Portfolio Overview

The Trust’s NAV fell very slightly (-0.1%) in November, outperforming the Dow Jones World Technology Index return of -0.4%. During the month, stock selection had a modest impact and industry allocation contributed to relative performance.

Our position in Twilio was a top contributor during the period. The company provides a cloud-based platform that enables developers to build, scale, and operate real-time communications within software applications as a pay-as-you-go service. Twilio’s platform is being increasingly leveraged by companies that are building AI applications to enable them to design more intimate, real-time interactions with their customers. Shares surged during the period after the company reported 68% year-on-year revenue growth marking acceleration from prior quarters. We believe these results demonstrate that the company has extended its lead in the communications platform-as-a-service market driven by differentiated solutions and strong developer relationships.

Our position in Workday was also a top contributor. The company reported strong quarterly financial results across the board with the core human capital management (HCM) and Financials businesses showing solid acceleration in growth. Workday is one of the largest and fastest growing providers of HCM software solutions, delivered via a Software-as-a-Service model. HCM suites not only automate core Human Resource (HR) functions such as personnel records, benefits administration, and compensation but can also offer workforce management, recruiting, compliance, learning management, workforce performance, and compensation management. 30% of Fortune 500 companies are now using Workday’s core HCM offering. Workday has a very large established market and this market appears to be expanding with the development of its pipeline in Financials.

Other top active contributors included an underweight position in Apple and overweight positions in Amazon.com and Tableau Software.

Storage and data management solutions provider NetApp was the top detractor from relative performance during the period. The company reported solid quarterly financial results, but investors were disappointed that overall revenue came in at the low end of management’s guidance. For the upcoming quarter, management’s guidance was in line with expectations, and the company continues to return its free cash flow to shareholders through stock buybacks. NetApp continues to effectively rationalise costs and streamline the business, while benefitting from a base of highly recurring maintenance revenue streams. We believe the company may also benefit from demand for its all-flash arrays (storage infrastructure), market share gains, a better IT spending environment, and its growing cloud data services business.

Our underweight position in Microsoft also detracted from relative performance. Shares continued to outperform following the company’s most recent quarterly financial results that beat expectations on revenue, earnings and cash flows, with the Azure cloud computing service growing +76% year-on-year. At the current pace of growth, it is likely that Microsoft’s cloud business alone could become one of the largest technology platforms in the world. Moreover, the company has done this while executing a financial plan that has been very disciplined. Microsoft has been investing in data centers and developing partnerships to boost sales of its main cloud products, which appear to be paying off for the company. We are underweight relative to the benchmark’s large position in the stock. Our exposure to the cloud and Artificial Intelligence (AI) themes is spread across multiple companies in the portfolio, as we believe this approach offers a more attractive risk/reward profile.

Other top active detractors included underweight positions in Tencent and Alibaba and an overweight position in Take-Two Interactive.

Market Outlook

Despite the recent market volatility, our view is that technology is well-positioned to remain a major driver of market returns. The combination of solid global economic growth, strong corporate earnings, domestic tax cuts in the US, and the ongoing digital transformation among corporations should continue to drive growth in IT spending. Feedback from our discussions with company management teams, as well as management surveys from multiple sources, indicate that companies across the economy are turning to technology solutions to increase revenue, improve productivity, and enhance operating efficiency. While the largest technology companies today will inevitably struggle to grow as rapidly in the future, the broad technology sector should continue to see attractive growth in the future.

Despite high valuations for some cloud and internet companies, we continue to see massive addressable markets much larger than the revenue today. However, we have consolidated our exposure to these areas in select companies having the most compelling solutions and whose business models demonstrate a discernible path to deliver strong earnings and cash flow growth over the next few years.

We are also finding excellent investment opportunities among more attractively valued areas of technology. In particular, certain technology incumbents are making compelling progress on their “as-a-service” offerings.

AI is also becoming a significant trend. From consumer goods, such as the Amazon Echo, to autonomous driving, practical applications of AI are emerging. We expect AI will increasingly be used to make our lives more convenient.

We will continue carefully balancing risks and opportunities, leveraging our industry expertise, and emphasizing individual stock selection.