Portfolio Overview

The Trust’s –NAV fell 5.6% in September, underperforming the Dow Jones World Technology Index return of 0.6%. During the month, both stock selection and industry allocation detracted from relative performance.

Recent performance has been negatively impacted by the sharp rotation from high growth, “momentum” stocks to value and cyclical stocks. The rotation has been driven more by the significant outperformance and higher valuation of high growth stocks versus cyclical and value stocks, rather than a dramatic shift in the fundamental landscape. At the macro level, conditions remain favorable for growth stocks, and we do not expect these conditions to materially change any time soon. While value and cyclical stocks have performed well recently, the macro factors which have supported growth over value in recent years: low yields, low inflation, low growth, flatter yield curves, all remain intact and accommodative for growth relative to value and cyclical stocks. While there may be periods of market rotations or higher volatility due to macro issues, the move to cloud and the broader digital transformation remains well intact. We believe the long term growth prospects for the higher growth software companies remain very compelling.

Our position in Cree was the top relative contributor in September. Cree develops LED products, lighting products, and power and RF applications. Shares rallied in September after falling in August when the company reported earnings. Cree’s June quarter results were in line with the company’s revised ranges. However, management highlighted several near term challenges due to the company's exposure to Huawei and the global trade uncertainty that has created weakness in the LED business.

Our position in Proofpoint was also a top relative contributor in September. Shares rallied after an analyst upgrade highlighted the company’s recent improvement in execution and potential for strong growth through 2020. Proofpoint’s emerging products category, which includes Email Fraud Defense, Threat Response, Targeted Attack Protection, and Social Media Protection, is expected to be a driver of future growth. The company continues expansion efforts in Europe as they anticipate increased spending by companies seeking to comply with the EU’s General Data Protection Regulation. 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.

Other top active contributors included overweight positions in Teradyne and Taiwan Semiconductor and an underweight position in Alibaba.

Our position in cloud security company Zscaler was a top relative detractor during the period. The company reported strong quarterly results that beat expectations driven by revenue growth of 53%. However, investors were disappointed by management’s conservative guidance for growth in 2020, raising concerns of potential increased competitive risks. Zscaler operates as a security-as-a-service company, offering a cloud-based security platform. The platform provides web and mobile security, threat protection, cloud application visibility, and cloud-enabled networking solutions. 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 position in video streaming platform provider, Roku, was also one of the top relative detractors. Shares were under pressure due to competitive concerns from announcements by Comcast and Facebook. We do not view these offerings as major competitive threats in their current form.

Other top active detractors included overweight positions in Okta and Paycom Software and not owning Apple.

Market Outlook

The digital transformation is the top priority for many companies across the economy, as these technologies are increasingly becoming critical drivers of growth, productivity, and competitive positioning. If IT budgets must be cut in an economic slowdown, management teams are reporting that the budget for the digital transformation will be the last to be reduced. This transition is a multi-year process, and we believe we are still in the fairly early stages. We maintain exposure to companies that we believe will benefit from secular growth themes. Despite periods of volatility driven by geopolitical uncertainty, we expect the broad technology sector to see attractive growth in the future.

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 from the growth of the gross domestic product.

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 seeing an ongoing wave of innovation in the sector that we believe has the potential to produce attractive returns for companies with best-in-class solutions.

We continue to carefully balance risks and opportunities going forward, leveraging our industry expertise, and emphasising individual stock selection.