Welcome to the latest update for Allianz Technology Trust PLC from the Trust’s portfolio manager, Walter Price.
The Trust’s NAV returned 4.3% , outperforming the Dow Jones World Technology Index return of 2.8%. In US dollar terms, the portfolio gained 4.8%. During the month, stock selection contributed to relative performance, and industry allocation had no effect.
Our position in memory chip manufacturer Micron Technology was the top contributor during the period. Shares surged following the release of the fiscal second quarter earnings report in which the company beat previously stated results and guided above estimates for the current period. Underlying this constructive outlook was tightness in the supply of memory chips and lean channel inventories. Over the course of several years, consolidation in the memory chip industry has helped Micron and others rationalise supply and more effectively preserve profitability through the upsand-downs of the demand environment. We see these reported and forecasted results as evidence of the improvement in this industry structure.
Our position in Mobileye, which designs and makes chipsets and software used in vision-based advanced driver assistance systems (ADAS), was also one of the largest relative contributors in March. The stock rallied 28% after Intel announced plans to acquire the firm at a significant premium. Mobileye is an industry leader in vision-based algorithms and a front-runner in autonomous driving. The company has partnerships with major auto and auto parts manufacturers including Delphi, Audi, Volkswagen, and BMW. Intel had been working with Mobileye since June 2016 under a partnership with BMW to create a fully autonomous self-driving vehicle. Intel plans to integrate its autonomous vehicle unit with the company under Mobileye’s leadership. We exited the position after the announcement as the share price approached the acquisition price leaving minimal upside potential.
Other top active contributors included overweight positions in Veeva Systems and Infineon Technologies and not owning IBM.
Security provider Proofpoint was also among the top detractors in March. Shares fell when an analyst downgraded the stock to a sell rating. In January, management provided a favorable outlook for 2017 and noted a stable demand environment in the US and in international markets with no changes in the competitive landscape. Proofpoint is benefiting from several growth drivers, and the power of its software-as-a-service model is beginning to generate leverage and produce solid free cash flow growth. Email security is a mature market, but we think Proofpoint should continue to capture market share as enterprises shift to cloudbased infrastructure and adopt more of the company’s products. We believe the company is well-positioned to deliver strong earnings and free cash flow growth over the next few years.
Our position in non-benchmark holding Square was among the top detractors to relative performance in March. Shares pulled back slightly in March after surging in February when quarterly results showed revenues and margins beating expectations, driven by increasing gross payment volume. We anticipate Square will continue to gain market share as the company expands from its historical micro-merchant focus to small and medium businesses as well as internationally. The company should continue delivering very attractive incremental margins due to scale benefits in its payments business and an increasing mix of subscriptions and services. Square’s subscriptions and services are key differentiators against other processors and include instant deposit, employee management, marketing, inventory management, Caviar (food delivery), and Square Capital, which provides loans to merchant clients that are repaid from card sales.
Other top active detractors included overweight positions in Palo Alto Networks and Yandex and an underweight position in Tencent Holdings.
We continue to believe the technology sector can provide some of the best absolute and relative return opportunities in the equity markets – especially for bottom-up stock pickers. The growth in technology is coming from the creation of new markets, rather than simply GDP growth. Investors need to find companies generating organic growth by creating new markets or effecting significant change on old markets. Sectors such as automobiles, advertising, security, retail, and web services are all being shaped and transformed by advances in technology.
At present, we are seeing a wave of innovation in the sector that we believe has the potential to produce attractive returns for companies with best-in-class solutions. We also see a number of companies with present valuations that, in our view, do not fully reflect positive company- and/or industry-specific tailwinds.
Lastly, we believe the Augmented/Virtual Reality (AR and VR) theme is poised to accelerate in 2017. This theme has been slow to take off due to insufficient and expensive hardware and relatively new software applications. However, declining hardware costs, more gaming software availability, new mobile phones from Apple and Google, and ongoing AR work by Microsoft and Tesla with productivity applications should pave the way for this theme to deliver attractive growth.
We will continue carefully balancing risks and opportunities, leveraging our industry expertise, and emphasising individual stock selection.
For the latest portfolio breakdown, performance, dividend information, please visit www.allianztechnologytrust.com.
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