Portfolio Overview

Allianz Technology Trust’s NAV fell by 11.3% in October, underperforming the Dow Jones World Technology Index return of -7.6%. Global markets fell sharply during the month, with technology stocks hit particularly hard. In the case of ATT, stock selection detracted from its relative performance against the benchmark.

Our position in electric vehicle maker, Tesla, was the top contributor during the period. Shares have been more volatile recently with questions regarding the financial stability of the company escalating while ramping up production of its Model 3 car. We believe Tesla made significant steps in addressing those concerns in its latest quarterly update, demonstrating better-than-expected profitability on Model 3 and generating attractive and healthy cash flows. Another area of concern has been sustainability of demand, and we believe Model 3 sales to non-US countries could offset potential pressures in the future.

Our underweight position in NVIDIA was also a top contributor. NVIDIA’s Graphics Processing Units (GPUs) are used in nearly all deep learning/machine learning applications for the purpose of training neural networks. Shares fell in sympathy with other semiconductor stocks through some of the market volatility. Losses accelerated when a competitor reported earnings and indicated that the market for GPUs used in crypto-currency mining applications had weakened more than expected. We remain constructive on NVIDIA shares as the long-term growth trajectory is intact driven by increasing penetration of GPUs in the AI training market and strength in other end markets. While we like the long term opportunity for NVIDIA, we reduced our overall position size in the stock and semiconductors space due to concerns around inventories and the ongoing trade issues with China.

Other top active contributors included not owning IBM, an underweight position in Tencent, and an overweight position in MongoDB.

Our position in Square was the top relative detractor over the month. The company develops business management software for small and medium-sized businesses (SMB) and monetises many of these products through transaction processing. During the month, Square announced that Sarah Friar (CFO) would be stepping down to take on a CEO role at Nextdoor (a hyper-local social platform). Friar had been the face of the company to investors, and her departure was unexpected and disappointing. Jack Dorsey (CEO) indicated in a memo that her departure was amicable and driven by her ambition to be a CEO. Square’s culture of experimentation and delegation has created a deep bench of talent. Square continues to execute well against its goals of moving to larger sellers, expanding internationally, and building e-commerce tools.

Our position in Amazon.com was the top detractor during the period. The company’s shares were caught in the investor angst that persisted throughout the month. Amazon’s third quarter revenue and fourth quarter guidance also fell short of expectations, which further exacerbated the share price declines. While revenues lagged, the company meaningfully increased profitability demonstrating the strength of the underlying cash flow generation of the consolidated entity. We expect there is some conservatism in management’s outlook for the fourth quarter and remain constructive on the business trends, especially the emerging profitability profile.

Other top active detractors included an underweight position in Apple and overweight positions in Advanced Micro Devices (AMD) and GrubHub.

Market Outlook

Our view is that technology remains 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.

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. We expect AI will increasingly be used to make our lives more convenient.