Interim Management Statement

RNS Number : 6906O

Polar Capital Technology Trust PLC

21 September 2011

 



Polar Capital Technology Trust plc  Interim Management Statement for the 4 months to 31 August 2011 (unaudited)

Investment objective The investment objective of Polar Capital Technology Trust PLC is to maximise long-term capital growth through investing in a diversified portfolio of technology companies around the world. Material Events in the period Share Capital Changes in the share capital in the period to 31 August 2011 and up to 19 September 2011 Ordinary Shares Subscription Shares In issue at 30 April 2011 217,111,211 25,294,991 Conversion of subscription shares between 30 April 2011 and 31 August 2011 in to ordinary shares +10,401 -10,401 In issue at 31 August 2011 127,425,693 25,283,973 Conversion of subscription shares on 1 September 2011 +3,464 -3,464 Issus of ordinary shares between 1 September 2011 and 19 September 2011 +300,000 - In issue at 19 September 2011 127,725,693 25,280,509 Latest  Total Voting Rights As at 31 August 2011, Polar Capital Technology Trust plc's share capital consisted of 127,422,229 ordinary shares of 25 pence each and 25,283,973 subscription shares of 1 pence each. Each ordinary share carries one vote while the subscription shares have no voting rights. Therefore as at 31 August 2011, the total number of voting rights was 127,422,229. No shares were held in Treasury. ANNUAL GENERAL MEETING The Annual General Meeting was held on 4 August 2011 and all resolutions were passed on a show of hands. The AGM presentation and proxy votes can be viewed on the Company's website. Latest NAVs The unaudited, undiluted NAV per share on 20 September 2011 was 336.54p (including current year deficit). Performance Performance over the period from 30 April 2011 to 31August 2011 is shown below.

Market Performance

Deteriorating economic data and the re-emergence of the sovereign risk issue in Europe led stocks lower over the period. The period began with first-quarter earnings season all but complete which forced investor attention to return to weak economic data and the resurfacing of sovereign risk in the form of a potential Greek default. This combination, augmented by disappointing US non-farm payrolls and weak European and Chinese PMIs naturally led risk assets lower as ten year US Treasury bonds breached 3% for the first time in 2011. Amid a sharp correction in risk assets, investor sentiment plunged to depths not witnessed since last summer (the AAII Investor Sentiment survey registering its most bearish reading since July 2010). As a result, the passing of a Greek austerity package and some better than expected US data led to a pronounced rotation from bonds into equities at the end of June, US stocks enjoying their strongest weekly gain in two years. However, these positive developments were over-shadowed in early July by protracted US budget deficit negotiations, rising European sovereign bond yields and a more mixed Q2 earnings season. This led to further equity market weakness (ameliorated somewhat by a stronger US Dollar) which worsened in August amid the US losing its coveted triple-A rating and the Chancellor Merkel dismissing the idea of German-backed Eurobonds.

Technology Performance

The technology sector fell broadly in line with the market during the quarter as stolid performances from a number of large-caps together with a stronger US Dollar helped offset pronounced weakness in component stocks. The period began with a number of disappointing first-quarter earnings reports from a number of legacy incumbents including Cisco, Hewlett Packard and Nokia, reflecting the combination of a softer macro backdrop and a new cycle gathering pace, epitomised by the positive IPO debut of social networking leader LinkedIn and strong numbers from Salesforce.com.  However, by June deteriorating economic conditions began to weigh on the sector as falling bond yields led to profit taking in the most cyclical sub-sectors such as semiconductors, augmented by poor numbers from DRAM maker Micron. Inventory digestion also left its mark on the optical equipment space with both Ciena and Finisar issuing negative pre-announcements, whilst sharply lower guidance from Research in Motion (the maker of Blackberry devices) led to profit-taking in smart phone-related stocks. The month ended on a positive note as Oracle, Red Hat and TIBCO posted constructive off-quarter earnings reports which helped the sector to fully participate in the late June rally. Although the sector outperformed in July, this was largely as a result of a number of strong earnings from mega-caps such as Apple and Google (augmented by each of IBM, Microsoft and Intel). These were in stark contrast with a generally more mixed second quarter earnings season as inventory digestion and weakening European demand meant that a number of 'next-generation' companies were unable to deliver requisite 'beat-and-raise' quarters. This led to some significant share price weakness, particularly in the networking subsector, following a disappointing quarter from Juniper Networks and lacklustre reports from both F5 Networks and Riverbed Technology. This trend continued into August with disappointing earnings reports from both Dell and Network providing evidence of softening fundamentals amid the macroeconomic slowdown. The resignation of Apple's talismanic CEO Steve Jobs was another key development although the muted stock reaction made plain the well publicized nature of Mr Jobs' health (and investor comfort with new CEO Tim Cook). M&A resurfaced late in the period as Hewlett Packard announced its expensive acquisition of UK software vendor Autonomy while Google bolstered the intellectual property position of its Android operating system by purchasing Motorola Mobility.

Outlook

Since period end, the macroeconomic and sovereign risks that were largely responsible for weaker equity markets during the quarter have accelerated to the downside. Indeed, with global equities c.16% below their 2011 highs as at the end of August, it is clear that the recent torrent of 'top-down' challenges represents one of the greatest threats to the post 2008 recovery. Although cognisant of the existential threats represented by sovereign risk and deflation, we had taken comfort in the fact that our interests as equity investors have been remarkably aligned with those of policymakers (who are every bit as keen as us to avoid a so-called 'double dip' rescission or worse). Unfortunately, protracted US budget negotiations, Greek failure to meet deficit targets and Germany closing the door on EU wide backed Eurobonds have made it all too apparent that policymakers themselves might be unable (or unwilling) to deliver, at least not in a satisfactory timeframe. This lack of 'backstop' has led investors to consider previously unthinkable outcomes such as US default and the breakup of the European Union which has forced liquidity into 'tail-risk' assets such as gold and the Swiss franc (for those fearing inflation) and long-dated Treasuries (for those fearing deflation). The desire for capital preservation, combined with the need to 'do something' ('fight or flight' syndrome) reached fever pitch in August when a US gold Exchange Traded Fund became the largest ETF in the world. It also contributed to ten year Treasury yields falling below 2% as investors scrambled to lock in what are likely to be negative real returns unless deflation prevails. Likewise European sovereign Credit Default Swap spreads have continued to move sharply higher at least in part because they represent relatively 'cheap' insurance on systemic failure. With liquidity fleeing into 'tail-outcome' beneficiaries, anything left in the middle (equities, credit and commodities) has been subject to a 'buyers strike' which helps explains the extent of the equity market correction and the remarkable degree of cross-correlation. Given our bias towards small and mid-cap growth stocks, we have experienced this dynamic all too keenly, as a lack of buyers for our favoured assets has led to some remarkable and largely unwarranted price declines.

Given the increasingly staccato nature of the global economy, we acknowledge that recession risk has risen as a consequence of the recent loss of confidence. We also expect third-quarter earnings season to prove particularly tricky. We do not anticipate a 'V-shaped' recovery in markets, but for those investors with a longer-term horizon (or simply those who refuse to settle for negative real returns) the equity market correction represents an outstanding opportunity to increase exposure to an undervalued and under-owned asset class. To those who argue stocks are far from cheap based on Shiller-type analysis, we would point to globalisation and the impact it has had on labour's share of GDP and effective corporate tax rates. Instead, we would contend that equities are not only attractive in an absolute sense but relative to risk free alternatives they are remarkably so, as evidenced by the S&P dividend yield recently surpassing ten year US Treasury yields for only the second time since 1958. Of course, companies are operating at record levels of profitability which leaves business models particularly sensitive to a downturn, but the vast majority of our portfolio looks attractive even assuming a c.20% cut to 2012 estimates. This sentiment appears to be well supported by a significant pick up in M&A activity within and beyond our sector, and a flurry of large recent buyback announcements from the likes of Lam Research, Harris, St Jude Medical to name a few.

While we remain hopeful that a recessionary outcome can be avoided, we believe that those who do not share this sanguine view are tending to equate a downturn with a re-run of 2007/8. We strongly disagree with this assumption which is why we have been increasing our small/mid-cap exposure at a time when others are applying their 2008 Model (eschewing debt laden and/or non-index constituents). We simply do not expect the financial system to seize up again, nor do we believe economic activity will grind to a halt as it did in 2007/8. As such, we do not envisage inventories falling by the same magnitude, nor do we expect the longevity of solidly profitable companies to be called into question. Rather we continue to believe - as challenging as things appear right now - that the current environment is best understood as an echo of the previous crisis, rather than a repeat performance. Of course, we do not know when investors will revert to a 'glass half full' mentality, nor do we have a strong sense of what the catalysts for that change might be. Instead, we are using the current dislocation to further rotate away from so-called 'cheap' incumbents such as Hewlett Packard that appear both structurally and cyclically challenged in favour of next generation winners that should be able to grow in anything other than a worst-case scenario. Lastly, we would expect recent market weakness to presage acceleration in M&A activity that would reverse the recent fortunes of small and mid-caps. Indeed, the recent acquisition of Autonomy could yet prove the catalyst for a wave of M&A activity just as the bidding war for storage vendor 3PAR did this time last year

Ben Rogoff

Polar Capital LLP

21 September 2011

	31 August  2011	30 April  2011
Share Price (p)	322.90	373.50
NAV per Share (p)	323.83	368.74
Premium / (Discount) (%)	(0.29)	1.42
Total Investments (£m)	413	469
AIC Gross Gearing Ratio (%)*	106	106
AIC Net Gearing Ratio (%)*	97	98
*Gearing calculations are exclusive of current year Revenue/Loss.

Performance (%)	6 Months	1Year			5 years
Share Price	-10.55	+16.15			+50.89
NAV per Share	-13.71	+11.14			+45.09
Dow Jones World Technology Index	-11.23	+9.98			+36.96
Geographical Breakdown (%)	31 August 2011	30 April  2011
North America	69.5	70.9
Asia	14.1	13.9
Europe	7.7	8.8
Japan	4.7	3.6
Cash & Equivalents	4.0	2.8
Sector Breakdown (%)	31 August 2011	30 April  2011
Semiconductors	23.0	23.0
Software	22.1	21.4
Computing	20.6	19.2
Comms Equipment	16.5	18.6
Internet / Consumer	10.6	8.0
Services	2.9	4.2
Hardware	1.7	2.3
Telecoms / Media	1.1	0.7
Electronic Components	0.6	1.1
Other Sectors	0.4	0.1
Healthcare	0.2	1.0
Defence / Security	0.2	0.2
Clean Energy	0.1	0.1
Options	-	0.1
Top Ten Holdings (%)	31 August 2011	30 April  2011
Apple	10.2	8.1
Google	4.8	3.9
International Business Machines	4.3	4.3
Microsoft	3.9	3.3
Oracle	3.8	4.3
Samsung Electronics	3.3	3.3
Qualcomm	2.7	2.7
Taiwan Semicon Manufacturing	2.2	2.0
EMC Corporation	1.8	-
Cisco Systems	1.6	2.2
Subscription Share Information Each Subscription Share entitles the holder to subscribe for one Ordinary Share at the applicable Subscription Price by 5.00 p.m. on the last Business Day of each month between the last Business Day in March 2011 and the last Business Day in March 2014, after which the Subscription Rights will lapse. The Subscription Prices are as follows: • if the subscription rights are exercised on any day between and including the last Business Day in March 2011 and the last Business Day in March 2012, 401p per Ordinary Share; • if the subscription rights are exercised on any day between and including 1 April 2012 and the last Business Day in March 2014, 478p per ordinary share
General Information:
For further information please visit the company's website where monthly fact sheets for the Company are available.  www.polarcapitaltechnologytrustplc.co.uk. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the company's website (or any other website) is incorporated into, or forms part of, this announcement. The net asset value of the Company's ordinary shares are calculated daily and can be viewed on the London Stock Exchange website at www.londonstockexchange.com This interim management statement has been produced solely to provide additional information to shareholders as a body to meet the relevant requirements of the UK Listing Authority's Disclosure and Transparency Rules. It should not be relied upon by any other party for any other purpose.

 

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