Portfolio Overview

The Allianz Technology Trust returned 0.4% in July, underperforming the Dow Jones World Technology Index return of 1.1%. During the month, stock selection contributed and industry allocation detracted from relative performance.

Our position in collaboration software provider Asana was a top relative contributor during the period. The company’s most recent quarterly financial results exceeded expectations driven by revenue growth of 61% year-on-year. Management provided guidance ahead of expectations driven by accelerating new customer growth, expansion of current customer contracts, investments in enterprise sales capacity, product enhancements, and international expansion. Asana offers a flexible and scalable work management platform that helps individuals, teams, managers, and executives coordinate and execute activities and tasks, streamline and automate workflows, and collaborate more effectively.

Our position in cloud security company Zscaler was also a top relative contributor. The company’s most recent quarterly financial results were outstanding with revenue growth of 60%, far ahead of consensus estimates. Billings grew 71% and exceeded expectations by a wide margin as it is clear that demand for cloud security is hitting another gear of growth. We continue to view Zscaler as a company which is a first mover in cloud security that has essentially created a new market in the cyber security world. The cloud journey is still in the early innings, and Zscaler should therefore see a significant expansion in its addressable market.

Other top active contributors included an underweight position in Tencent, not owning Alibaba, and an overweight position in EPAM Systems.

Our position in Amazon.com was a top detractor during the period. The company reported mixed results, as sales growth of 27% year-on-year and 4% from the first quarter, fell short of high consensus expectations. However, profit growth was better than expected with operating profit coming in at the higher end of management’s guidance. Sales growth was particularly strong across multiple business segments with third-party seller services up 34%, subscription services up 28%, advertising services up 83% and AWS (Amazon Web Services) up 37%. Sales in the company’s online retail segment increased by 13% in the second quarter, a deceleration from previous quarters as Amazon begins to face tougher comparisons following heightened demand amid pandemic-related restrictions in the prior year. It is important to note that management sees lasting benefits from a larger Prime subscriber base as we come out of the pandemic restrictions.

Our underweight position in Microsoft, the benchmark’s second largest position at 12.7%, was also a top detractor. Microsoft reported a strong end to its fiscal year, beating expectations for revenue and earnings. Total revenue growth of 17% and commercial cloud revenue growth of 31% were both impressive for a business of this scale. The company saw solid long-term commitments to its cloud platform, with significant growth in the number of $10 million-plus Azure and Microsoft 365 contracts. Strength in Microsoft 365 has been driven by the higher tier upsells due to strong demand for security, compliance, and voice capabilities. In security alone, Microsoft reported a 70% increase year-on-year in small-to-medium sized business customers. Microsoft continues to build success in newer product areas, such as security, compliance, and collaboration. Longer term, the urgency of digital transformation has increased due to the COVID pandemic. The stock remains a top holding in the portfolio, though we maintain an underweight position relative to the benchmark’s large weight.

Other top active detractors included overweight positions in Micron and PayPal and an underweight position in Apple.

Market Outlook

In our view, the technology sector continues to benefit from strong tailwinds which should, we believe, continue to drive attractive long-term appreciation. There is no question in our minds that the COVID-19 crisis will spur the use of technology and change how we live and work in the future. Additionally, many businesses are struggling to find workers to meet customer demand and need technology solutions to improve productivity of limited staffs. As companies need to reduce costs and improve productivity, we expect to see accelerating demand for innovative and more productive solutions such as cloud, software-as-a-service, artificial intelligence, cyber security, etc. We are in a period of rapid change, where the importance of technology is key to the prosperity of most industries. We believe that this environment is likely to provide attractive growth opportunities in many technology stocks over the next several years.

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.