Portfolio Overview

The Trust’s NAV rose by 8.5% in January, outperforming the Dow Jones World Technology Index return of 6.0%. During the month, stock selection contributed and industry allocation detracted from relative performance.

Our position in Okta was the top contributor in January. After a volatile fourth quarter during the market sell-off, the stock delivered strong gains to start the new year. Okta is a data security provider offering services such as automated user management, integration, mobile identification, multifactor authentication, and reporting software. Okta has an opportunity to disrupt the large market for identity and access management.

Our position in Square was also a top contributor. The company develops business management software for small- & medium-sized businesses (SMB) and monetises many of these products through transaction processing. Shares gained following the announcement of a new Chief Financial Officer to take the seat that was vacated in October. We believe shares also reacted favorably to the Fed’s communication of a pause on interest rate increases, which is helpful from a valuation perspective.

Other top active contributors included an underweight position in Microsoft and overweight positions in Twilio and Zscaler.

Our position in electric vehicle maker, Tesla, was a top detractor during the period. Shares lost ground after the company unexpectedly announced price cuts on its vehicles following the expiration of tax credit programmes in the US. This contributed to the view that Tesla might be seeing softening demand in the US, though we see this as a reasonable action and note the company still has large unmet demand in Asia and Europe. Later in the period, shares compressed further after the CEO announced layoffs intending to rationalise costs as the company targets profitability. Because of the company’s vertical integration that requires high capital needs, we acknowledge the shares are more sensitive to changes in business trajectory and perception of capital conditions. We are mindful of this sensitivity and manage the position size in the portfolio to reflect these issues.

Sophos Group was also a top detractor in January after reporting interim quarterly financial results with disappointing billings growth. The company continued to experience strong renewal rates from existing customers and added 9,000 net new customers.

Other top active detractors included underweight positions in Facebook, Alibaba, and Samsung.

Market Outlook

Despite the recent market volatility, our view is that technology is well-positioned to remain a major driver of market returns. 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. We believe this is a multi-year transition which is still in the very early stages. 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. During the sharp sell-off in the fourth quarter, many high quality technology companies continued to deliver strong operational execution. With more reasonable valuations and less euphoria in the market, we believe high quality companies should exceed expectations and deliver attractive stock returns in 2019.

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 economic 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 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 also see a number of companies with present valuations that, in our view, do not fully reflect positive company- and/or industry-specific tailwinds.

Despite high valuations for some high growth 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.

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.

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