUIVALENTS

30April2020

£'000

30April2019

£'000

Cashatbank

109,715

194,544

Money market funds

36,962

-

Cash and cash equivalents

146,677

194,544

Bank overdraft

-

(391)

 

146,677

194,153

 

As at 30 April 2020, the Company held BlackRock's Institutional Cash Series plc - US Treasury Fund with a market value of £36,962,000 (30 April 2019: nil), which is managed as part of the Company's cash and cash equivalents as defined under IAS 7.

 

11.  (LOSSES)/EARNINGS PER ORDINARY SHARE

 

 

Yearended30April2020

Yearended30April2019

 

Revenuereturn

Capitalreturn

Totalreturn

Revenuereturn

Capitalreturn

Total

return

Thecalculationofbasicearningspershareisbasedonthefollowingdata:

 

 

 

 

 

 

Net (loss)/profit for theyear(£'000)

(5,431)

365,533

360,102

(6,328)

389,965

383,637

Weightedaverageordinary sharesinissueduringtheyear

133,837,576

133,837,576

133,837,576

133,821,384

133,821,384

133,821,384

Fromcontinuingoperations

 

 

 

 

 

 

Basicanddiluted

-ordinaryshares(pence)

(4.06)

273.12

269.06

(4.73)

291.41

286.68

 

As at 30 April 2020, there are no potentially dilutive shares in issue and the earnings per share therefore equate to those shown above (2019: there was no dilution).

 

 

12.  SHARE CAPITAL

 

30April

2020

£'000

30April

2019

£'000

Allotted,CalledupandFullypaid:

 

 

Ordinary shares of 25p each

 

 

Opening balance of 133,825,000 (30 April 2019: 133,795,000)

33,456

33,449

Issue of 741,000 (30 April 2019: 30,000) ordinary shares

185

7

Allotted, called up and fully paid: 134,566,000

(30 April 2019: 133,825,000) ordinary shares of 25p

33,641

33,456

At30April2020

33,641

33,456

 

During the year a total of 741,000 ordinary shares (30 April 2019: 30,000 ordinary shares), nominal value £185,000 (30 April 2019: nominal value £7,000) were issued to the market to satisfy demand, at an average price of 1,734.01p per share, for a total net consideration received of £12,849,000 (30 April 2019: £398,000).

 

Subsequent to the year end, and to 10 July 2020 (latest practicable date), 2,699,000 ordinary shares were issued at an average price of 1,941.48p per share.

 

This reserve is not distributable.

 

 

13. 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 2020 were £18,273,000 (2019: £15,341,000) of which £nil (2019: £3,876,000) was outstanding at the yearend.

 

A performance fee amounting to £1,050,000 (2019: £6,644,000) is payable in respect of the year, and the whole of this amount (2019: same) was outstanding at the year end.

 

In addition, the total research costs in respect of the year ended 30 April 2020 were £nil (2019: £238,000) of which £nil (2019: £nil) was outstanding at the year end.

 

The new investment management agreement which came into effect from 1 May 2019 agreed the removal of any contribution by the Company to research costs; a reduction in the marketing costs payable by the Company with the Manager contributing the first £100,000 per annum to such; a reduction in the base management fee above certain sizes of net asset value; a reduced percentage of outperformance payable to the Manager; a reduction in the cap on any such performance fee payable. Details of the revised terms of the investment management agreement are provided in the Strategic Report on above.

 

(B) RELATED PARTY TRANSACTIONS

The compensation payable to key management personnel in respect of short term employee benefits is £196,000 (2019: £190,000) which comprises £196,000 ((2019: £190,000) paid by the Company to the Directors.

 

Refer to Company's 2020 Annual Report for the Directors' Remuneration Report including Directors' shareholdings and movements within the year.

 

14.   NET ASSET VALUE PER ORDINARY SHARE

 

 

Netassetvaluepershare

 

 

30April

2020

30April

2019

Undiluted:

 

 

NetassetsattributabletoordinaryShareholders(£'000)

2,308,597

1,935,646

Ordinarysharesinissueatendofyear

134,566,000

133,825,000

Netassetvalueperordinaryshare(pence)

1715.59

1446.40

 

As at 30 April 2020, there were no potentially dilutive shares in issue (2019: there was no dilution).

 

 

15.   POST BALANCE SHEET EVENT

The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a global health emergency on the 30 January 2020, which has caused disruption to economic activity and brought increased market volatility across many of the global stock markets. Subsequent to the year end, the global stock markets continue experience substantial fluctuations associated with uncertainties linked to the COVID-19 pandemic. The Board and Investment Manager continue to monitor developments relating to COVID-19 and the impact on investment performance in line with the investment objectives. As at 10 July 2020 (the latest practicable date), the Company's unaudited net asset value as at the close of business has risen by 21.3%.

 

Polar Capital, the appointed Investment Manager, is coordinating its operational response based on existing business continuity plans and on guidance from global health organisations, UK government and general pandemic response best practice.

 

Subsequent to the year end, and to 10 July 2020 (latest practicable date), 2,699,000 ordinary shares were issued at an average price of 1,941.48p 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.

 

 

ALTERNATIVE PERFORMANCE MEASURES (APMS)

In assessing the performance of the Company the Investment Manager and the Directors use the following APMs which are considered to be known industry metrics:

 

Net Asset Value (NAV)

The NAV is the value attributed to the underlying assets of the Company less the liabilities, presented either on a per share or total basis.

 

The value of the Company's assets, principally investments made in other companies and cash being held, minus any liabilities. The NAV is also described as 'Shareholders' funds' per share. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the Company's shares can be bought or sold by an investor.

 

As at 30 April 2020, the Company's total equity was £2,308,597,000 and there were 134,566,000 ordinary shares in issue. The Company's NAV per share was therefore 1715.59p (£2,308,597,000/134,566,000).

 

NAV Total Return

The NAV total return shows how the net asset value per share has performed over a period of time taking into account both capital returns and dividends paid to Shareholders.

 

NAV total return reflects the change in value of NAV plus the dividend paid to the Shareholder. Since the Company has not paid a dividend the NAV total return is the same as the NAV per share return as at the year ended 30 April 2020.

 

Share Price Total Return

Share price total return shows how the share price has performed over a period of time. It assumes that dividends paid to Shareholders are reinvested in the shares at the time the shares are quoted ex dividend.

 

Share price total return reflects the change in share price value plus the dividend paid to the Shareholder. Since the Company has not paid dividends the share price total return is the same as the price per ordinary share return as at year end 30 April 2020.

 

Discount/Premium

A description of the difference between the share price and the net asset value per share usually expressed as a percentage (%) of the net asset value per share. If the share price is higher than the NAV per share the result is a premium. If the share price is lower than the NAV per share, the shares are trading at a discount.

 

The share price at 30 April 2020 was 1774.00p and the NAV was 1715.59p, the premium was therefore 3.4%, ((1774.00p -1715.59p)/1715.59p).

 

Total Expenses

Comprising all the operating expenses, which includes research costs, of the Company plus those expenses which are excluded from the ongoing charges calculation, including transaction costs, finance costs, tax and non-recurring expenses. Costs in relation to share issues and share buybacks are excluded from the calculation.

 

At 30 April 2020, the total operating expenses including management and performance fees were £20,274,000, finance costs were £1,260,000 and taxes were £1,833,000, the total expenses therefore were £23,367,000 (£20,274,000 + £1,260,000 + £1,833,000 = £23,367,000).

 

Ongoing Charges

Ongoing charges are calculated in accordance with AIC guidance by taking the total expenses of the Company, excluding performance fees and exceptional items, if any, and expressing them as a percentage of the average daily net asset value of the Company over the year.

 

Ongoing charges include all regular operating expenses of the Company. Transaction costs, interest payments,

tax and non-recurring expenses are excluded from the calculation as are the costs incurred in relation to share

issues and share buybacks.

 

Where a performance fee is paid or is payable, a second ongoing charge is provided, calculated on the same basis as the above but incorporating the amount of performance fee due or paid.

 

Ongoing charges for the year equal the management fee of £18,273,000 plus other operating expenses of £951,000 divided by the Company's average daily NAV in the period. (£19,224,000/£2,057,773,000 = 0.93%)

 

Ongoing charges including performance fee based on the above plus the performance fee of £1,050,000 (£20,274,000/£2,057,773,000 = 0.99%).

 

 

GLOSSARY OF TERMS

 

AAII Bear

American Association of Individual Investors sentiment survey showing the mood of individual investors - Bullish/Neutral/Bearish

 

AAF Report

A report prepared in accordance with Audit and Assurance Faculty guidance issued by the Institute of Chartered Accountants in England and Wales. Utilised within the review of internal controls.

 

AGM

The Annual General Meeting will be held on Wednesday, 2 September 2020. Details of the arrangements will be provided in the separate Notice of AGM and on the Company's website.

 

AIC

Association of Investment Companies, the industry body for closed ended investment companies.

 

AIFM

Alternative Investment Fund Manager - Polar Capital LLP.

 

AIFMD

Alternative Investment Fund Managers Directive. Issued by the European Parliament in 2012 and 2013, the Directive requires that, while the Board of Directors of an Investment Trust remains fully responsible for all aspects of the Company's strategy, operations and compliance with regulations, all alternative investment vehicles ('AIFs') in the European Union, must appoint a Depositary and an Alternative Investment Fund Manager ('AIFM'). The Company's AIFM is Polar Capital LLP.

 

Benchmark

The Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes).

 

BREXIT

The advisory public referendum which was held on 23 June 2016 in the United Kingdom to indicate whether voters wanted to remain or withdraw from membership of the European Union (EU). The referendum vote was cast in favour to leave the EU. The process of actually leaving is termed BREXIT.

 

Closed-ended Investment Company

An Investment Company with a fixed issued ordinary share capital, the shares of which are traded on an exchange at a price not necessarily related to the net asset value of the company and which can only be issued or bought back by the company in certain circumstances.

 

Custodian

The Custodian is HSBC Bank plc, a financial institution responsible for safeguarding, worldwide, the listed securities and certain cash assets of the Company, as well as the income arising therefrom, through provision of custodial, settlement and associated services.

 

Depositary

The Depositary is also HSBC Bank plc. Under AIFMD rules the Company must appoint a Depositary whose duties in respect of investments, cash and similar assets include: safekeeping; verification of ownership and valuation; and cash monitoring. Under the AIFMD rules, the Depositary has strict liability for the loss of the Company's financial assets in respect of which it has safe-keeping duties. The Depositary's oversight duties will include but are not limited to share buybacks, dividend payments and adherence to investment limits.

 

Derivative

A contract between two or more parties, the value of which fluctuates in accordance with the value of an underlying security. Examples of derivatives are Put and Call Options, Swap contracts, Futures and Contracts for Difference. A derivative can be an asset or a liability and is a form of gearing because it can increase the economic exposure to Shareholders.

 

Discount / Premium

The Company's share price is determined by market demand for the Company's shares. If the share price is lower than the NAV per share, the shares are said to trade at a discount. If the share price is higher than the NAV, this is described as trading at a premium. Trading at a discount might indicate a higher level of sellers in the market while trading at a premium might indicate higher buying demand.

 

Fund/Portfolio Manager

Ben Rogoff of Polar Capital LLP has been delegated responsibility for the creation of the portfolio of investments subject to the investment policy and various parameters set by the Board of Directors.

 

GAAP

The Generally Accepted Accounting Practice. This includes UK Financial Reporting Standards ('FRS') and International GAAP (IFRS or International Financial Reporting Standards applicable in the European Union).

 

Gearing 

Calculated using the Association of Investment Companies definition. Total assets, less current liabilities (before deducting any prior charges (such as borrowings)) minus cash/cash equivalents divided by Shareholders' funds, expressed as a percentage.

 

Investment Company

Section 833 of the Companies Act 2006. An Investment Company is defined as a company which invests its funds in shares, land or other assets with the aim of spreading investment risk.

 

Investment Trust taxation status

Section 1158 of the Corporation Tax Act 2010. UK Corporation Tax law allows an Investment Company (referred to in Tax law as an Investment Trust) to be exempted from tax on its profits realised on investment transactions, provided it complies with certain rules. These are similar to Section 833 above but further require that the Company must be listed on a regulated stock exchange and that it cannot retain more than 15% of income received. The Directors' Report contains confirmation of the Company's compliance with this law and its consequent exemption from taxation on capital gains.

 

KPMG 

The Company's auditor is KPMG LLP, represented by John Waterson, Partner.

 

Leverage

As defined under AIFMD rules, leverage is any method by which the exposure of an AIF is increased through borrowing of cash or securities or leverage embedded in derivative positions. Leverage is broadly equivalent to gearing but is expressed as a ratio between the assets (excluding borrowings) and the net assets (after taking account of borrowings).

 

Manager/Investment Manager

Polar Capital LLP (Polar Capital), also appointed as AIFM. The responsibilities and fees payable to Polar Capital are set out in the Directors' Report.

 

MiFID II

Markets in Financial Instruments Directive, applicable from 3 January 2018.

 

Non-executive Director

The Company is managed by a Board of Directors who are appointed by letter rather than a contract of employment, with the Company. The Company does not have any executive Directors. Remuneration of the Non-executive Director is set out in the Directors' Remuneration Report while the duties of the Board and the various Committees is set out in the Report on Corporate Governance.

 

PRIIPS 

The Packaged Retail and Insurance-based Investment Products regulations which came into force on 1 January 2018 in the UK and EU. The regulations require generic pre-sale disclosure of investment 'product' costs, risks and certain other matters.

 

SORP 

The Statement of Recommended Practice. The financial statements of the Company are prepared in accordance with the Investment Trust SORP issued by the AIC.

 

FORWARD LOOKING STATEMENTS

Certain statements included in this Annual Report and Financial Statements contain forward-looking information concerning the Company's strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which the Company operates. By their nature, forward looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Company's control or can be predicted by the Company. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the principal risks and uncertainties included in the Strategic Report within the Annual Report. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Polar Capital Technology Trust plc or any other entity and must not be relied upon in any way in connection with any investment decision. The Company undertakes no obligation to update any forward-looking statements.

 

Annual Report and Notice of AGM

The Annual Report and Financial Statements for the year ended 30 April 2020 will shortly be available on the Company's website www.polarcapitaltechnologytrust.co.uk and will be posted to Shareholders in late July.

 

The Annual General Meeting will be held on 2 September 2020, full details of the arrangements will be provided in the Notice of AGM and on the Company's website in due course.


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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FR UORKRRRUBAAR
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