Portfolio Overview

The Trust’s NAV fell by 4.7% in May, outperforming the Dow Jones World Technology Index return of -6.5%. During the month, both stock selection and industry allocation contributed to relative performance.

Our position in Okta was the top contributor in May after reporting strong quarterly results with 50% revenue growth year-on-year. Okta is a data security provider offering services such as automated user management, integration, mobile identification, multifactor authentication, and reporting software. Okta has a compelling opportunity to disrupt the large market for identity and access management. With a large number of applications and over 5,000 customers, Okta is beginning to see a network effect developing. The company also benefits from the shift to the cloud as customers looking for an identity management solution for cloud applications are attracted to the wide range of applications. Management noted that subscription revenue was driven by the company’s acceleration with enterprise customers. The world's largest organisations are increasingly realising that identity security is essential to their cloud, digital transformation, and security initiatives.

Our position in cloud security company Zscaler was also a top contributor in May after delivering impressive quarterly results with revenue growth of 61% year-on-year. 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.

Other top active contributors included overweight positions in Paycom Software and AVEVA Group and not owning Apple.

Our underweight position in Microsoft was the top detractor from relative performance. Shares outperformed the technology sector following the release in April of very strong quarterly results driven by broad-based strength in its cloud business. Commercial cloud grew 34%, which is very impressive given the size of this business segment, and its Azure segment grew about 75% year over year. We are seeing an inflection of demand from enterprise customers as more companies move their workloads to the cloud. Microsoft should continue to benefit from this shift over time given their strong long-term relationships with enterprise customers. At the current pace of growth, it is likely that Microsoft’s cloud business alone could become one of the largest technology platforms in the world. Microsoft has been investing in data centres and developing partnerships to boost sales of its main cloud products, which appears to be paying off for the company. We are underweight relative to the benchmark’s large position in the stock. Our exposure to the cloud and artificial intelligence themes is spread across multiple companies in the portfolio, as we believe this approach offers a more attractive risk/reward profile.

Cloud networking software and hardware provider, Arista Networks, was also a top relative detractor during the period. The company delivered solid first quarter 2019 results with revenue up 26%, earnings up 39%, and billings up 32% year over year. However, Arista’s second quarter revenue guidance fell short of consensus estimates, which management attributed to delayed capital expenditures by a couple of large cloud customers following their strong 2018 investments. Arista provides cloud networking software and hardware for Internet and Cloud service providers, as well as next generation datacentres. Its products include modular cloud networking platforms that enable in-service upgrades and application extensibility. End-demand and Arista’s competitive position remain strong in the cloud segment.

Other top active detractors included overweight positions in Pure Storage, DXC Technology, and Cree.

Market Outlook

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 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.

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.

We will continue carefully balancing risks and opportunities, leveraging our industry expertise, and emphasising individual stock selection.