Portfolio Overview

The Allianz Technology Trust’s NAV returned 7.5% in January, outperforming the Dow Jones World Technology Index return of 3.2%. During the month, both stock selection and industry allocation contributed to relative performance.

Paycom Software was a top contributor to relative performance after shares were boosted by news that the stock would be added to the S&P 500 index at the end of January. 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. We see the company as a unique cloud asset modernising the payroll market.

Our position in RingCentral was also a top relative contributor. Shares outperformed in January as analysts continued to react positively to the company’s recently announced strategic partnership with Avaya, the leader in on-premise unified communications (UC). The companies will jointly deliver a cloud UC offering leveraging Avaya’s customer base and sales network. RingCentral provides cloud-based UC services that connect multiple users over multiple devices. The company’s solution replaces legacy business communication systems and offers advantages such as minimal upfront investment, rapid deployment, increased functionality, and ease of management. RingCentral has the largest scale among its cloud-based competitors, and we believe it is well positioned to achieve growth by continuing to disrupt the business communications market in the mobile workforce era.

Other top active contributors included overweight positions in Tesla, MongoDB, and Zscaler.

Our underweight position in Microsoft was the top detractor from relative performance. The company reported strong quarterly financial results across every segment of its business, beating both revenue and earnings expectations, and management provided better than expected guidance. Revenue growth from cloud service Azure accelerated to 64% year-on-year from 63% year-on-year in the prior quarter, demonstrating continued rapid market growth. The company has done a good job of meeting the complex requirements of its enterprise customers as they begin the migration to cloud based architectures. Microsoft should continue to benefit from this shift over time given their strong long-term relationships with enterprise customers. While we are positive on 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.

Our underweight position in Apple, the largest holding in the benchmark, was also a top detractor from relative performance. The company reported strong quarterly financial results with both revenue and earnings exceeding expectations. The strength in the quarter was driven by better than expected iPhone and wearables/accessories sales. Higher than expected profitability helped generate free cash flow of $28.4 billion, which supported a robust return of capital via a cash dividend of $3.5 billion and stock repurchases of $20.7 billion. Management provided a stronger than expected outlook for the upcoming quarter, but provided a wider range given the uncertainty and fluidity of the coronavirus outbreak. While the iPhone product cycle remains uncertain, the consistent growth in the services segment is helping the company re-accelerate revenue growth. The portfolio’s weighting in Apple continues to be significantly underweight relative to the benchmark’s large position.

Other top active detractors included an overweight position in Taiwan Semiconductor, an underweight position in Alphabet (Google’s parent), and not owning Salesforce.

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.