Portfolio Overview

The Trust’s NAV rose by 5.5% in February, outperforming the Dow Jones World Technology Index return of +3.4%. During the month, both stock selection and industry allocation contributed to relative performance.

Cloud networking software and hardware provider, Arista Networks, was a top contributor during the period. The company reported solid fourth quarter financial results with revenue growth of 27% year on year, exceeding expectations. Overall demand was good across segments with cloud networking and other enterprise customers continuing to invest. Further, management’s outlook for the current fiscal year was better than anticipated with growth from enterprise customers and adoption of 100G network technologies offsetting some large customer slowdowns. Arista provides cloud networking software and hardware for Internet and Cloud service providers, as well as next generation datacenters. Its products include modular cloud networking platforms that enable in-service upgrades and application extensibility.

Our position in Square was also a top contributor in February. The company develops business management software for small- & medium-sized businesses (SMB) and monetises many of these products through transaction processing. Square reported strong quarterly financial results driven by growth in subscriptions and services. Square continues to execute well against its goals of moving to larger sellers, expanding internationally, and building e-commerce tools. The company has been effectively adding new services to its platform to make the total value proposition more compelling for customers.

Other top active contributors included overweight positions in Paycom Software and Teradyne and an underweight position in Tencent.

Our position in Amazon.com was the top detractor during the period. The company reported results ahead of expectations for both revenue and operating income. Notably, Amazon Web Services (AWS) and other revenue (largely advertising) grew 46% and 97%, respectively. We reduced our weighting as we expect the higher spending expectations to be a near term headwind for the company’s profit growth. Nevertheless, we expect Amazon to strengthen its leadership position in retail and cloud services over time.

Our position in video game publisher Take-Two Interactive Software was also a top detractor during the period. The company’s financial results beat expectations, and management raised full year guidance. However, its shares came under pressure after fiscal Q4 guidance fell short of expectations, and investors remain concerned about the growth of one of the company’s popular online games. Take-Two is focusing on stabilising growth by increasing recurring revenues from digital game downloads, in-game micro transactions, and mobile sales. However, these initiatives will likely take time to stabilise the company’s growth. As a result, we decided to exit the position while the company works through some near-term headwinds.

Other top active detractors included an underweight position in Microsoft and not owning Intel or Cisco Systems.

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 Gross Domestic Product (GDP) 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.

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 emphasizing individual stock selection.