Portfolio Overview

The Allianz Technology Trust’s NAV returned -0.9% in December, underperforming the Dow Jones World Technology Index return of 2.6%. During the month, both stock selection and industry allocation detracted from relative performance.

Our position in electric vehicle maker, Tesla, was the top relative contributor. Shares gained amid reports that the company’s Chinese plant would soon start making vehicle deliveries. This was ultimately confirmed at the end of the month with the first Model 3 sedans going to company employees. Along with the first deliveries, it was reported that Tesla could reduce price on the Chinese produced models by 20% or more next year as production scales and supply chains mature, which could spur further demand. We acknowledge the high variability of cash flows given the capital intensity of the company’s strategy. This variability of cash flows makes the shares more sensitive to changes in business trajectory and the perception of capital conditions. We are mindful of this sensitivity and manage the position size in the portfolio to reflect these issues.

Our position in semiconductor manufacturer Advanced Micro Devices was also a top relative contributor during the period. Shares gained along with other semiconductor stocks after the US and China reached a phase one trade agreement. AMD has executed solidly and delivered new products (PC Client CPUs, Gaming GPUs, and Server CPUs) enabling unit share gains. The Compute/Graphics business segment (71% of revenues) grew 36% year over year in the third quarter driven by increased shipment of PC client CPUs for desktop and notebook applications.

Other top active contributors included an overweight position in Taiwan Semiconductor, an underweight position in Alphabet (Google’s parent) and not owning Oracle.

Our position in cloud security company Zscaler was a top relative detractor during the period. The company reported strong quarterly results driven by 48% revenue growth, ahead of forecasts of 42%, and 37% orders growth, ahead of forecasts of 25%. Despite the very good results, shares were down in December as most analysts continue to have a hold on the stock and found reasons not to compliment the company. Customers are increasingly adopting Zscaler’s products, which provide a single platform to enforce business and security policy for their users to access multiple applications and services. Our conviction in Zscaler remains high as the company has a significant growth opportunity and compelling competitive advantages with its unique capabilities in cloud security. Additionally, customers are seeing a quick return on their investment, which is a very strong selling point for Zscaler relative to competitors. The company is the leader in cloud security, the fastest growing sector in the security universe.

Our position in Okta was also a top relative detractor despite reporting strong quarterly results with revenue growth of 45% year over year. Management articulated a confident and strong environment for their offering and excitement around some of their new offerings (Access Gateway in particular). The valuation is expensive, which is the biggest investor concern about a company that appears to be in position to becoming a de-facto standard in identity security as companies move to the cloud. The world's largest organisations are increasingly realising that identity security is essential to their cloud, digital transformation, and security initiatives. Okta has a compelling opportunity to disrupt the large market for identity and access management. A growing market opportunity, strong execution, and new product launches should further advance Okta’s leadership in identity security.

Other top active detractors included an underweight position in Apple and overweight positions in Paycom and Roku.

Market Outlook

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 Gross Domestic Product (GDP) growth.

Investors need to find companies generating organic growth by creating new markets or effecting significant change on old markets. Industries such as automobiles, advertising, security, retail, and manufacturing are all being shaped and transformed by advances in technology.

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. Artificial Intelligence (AI) is also becoming a significant trend. From consumer goods, such as the Amazon Echo, to autonomous driving, practical applications of AI are emerging.

Finally, we will carefully balance risks and opportunities going forward, leveraging our industry expertise, and emphasising individual stock selection.