Portfolio Overview

The Trust’s NAV fell by 4.6% in August, underperforming the Dow Jones World Technology Index return of -2.4%. During the month, both stock selection and industry allocation detracted from relative performance.

Our position in video streaming platform provider, Roku, was one of the top relative contributors. Shares surged after the company reported solid quarterly revenue results and management raised their outlook for the year. Underlying metrics were also strong with average revenue per user growth accelerating versus the prior quarter and user counts continuing to grow at impressive rates. Roku is a direct beneficiary of the secular trend towards streaming. In the near-term, we expect consumer engagement on its platform to rise as new direct-to-consumer offerings are launched over the next year.

Paycom Software was also a top contributor to relative performance after reporting strong quarterly results driven by revenue growth of 31% year over year. Paycom provides cloud-based payroll and human capital management software in a Software-as-a-Service (SaaS) format to small and medium businesses in the US. The company’s software provides unique value to customers because it typically replaces multiple systems and helps manage complex compliance requirements. The single database, ease of implementation, and high customer satisfaction should help Paycom continue to take market share in this market. We see the company as a unique cloud asset modernising the payroll market.

Other top active contributors included not owning Cisco, an underweight position in Tencent, and an overweight position in Alteryx.

Our position in cloud security company Zscaler was the top relative detractor during the period. The company’s shares more than doubled this year through July, but then pulled back in August amid market volatility and an analyst’s downgrade. Zscaler operates as a SaaS 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. Zscaler has compelling competitive advantages with its unique capabilities in cloud security. Additionally, customers are seeing a quick return on their investment, which is a very strong selling point for Zscaler relative to competitors.

Our position in Square was also one of the top relative detractors during the period. The company develops business management software for small & medium-sized businesses (SMB) and monetises many of these products through transaction processing. Shares came under pressure after the company reported fiscal quarter earnings results with strong revenue growth but lower-than-expected volume metrics. The company also announced plans to sell its food delivery business, Caviar, to pure-play DoorDash.

Other top active detractors included overweight positions in Cree, Bloom Energy, and DXC Technology.

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.

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.

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