Portfolio Overview

The Allianz Technology Trust’s NAV returned -1.1% in February, outperforming the Dow Jones World Technology Index return of -2.9%. During the month, both stock selection and industry allocation contributed to relative performance.

Our position in RingCentral was a top relative contributor after reporting strong quarterly results that exceeded expectations driven by subscription revenue growth of 34% year over year. RingCentral provides cloud-based unified communications (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.

Our position in small-business payments and software provider, Square, was also one of the top relative contributors during the period. The company reported strong fourth quarter results at the end of the month with volumes steady and gross profit growth accelerating quarter-on-quarter. We believe these results provide an early proof point that Square’s incremental investments in sales and marketing to reinvigorate growth in its core payments processing business will bear fruit.

Other top active contributors included an underweight position in Apple, an overweight position in Netflix, and not owning Intel.

Paycom Software was a top detractor from relative performance during the period. The company reported a solid end to 2019 with full year results exceeding expectations and Q4 revenue growing 29% year over year. Despite the strong results, investors were disappointed with management’s conservative guidance for 2020. 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.

Our position in Fortinet was also a top relative detractor during the period. Fortinet again delivered an impressive quarter, exceeding expectations across all metrics (billings, revenue, and adjusted earnings per share (EPS)) by a wide margin. 2020 guidance was also above the consensus estimates for revenue, adjusted EPS, and billings. Product growth was again a highlight, with the company delivering 18.9% growth despite a very tough comparison year-over-year. Billings grew by 23.6%, and total revenue grew 21.2%. Fortinet continues to see success in the next generation firewall space, while most of its competitors are reporting negative product growth. The company’s focus and ability to innovate has led to significant credibility gains with enterprise customers.

Other top active detractors included not owning Tencent or Alibaba and an overweight position in Snap.

Market Outlook

While it is too early to predict the ultimate economic impact of the coronavirus outbreak, we do believe some industries will be more severely impacted than others. Within technology, supply chain disruptions will have an impact on some hardware and semiconductor companies. However, we expect companies associated with the digital transformation to hold up better than other segments in the economy. As companies adjust budgets due to supply and/or demand disruptions, there may be some delays in deal closings, but the need for companies to reduce costs should accelerate the move to cheaper and more productive solutions such as cloud, software as a service, artificial intelligence, cyber security, etc.

The recent market decline is certainly not pleasant, but we maintain our conviction in the long term growth opportunity for these companies. The global digital transformation will continue to progress due to numerous cost and productivity benefits relative to traditional technologies. These are dynamic and growing companies delivering products and services that solve real-world problems. Although further market downside is possible near term, and earnings estimates will likely come down over the next few months, we believe the long term reward to risk ratio is now more attractive.

In the longer term 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.

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.