Portfolio Overview

The Trust’s NAV gained 7.1% in July, underperforming the Dow Jones World Technology Index return of 7.7%. During the month, stock selection contributed and industry allocation detracted from relative performance.

Our position in Elastic was a top relative contributor as investors reacted positively to a series of meetings with company management. Elastic offers a variety of solutions, including monitoring, security analysis, enterprise search, cloud computing, and open-source application performance monitoring. Its technology helps customers explore and analyse their data differently using the power of search with real-time speed. More than 5,500 customers have built apps on top of its Elasticsearch stack. Machine learning is now integrated into its technology stack to help customers design more intelligent applications.

Our position in cloud security company Zscaler was also a top relative contributor during the period. The company 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 conviction in Zscaler remains high as the company has a significant growth opportunity and compelling competitive advantages with its unique capabilities in cloud security.

Other top active contributors included not owning Samsung or SAP and an overweight position in Teradyne.

Not owning Apple, one of the largest holdings in the benchmark, was the top detractor from relative performance. Apple reported slightly better quarterly financial results relative to expectations and guided the upcoming quarter ahead of consensus and much better than feared. The market is optimistic that Apple’s large installed base of iPhone users will boost future iPhone upgrades as well as monetization of services. However, we expect to see a lull in the 2019 iPhone product cycle ahead of the 5G iPhones in 2020. Further, we may see demand fluctuations from Chinese consumers due to the US-China trade dispute. Both issues could limit iPhone upgrades and services revenue growth more than current expectations. Despite the benefits of Apple’s balance sheet flexibility being priced into the stock, we are not currently invested in the stock.

Our position in web-based customer support platform, Zendesk, was also a top relative contributor during the period. The company delivered strong quarterly financial results, but shares sold off as management called out slipped deals in Europe (UK) and Asia. We do not believe these issues reflect a change in fundamentals and that many of these deals can close by the end of year. Zendesk provides help-desk services software predominantly to small- and medium size businesses. The company’s solutions are delivered as-a-service (cloud) and help companies engage with their customers via voice, email, chats, and websites. Zendesk deploys natural language processing and machine learning to understand issues as they arise and resolve them in the most efficient manner possible. We remain constructive on Zendesk seeing strong secular tailwinds and the potential for more consistency in execution.

Other top active detractors included an underweight position in Alphabet (Google’s parent) and overweight positions in Bloom Energy and AVEVA.

Market Outlook

In our view, the technology sector continues to benefit from strong tailwinds which should continue to drive attractive long term appreciation. 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. For the semiconductors and hardware segments, we expect the environment to remain mixed as companies work through production and inventory adjustments amid the trade conflict between the US and China. From a fundamental perspective, these companies are much stronger after years of consolidation, and we expect growth to reaccelerate in 2020. 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 simply gross domestic product 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.

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