Portfolio Overview

The Allianz Technology Trust’s NAV returned 14.1% in May, outperforming the Dow Jones World Technology Index return of 8.7%. During the month, stock selection contributed while industry allocation detracted from relative performance. For the year to date period, the Trust returned 25.7% and significantly outperformed the benchmark return of 13.7%.

Our position in cloud security company Zscaler was the top contributor during the period. The company delivered a very strong quarter, significantly exceeding consensus expectations across the board, including 55% year over year billings growth versus 30% last quarter. The acceleration of demand is being boosted by the COVID-19 pandemic backdrop, with more enterprises shifting to a remote workforce for the foreseeable future and CIOs focused on fast tracking a digital transformation. The combination of its ZIA and ZPA products is what many enterprises are looking for as they migrate to cloud driven deployments. Additionally, sales execution has meaningfully improved as the new CRO, Dali Rajic, continues to transform the sales force. Zscaler is a first mover in cloud security that has essentially created a new market in the cyber security world with an innovative product umbrella and strategic focus.

Our position in Twilio was also one of the top relative contributors 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. Shares surged after the company reported solid first quarter results and management offered a strong outlook for the current quarter. Weakness in verticals like travel and hospitality were offset by new use cases catalysed by the pandemic such as remote contact center, contactless delivery, distance learning, and telehealth.

Other top active contributors included overweight positions in MongoDB, CrowdStrike, and Zoom Video.

Our position in Amazon.com was the largest detractor during the period. Although the company saw a huge spike in retail demand, Amazon’s results and outlook fell short of high expectations as the company announced that they would spend $4 billion in extra costs to meet the demand and safety needs of their customers and employees during the COVID-19 crisis. Management is implementing testing for their employees and adding extra wages for those who are working. They added 80,000 employees by March and another 95,000 by the end of April. Additionally, they are shipping many essential items at cost and providing meal deliveries to disadvantaged people. Although this will likely weigh on earnings growth for a while, it is pulling forward the penetration of E-commerce everywhere and expanding Amazon’s ability to deliver products themselves quickly.

Our underweight position in Apple, one of the largest holdings in the benchmark, was also a top detractor from relative performance. The company reported quarterly financial results that were better than feared due to unexpected demand recovery in China toward the end of the quarter. The services segment posted revenue growth of 17% year over year driven by strong buying activity in the App Store due partly to the stay-at-home trend as well as continued strong adoption of the various subscription services. Apple continued with its robust shareholder return and announced increases in both cash dividends and stock repurchases. The company indicated that iPhone demand has picked-up meaningfully in April coupled with the launch of the second-generation of its lower-end iPhone, the iPhone SE, with a starting price of $399. The lower price point creates strong growth opportunities in emerging markets like India and China, which could significantly increase the installed base of users and drive demand for wearables/accessories and services. While the company did not provide guidance, in our opinion, management clearly projected a positive tone looking into the remainder of the year driven by the reopening of the economy as well as the beginning of the new 5G iPhone product cycle. While we have recently increased the position size in Apple, the portfolio’s weighting continues to be significantly underweight relative to the benchmark’s large position.

Other top active detractors included overweight positions in Taiwan Semiconductor and Micron and not owning Cisco Systems.

Market Outlook

In our view, the technology sector continues to benefit from strong tailwinds which should continue to drive attractive long term appreciation. There is no question in our minds that the present events around the COVID-19 crisis will spur the use of technology and change how we live and work in the future. As companies adjust budgets due to supply and/or demand disruptions, the need for companies to reduce costs should accelerate the move to cheaper and more productive solutions such as cloud, software-as-a-service, artificial intelligence, cyber security, etc. We are in a period of rapid change, where the importance of technology is key to the prosperity of most industries. This environment is likely to provide attractive growth opportunities in many technology stocks over the next several years.

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.