Portfolio Overview

The Allianz Technology Trust’s NAV returned -1.6% in October, underperforming the Dow Jones World Technology Index return of -0.9%. During the month, stock selection contributed and industry allocation detracted from relative performance.

Our position in video streaming platform provider, Roku, was the top relative contributor. Shares recovered a large portion of their value lost in the prior month as investors digested the recent competitive products announced by Comcast and Facebook. Additionally, Roku announced that the Apple TV+ streaming service would be available on its platform, which validated the company’s position as a leading aggregator. Our view is that the company continues to be uniquely positioned as an independent platform with highly advantageous direct relationships with TV manufacturers and is a direct beneficiary of the secular trend towards streaming.

Our position in electric vehicle maker, Tesla, was also among the top relative contributors during the period. Shares gained after the company reported a surprise profit and provided other positive updates in the latest quarterly report. Beyond the financial results, the CEO announced the company was ahead of schedule on key initiatives such as the opening of a Chinese factory and the release of the Model Y cross-over vehicle. We are encouraged by the strong financial results this quarter, but acknowledge the high variability of cash flows given the capital intensity of the company’s strategy. This variability of cash flows makes the shares more sensitive to changes in business trajectory and the perception of capital conditions. We are mindful of this sensitivity and manage the position size in the portfolio to reflect these issues.

Other top active contributors included overweight positions in RingCentral, Advanced Micro Devices, and AVEVA.

Our position in cloud security company Zscaler was a top relative detractor during the period. Investors have been concerned about management’s conservative guidance for growth in 2020, raising concerns of potential increased competitive risks. 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. Additionally, customers were seeing a quick return on their investment, which was a very strong selling point for Zscaler relative to competitors.

Our position in Proofpoint was also a top relative detractor in October. The company reported solid quarterly results that slightly exceeded consensus expectations for billings, revenue, and earnings. However, the company reiterated full-year guidance, which results in a slightly lower fourth-quarter guide. Given the strength in the underlying business and the demand environment, this is likely conservative guidance. The highlights for the quarter were strength in the company’s new security products as well as strong performance in the core products. Proofpoint’s portfolio approach to developing new products and markets should help it deliver sustainable and consistent growth in a dynamic market. The use of bundling to simplify sales processes should also help the company capture more market share and drive faster returns on newer products. 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 detractors included an underweight position in Apple and overweight positions in Temenos and Alteryx.

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.

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