Allianz Technology Trust says its NAV increased by 10.3% over the year to 30 November 2015, finishing at 675.1p compared with 612.2p as at 30 November 2014. They outperformed their benchmark index, the Dow Jones World Technology Index, by 3.3% over this period. The market price of the Company’s shares also outperformed the benchmark finishing the period up 9.6% with the share price increasing from 576.5p to 632.0p. The discount to NAV per share widened slightly at the year-end to 6.4% compared with 5.8% at 30 November 2014.
The manager says, as volatility in the broad market rose, market indices became extraordinarily concentrated. Within the Dow Jones World Technology Index, three stocks – Google, Microsoft, and Facebook – drove performance for the entire index. Four stocks – Apple, Microsoft, Google, and Facebook – represented 32% of the benchmark at one point.
At the holdings level, Amazon.com was the top relative contributor for the period. Shares surged higher as earnings results topped expectations throughout the year. The company continues to benefit from Amazon Web Services (AWS) – its high-growth cloud computing division – strong e-commerce sales, and more disciplined spending. While the company remains a strong online retailer, its cloud-computing business is becoming a significant growth engine. AWS, which offers web data storage and computing services, grew 78% from the previous year as of the September quarter. AWS continues to win business against large competitors due to its robust offerings, quality customer service, and massive infrastructure. As more companies move to adopt cloud services, they expect AWS to continue growing at a rapid pace. Amazon is a solid leader in two attractive secular growth trends – e-commerce and cloud computing – and they believe these segments should lead to sustainable long-term earnings growth.
Palo Alto Networks was also among the top contributors to relative performance. The company continues to deliver strong earnings results while expanding operating margins and producing positive free cash flow. Palo Alto remains the most consistent company in the security industry, and they believe its broad based products and business model position the company for sustained leadership. Strong customer growth continued during the period, particularly at the high end, and customers are increasingly adopting a broader set of Palo Alto’s solutions. Management noted customer wins against Cisco and Check Point, which was also confirmed by the manager’s recent Grassroots(SM) survey. They expect security spending will remain a top priority in IT budgets going forward, but there may be a larger separation between the winners and losers in the industry.
Other top active contributors also included overweight positions in Netflix, Freescale Semiconductor, and security provider Proofpoint.
On the negative side, the position in Alibaba was among the top relative detractors for the period. While they like the long-term prospects for Alibaba, they reduced our position in early 2015 to lessen the negative performance impact from short-term headwinds. First, there was rhetoric from the Chinese government about Alibaba selling fake products on its website. Secondly, the pace of mobile traffic monetisation was slower than expected. They then exited the stock in August to avoid sharp declines as the Chinese stock market plunged. In October, they bought the stock back at a more attractive valuation after the Chinese market stabilised. Shares rallied in October after the company reported sales growth of 32% as the company captured more of China’s shift to online shopping. Management noted strength in its mobile business, which was a key contributor to the rise in sales. Alibaba also formed a partnership with an electronics chain to expand its range of merchandise and offered new cloud-based services. Despite macro headwinds in China’s economy, the company is confidently pushing ahead with its long-term growth plans and expanding into new markets through acquisitions. The impressive sales results indicate the setback in China’s macro economy is not having a large impact on consumption patterns.
The underweight position in Google, now Alphabet, even though it was the third largest holding in the portfolio, was also among the largest detractors from relative performance. In the second half of the period, Google reported earnings results that exceeded expectations for operating income, cash flow, and earnings while expenses came in below expectations. More importantly, the company showed compelling growth in mobile/video advertising revenue. Google is demonstrating an ability to capture some of the growth in mobile/video ads as advertisers shift spending away from traditional and internet media. Additionally, Google’s new CFO emphasised that the company will focus more on maximising shareholder value, which boosted optimism among investors. In early August, the company announced it was reorganising into a holding company, under the name Alphabet, which gives its core web operations greater independence while offering investors more visibility into plans to expand new businesses. They added to the position due to the company’s progress in mobile/video ads and the greater visibility into its operations. However, Allianz Technology’s portfolio remains underweight relative to the benchmark as the stock represents nearly 9% of the index.
Other active detractors included overweight positions in SanDisk (exited), SunEdison (exited), and Fitbit.
ATT : Allianz Technology outperforms increasingly concentrated benchmark