Preliminary Announcement

RNS Number : 8308K

Polar Capital Technology Trust PLC

30 June 2014

 



POLAR CAPITAL TECHNOLOGY TRUST PLC

UNAUDITED PRELIMINARY RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2014

30 June 2014

THIS ANNOUNCEMENT CONTAINS REGULATED INFORMATION

Financial Highlights

	As at 30 April 2014		As at 30 April 2013	Movement %
Total net assets	£606,633,000		£528,845,000	14.7%
Net assets per ordinary share	458.40p		412.41p	11.2%
Ordinary shares in issue	132,336,159		128,231,742	3.2%
Price per ordinary share	442.00p		398.50p	10.9%
Subscription shares in issue (Note 1)	-		24,774,460	-
Price per subscription share	-		7.88p	-
Note 1: The subscription shares ceased to exist following the final conversion date of 31 March 2014
Benchmark Change over the year to 30 April 2014 Dow Jones World Technology Index total return Sterling adjusted with  withholding taxes removed				+ 13.1%
Exchange rates	As at 30 April 2014		As at 30 April 2013
US$ to £	1.6886		1.5564
Japanese Yen to £	172.49		151.61
Euro to £	1.2178		1.1805
	For the year to 30 April
	2014		2013
Ongoing charges ratio	1.15%		1.19%
Ongoing charges ratio incl.  performance fee	1.15%		1.19%
	For the year to 30 April 2014
Benchmark Change	Local currency %		Sterling adjusted %
Dow Jones World Technology Index, total return, sterling adjusted with withholding taxes removed	+22.7		+13.1
Other Indices (total return)
FTSE World	-		+6.8
FTSE All-share	-		+10.5
S&P 500 composite	+20.4		+11.0
For further information please contact:
Ben Rogoff		Neil Doyle / Jack Hickey
Polar Capital Technology Trust PLC		FTI Consulting
Tel: [phone]		Tel: [phone]

Chairman's Statement

Michael Moule

Results

For most of our financial year global technology has been one of the leading sectors in a good year for developed equity markets. However a very promising performance was curtailed by a rapid reversal for the sector in the last six weeks of our financial year when US investors switched from growth to value stocks. In sterling terms the Dow Jones World Technology Index still managed a 13.1% return versus 6.8% for the FTSE World Index, and 11.0% for the S&P 500. The manager's policy of investing in faster growing mid and smaller sized companies helped build a significant performance above the benchmark , but this cushion was completely eroded by the painful setback in late March and April . I am relieved to report a return of 11.2% in Net Asset Value and a rise of 10.9% for our share price, in a bittersweet year for shareholders.

Perhaps the most surprising feature was the contrast between geographical regions. The debt laden, growth challenged equity markets of the USA, Europe and the UK provided the best returns in a very broad based upturn which favoured mid and small companies. By contrast most Asian and Emerging markets have suffered modest declines, unsettled by fears of US tapering, Chinese growth and debt fears, territorial disputes, and currency instability. Japan lost momentum later in the year with doubts about the longer term benefits of President Abe's experimental economic policy. A detailed analysis of our results in all markets and the currency headwinds we endured can be found in the manager's report.

Subscription Shares

The late March decline in US tech stocks was unsettling for subscription shareholders as the premium of the share price and NAV over the 478p subscription price was whittled away to zero by the final acceptance date on 31 March 2014. A total of 3.988 million new shares were issued over the three year life of the sub-shares, 15.7% of the total. There was minimal dilution and the total number of issued ordinary shares increased by 3.1% as a result of the sub-share conversions over the three years.

Regulation

You will notice a few changes to the annual report as we are now obliged to provide a strategic report with certain prescribed content under an edict called the "Narrative Reporting Framework". We seem to be world class within the EU at introducing new regulations, good news for lawyers and accountants, but will it always help and protect shareholders? We are now well advanced to complying with the "post Madoff" stable door policy introduced by the EU called the AIFMD. The Board decided that the most practicable and cost effective AIFM (Alternative Investment Fund Manager) was to appoint Polar Capital rather than a third party or the Board itself. A sub-committee of the Board spent time meeting the few viable candidates willing to act as Depositaries.  They soon ascertained that separation of the depository function from the role of safe custody was inefficient. We concluded that consolidating both roles at HSBC was the best result as we could benefit from a cheaper bulk rate negotiated for all the Polar Capital trusts. We are on course to comply with the July 2014 deadline for both appointments.

The US tax authorities are very keen to keep tabs on overseas income received by US citizens wherever they reside. We have very few, if any individual US shareholders, however to avoid a doubling of withholding tax from 15% to 30%  on dividends we receive from our US investments we  have now registered  with the IRS under the unfortunate sounding FATCA ( Foreign Account Tax Compliance Act ) .

Directors

We have a duty to manage succession which involves finding the right blend of experience and diversity to challenge the manager and look after shareholders' interests. David Gamble who joined the Board in 2002 has indicated his intention to retire from the Board in September 2015, and we expect to appoint a new director in the first half of 2015. Rupert Montagu and I both joined the Board in January 2007 and after 2016 we hope to manage our succession as smoothly as possible, but for continuity we will not leave the Board in the same year.

We conducted an internal review of the Board and the chairman in March 2014. We have five independent directors which we feel is the right number for an investment trust of this size and we are almost unique in having the benefit of the former fund manager as an unpaid Board member. He is willing to stand down at any time but the situation works well for the Board and shareholders as our current manager does not feel in any way inhibited by his presence and we all benefit from his long experience with all types of past technology cycles. We all stand for annual re-election and I would ask shareholders to vote in favour of each re-election despite two directors having served more than nine years.

AGM and Shareholder Information

The AGM will be held at 12 noon on 4 September 2014 at the RAC Club, Pall Mall, London. This is always a lively event and the formal business will be preceded by a presentation by the manager. We are probably several years away from providing a live AGM webcast , instant electronic voting and twitter feed , however if you cannot attend the AGM I would urge you to look at our new website . The site seems turbocharged, so even for me in "rustic band" Sussex all information and documents appear very quickly and the AGM presentation and proxy votes will be posted on the site after the AGM.

Outlook

In developed equity markets calendar year 2013 produced very little earnings growth but a big increase in the valuation of the average company. Further upward progress in equity markets is heavily reliant on evidence of sustainable sales and earnings growth, leading to increased individual price risk if this is not forthcoming. For both top down strategists and bottom up stock pickers the five year old bull market is showing signs of maturity reflected in new issues volumes, hostile takeovers and sector rotation. Globalisation, the internet, and flexible labour markets are helping keep inflation low, and the slow speed of economic recovery in the USA and Europe leaves little appetite for a material increase in interest rates. Thus equities may remain the asset of choice for longer than usual with a rare, but possible "euphoria" leg to ensue.

Fortunately the global technology sector has a cycle of its own making with the internet seemingly unstoppable in its voracious inroads into the everyday life of business and individuals. There is consequently no shortage of exciting new companies for our managers to assess but product life cycles and patent protection appear to get shorter, and sifting the few winners from the myriad of losers is no easy task. Finally I would like to thank our management team for all their hard work and dedication on our behalf, and to congratulate Ben and Neil for winning the AIC award for best annual report in the specialist trust category.

Michael Moule

Chairman

investment manager's report

MARKET REVIEW

Equity markets added to their post financial crisis gains during the fiscal year as improved risk appetite and PE expansion outweighed downward revisions to global growth. Although investors continued to climb the proverbial 'wall of worry' (this time taking the form of tapering fear), the relative absence of systemic threats and growing recognition that policymakers would "do whatever it takes" allowed equity valuations to expand further, driving the majority of returns. Unfortunately, pronounced sterling strength (the UK economy performing well ahead of expectations) stymied returns, the FTSE World total return index gaining just 6.8% during the year as the currency appreciated 8.5% and 13.8% against the US Dollar and Japanese Yen respectively.

Developed markets led the running with both European and US equities rising in sterling terms ; although concerns about 'Abenomics' and further Yen weakness saw Japanese stocks give back nearly half of their prior year gains. Emerging markets (EM) were also weak during the fiscal year, impacted by sharply higher sovereign rates (US ten year Treasury yields rising from 1.68% to 2.65%) driven by fear (and then the reality) of tapering, the gradual reduction of asset purchases otherwise known as Quantitative Easing (QE). Tighter resulting monetary conditions, adverse financial flows and significant downward revisions to growth saw Asian ex Japan equities fall 8.5% in sterling terms.

In contrast with sentiment-driven equity returns, the global economy continued to undershoot expectations, registering 3% growth during 2013 (2012: 3.1%) versus early expectations of between 3.3-3.5%. Although global growth was once again led by developing economies (+4.7%) and China in particular (+7.7%), tighter financial conditions and slower growth took their toll on a number of emerging markets during the second half of the fiscal year. Fortunately, the recovery 'baton' was taken up by developed economies (+1.3%) that - adjusting for the impact of greater fiscal tightening in the US during the year - performed ahead of expectations.

In the US, Treasury yields moved sharply higher, as investors digested better economic data that raised the prospect of earlier than expected tapering. Despite a brief wobble in October - a partial federal government shutdown raising the spectre of an (unlikely) default - US rates peaked in December at a little over 3%, the same month that the FOMC commenced tapering (reducing their asset purchases by $10bn per month). In Europe, the process of normalisation allowed further real economic progress to be made, particularly in the periphery where large current account deficits were eliminated and financing needs substantially addressed while the ECB's balance sheet contracted significantly due to early LTRO repayments. Against all odds, the EU area climbed out of recession in the second quarter while Ireland, Portugal and Spain each returned to growth during the year. The Japanese economy also performed well as the Bank of Japan expanded its balance sheet from <30% to c. 47% of nominal GDP while the weak Yen significantly boosted corporate profits.

After an encouraging start, the global economic outlook was challenged during the second half of the year as tighter monetary conditions and slower Chinese growth tripped up a number of emerging economies and currencies. Tapering concerns came to the fore ahead of the September FOMC meeting with both Brazil and India feeling the impact of tighter monetary conditions, while Indonesia was forced to raise interest rates. Any hope of a quick remedy to the China slowdown was also dashed after the new leadership presented its reform plan following its Third Plenum in November. The shift in emphasis from quantity to quality of growth made clear by the reform agenda was reflected in weak Chinese Purchasing Manager Surveys (PMI) readings in both January and February while the near collapse of a high yield investment trust led to renewed concerns about the shadow banking system. January also saw a number of emerging markets begin to show signs of genuine tapering-related distress with three (India, South Africa, Turkey) opting to raise interest rates to defend their currencies and/or curtail inflation. The magnitude of Turkey's interest rate response was not lost on investors who rotated away from risk in favour of safe havens, US Treasuries falling from over 3% to 2.67% in January alone. Although monetary conditions improved somewhat, further concerns about China growth and more mixed data in the US and Europe triggered downward revisions to global growth forecasts during the final months of the year.

Although tapering fear dictated the market tempo during much of the year, our hope that investors would ultimately exchange measured tightening for more sustainable economic recovery was borne out, the December tapering decision proving a non-event for developed market equities. This was in large part because the decision was accompanied by reassurance that short-term interest rates would remain low "well past" the time that unemployment falls below 6.5% as long as inflation remains contained. The mollifying language of the FOMC statement epitomised continuing policymaker support that allowed investor sentiment to continue to rebuild during the year. The improvement in sentiment was evident from the strongest net equity fund inflows for at least twenty-one years at the expense of bond funds that suffered record annual outflows during 2013 - a rotation genuinely deserving of its 'Great' moniker. Improved confidence was also reflected by corporate activity that saw M&A volume increase 11% year on year (y/y) while the US IPO market enjoyed its best year since 2000.The combination of record inflows and greater M&A activity left developed equity markets largely impervious to negative events such as escalation in the Syrian conflict and more recently, upheaval in Ukraine.

While global equities closed out the year at highs, the final two months witnessed a dramatic shift in sentiment beneath the surface with US growth/small-cap stocks experiencing a sharp sell-off, the Russell 2000 retreating 7% from its highs (and more than 9% by mid-May). While periods of small-cap consolidation are not uncommon, the correction that began in early March was unusual because it did not accompany a market sell-off. As a result, US small-caps at their mid-May nadir had surrendered c. 40% of their post 2009 outperformance in just over two months. Although it is not clear what presaged this shift away from growth/small-caps, Fed Chair Yellen's testimony in mid-March during which she put a timeline on Fed Funds rate increases (likely in early 2015, broadly in line with prior expectations) appears to have acted as a catalyst for profit taking that may have triggered further selling, the magnitude of the correction suggestive of hedge fund distress and disorderly selling. During the year, the strongest regional returns (taking into account the impact of foreign exchange movements were generated by European stocks (+14.2%) that benefited from improving economic trends and a resurgent Euro while US stocks  (+11.0%) also comfortably outperformed global equity markets. While Asian equities trailed (-8.3%), weakest performance was reserved for Japanese stocks that fell sharply (-10.5%) due to some concerns about the pace of structural reform and demand trends post the consumption tax hike.

TECHNOLOGY REVIEW

Having materially trailed last year, the technology sector significantly outpaced the broader market during this past fiscal year, the Dow Jones World Technology Index rising +13.1%  in sterling terms.   Although some of the outperformance was passive (reflecting the sector's limited exposure to emerging markets), technology stock performance was driven by the combination of strong new cycle fundamentals and overall PE expansion. While the sector performed well for much of the year, the first half was driven by growth and small-caps with rising bond yields and sector M&A helping to drive a rotation away from defensives. In contrast, the final months of the year saw large-caps outperform sharply - in line with the broader market - as a number of mega-caps (Apple, Hewlett-Packard, Microsoft) delivered better results while small-caps/growth stocks were subjected to a painful dose of profit taking in the absence of any obvious change in fundamentals.

Strong sector performance was in stark contrast with weak IT budgets that expanded just 0.4% y/y against early expectations of between 3-4%. While capital spending was probably constrained by some macro-economic uncertainty, we cannot recall a previous period when IT budgets essentially failed to grow absent a recession, suggesting that 'new cycle' deflation likely played a significant role too. Lacklustre capital spending caught up with enterprise-orientated IT vendors as early as Q2, with each of Cisco, IBM and Oracle reporting disappointing quarters, while US Federal budget uncertainty and weaker trends in China left third-quarter earnings season at least as challenging, EMC joining the list of struggling incumbents. Taper-related emerging market weakness, together with an NSA/Snowden-related backlash created further headwinds in Q4 with IBM reporting hardware sales down 26% y/y while Cisco guided their upcoming quarter revenues $1bn below expectations. Although Q1 saw improved quarterly performances from a number of incumbents, IBM continued to disappoint delivering its eighth consecutive quarter of negative year over year revenue growth.

Smartphone stocks (ex Apple) also performed poorly during the year, our fears about slowing developed market growth and intensifying competition were essentially borne out with market share outside of the top five vendors (Samsung, Apple, Huawei, LG and Lenovo) rising to 39% from 27% in 2011. Early concerns were focused on disappointing demand for the Samsung Galaxy 4S and inventory adjustments in the smartphone supply chain. Second tier handset makers were particularly hard hit, with HTC and Blackberry looking increasingly marginal, the latter putting itself up for sale (only for that process to collapse shortly after). Nokia avoided a similar fate when it announced the sale of its handset division to Microsoft in September for €5.44bn, a decision that looked even more adroit following the company's final quarter as a smartphone vendor (Q1'14) which showed its handset revenues declining 30% y/y. Google also disposed of its loss making smartphone business, selling Motorola Mobility to Lenovo, although it retained the majority of its valuable patents. Even volume leader Samsung was unable to avoid the impact of greater competition and the shift towards the low-end, posting a quarterly profit decline in Q1.

At odds with a number of high-profile enterprise and smartphone-related disappointments, next-generation companies largely delivered ahead of expectations. Cloud computing - the backbone of our new cycle thesis - continued to gain momentum, following the pivotal decision by Adobe to shift to a software-as-a-service (SaaS) model, and the CIA awarding a $600m infrastructure deal to Amazon, rather than IBM. Internet stocks were among the strongest performers during the year, led by a resurgent Facebook having initially disappointed investors during its debut year. Facebook's renaissance was driven by strong quarterly results that began in Q2 as the company proved (more than) able to monetise soaring mobile usage. This, together with strong earnings from a slew of other Internet companies (including Google, LinkedIn, TripAdvisor and Yelp) and excitement ahead of a potential Alibaba IPO (China's largest e-commerce company) resulted in a substantial subsector re-rating. Next-generation valuations were further buttressed by a number of thesis-affirming M&A transactions with ExactTarget, Responsys and Sourcefire being acquired by Salesforce.com, Oracle and Cisco respectively.

While the combination of strong fundamentals and supportive M&A resulted in significant small-cap/growth outperformance during the first half of the year, large-cap/value stocks began to hold their own from mid-October. PC market stabilisation certainly helped, unit declines moderating to -8% y/y by Q3 from their first quarter nadir of -14%. While 2013 was still the worst in PC industry history, improved enterprise demand (driven by the XP replacement cycle) allowed PC-related companies to post better results and their stocks to re-rate from depressed levels. Microsoft epitomised this dynamic, announcing three respectable consecutive quarters and a new CEO Satya Nadella, following the surprise retirement of Steve Ballmer. A number of legacy companies also benefited from PE expansion as they unveiled belated Cloud offerings, Cisco announced its plans to build a so-called Intercloud, Oracle launched a slew of new products while IBM upgraded its infrastructure-as-a-service capabilities following its $2bn acquisition of private company, Softlayer. Microsoft's 'new cycle' strategy - based around Office 365 and Azure - also gained credibility following CEO Nadella's decision to launch Office for iPad.

Large-caps also greatly benefited from a recovery at Apple, following a difficult year. After some initial disappointment with the new iPhone 5s and pricing of its 'low end' handset, Apple's shares rebounded sharply from lows following a strong Q3 earnings report and news that activist investor Carl Icahn had initiated a position in the stock. Despite a disappointing Q4, Apple stock proved relatively resilient, supported by the company's large share repurchase programme. A better than expected first-quarter against low expectations saw Apple shares run up sharply into our year-end as investors began to rebuild positions ahead of the major iPhone refresh expected this September. Semiconductor stocks also enjoyed something of a renaissance with new product cycles, stabilising smartphone inventories (during the second half) and benign memory pricing helping propel the sector to multi-year highs, supported by further industry consolidation (sector M&A rising 32% y/y in value terms) that saw Applied Materials combine with Tokyo Electron, and Avago acquire industry veteran LSI Logic. Lastly, incumbent valuations were buttressed by welcome buyback announcements from the likes of Cisco, Microsoft and Qualcomm, private equity transactions that saw both BMC Software and Dell 'go private' and greater shareholder activism with Elliot Management acquiring stakes in both Juniper Networks and Riverbed Technology.

Renewed interest in large-cap/value stocks gave way to a profound rotation during the final two months that saw US small-caps give up all of their fiscal year relative returns. While it is difficult to pinpoint exactly what triggered the rotation, it mirrored small-cap profit taking in the broader market following Fed Chair Janet Yellen's comments about the timing of potential rate hikes. While first-quarter earnings season was largely supportive, a number of high-fliers (such as Linkedin and Twitter) failed to live up to high expectations while there were slightly more small-cap mishaps than usual. The IPO market had also become a little frothy following Twitter's stunning debut earlier in the year with some evidence of deteriorating quality. Likewise, M&A activity by next-generation companies appeared increasingly speculative following Google's $3.2bn acquisition of Nest Labs (connected home devices) and Facebook's $19bn acquisition of WhatsApp - the clear leader in instant messaging with c. 450m users but negligible revenues today. This inevitably led to comparisons with the late 1990s with some commentators suggesting that technology stocks were in the midst of another bubble (a view we strongly disagree with). High PE/high growth stocks bore the brunt of profit taking which bore no resemblance to continued strong fundamentals, the greatest disconnect occurring in the Internet sector where solid reports from Amazon and Google were received poorly while strong Facebook results saw investors sell the news. SaaS names also suffered badly, with strong numbers from ServiceNow and Workday unable to halt a pronounced de-rating process that saw many former leaders decline 40-60% from their recent highs.

OUR PERFORMANCE

Having led the benchmark for much of the year, the sharp rotation away from growth and small-caps during March and April left the Trust moderately trailing the benchmark during the year, our own net asset value rising 11.2%. The Trust was negatively impacted by not owning or holding underweight positions in a number of large-cap incumbents that delivered strong absolute returns during the year, including Apple (+26%), Hewlett Packard (+51%), Nokia (+106%) and Microsoft (+16%). Relative performance was also hindered by our constructive view on Japan and the decision to retain some liquidity. However, it was the year-end rotation away from growth/small-caps that proved most deleterious to relative performance as small-caps ended up trailing their larger peers over the full year having outperformed by more than 10% during the first half. In terms of positives, the Trust was aided by a significant underweight position in IBM (-9%) the only stock in the DJ Industrials to have fallen during 2013. Relative performance was also generated by an overweight position in Facebook (+98%) and a number of off-benchmark positions such as Harman (+129%), Telit (+170%) and TripAdvisor (+41%). The Trust also benefited from M&A activity with three of our holdings - ExactTarget, Responsys and Sourcefire acquired during the year at premiums that ranged from 29-52%.

ECONOMIC OUTLOOK

Despite weaker near-term data, we remain hopeful that 2014 will mark the first at or above trend growth year for the global economy post the financial crisis.  Developed economies (forecast +2.2%) should account for three quarters of the growth acceleration this year as fiscal headwinds diminish in Europe and the US, while the UK and Japan are likely to grow above trend. While we expect monetary policy to invariably tighten, this process is likely to be shallow in the developed world with policymakers happy to remain 'behind the curve' as inflation remains contained (and below target in Europe, Japan and the US) due to slack labour markets (particularly within the Eurozone) and well-anchored inflation expectations. As such, we continue to believe that deflation rather than inflation remains the greater risk; as long as policymakers share this view, monetary policy should remain remarkably easy for the duration of 2014 with base rates in the US and Europe likely to remain at current (near zero) levels at least until 2015.

Underpinning our relative confidence in current global GDP forecasts is the US economy that is expected to reaccelerate to 2.8% in 2014 (2013: 1.9%) as the impact of fiscal tightening goes into reverse. The economy should also continue to benefit from modest further labour market improvement (unemployment having already fallen from c. 10% in 2009 to 6.7% today) and consumption, fuelled by the substantial household balance sheet repair that occurred last year. Although increased confidence should result in an improvement in capital spending (US corporate capital stock age is the highest since 1970) this is likely to be muted given structural changes such as low sales to inventory ratios, offshore production and technology deflation. More mixed recent economic data and core CPI that remains comfortably below the 2% Fed target should ensure that US monetary policy remains extremely accommodative with zero interest rate policy (ZIRP) likely to extend into 2015. As long as the Fed succeeds in "divorcing tapering from tightening", negative short-term interest rates, together with improving confidence, should see the US enter a more sustainable recovery phase.

Having represented the greatest source of systemic risk last year, Europe is forecast to be the greatest contributor to global growth in 2014 with GDP pegged at 1.2%(2013: -0.5%). As in the US, growth should be supported by less financial instability, reduced fiscal drag with export growth and a slower pace of private deleveraging likely to help too. However - and critical to our relatively sanguine view on likely monetary policy adjustments - the EU recovery remains fragile with unemployment not far from record highs while the stronger Euro and outsized EM exposure  represent new risks to growth. With core inflation averaging less than 1% during the final quarter of our fiscal year, Europe still appears vulnerable to deflation. This, together with an under capitalised banking system, should ensure further intervention as and when required, although this will be increasingly delivered via 'unconventional' tools as benchmark rates are just 0.25% today. In stark contrast, the UK recovery is in full flow with PMIs recently at sixteen-year highs and 2014 growth pegged at 2.9% (its fastest pace of growth in seven years) with BoE Governor Mark Carney having to furiously adjust interest rate policy seemingly in order to delay rate hikes. 

While Japan is also expected to grow above trend this year, GDP forecasts of c. 1.4% (2013: 1.5%) capture the impact of a recent (April) consumption tax hike that will obscure underlying improvements driven by strengthening private investment and export growth (substantially aided by Yen depreciation). However - evidenced by poor relative performance so far this year - there remains significant scepticism that "Abenomics" will end fifteen years of deflation with bears focusing on negative real wage growth and the lack of substantive structural reform. While it is too early to tell if PM Shinzo Abe's bold plan to end deflation will work, the early signs are encouraging as land prices have stabilised and wages have stopped falling for the first time in three years. With core CPI (+1.3% y/y in March) remaining well below the 2% target set by the Bank of Japan last year, further intervention looks likely, albeit perhaps not in the near term given the BoJ's optimistic view of the economy. For now, the most significant risk to our constructive view on Japan relates to EM weakness (16% of Japanese exports) and deteriorating relations with China (18% of Japanese exports) evidenced by Abe's controversial visit to the Yasukuni shrine and efforts to reinterpret the pacifist constitution.

Accounting for more than 20% of incremental global growth, China remains a key factor in this year's economic outlook. The decision to reduce China's growth target to 7.5% in 2012 (having averaged 10.4% GDP growth between 2003-12) represented a clear break from the past characterised by a desire to deliver more sustainable growth. While the move towards a market driven credit system, together with efforts by the new leadership to reign in the shadow banking system are to be applauded they are likely to come at a near-term GDP cost. Even though the shift in emphasis from quantity to quality of growth raises the risk of a 'hard landing', we still consider that outcome a 'tail risk' because modest inflation and government debt at just c. 65% of GDP afford the Chinese considerable firepower should growth undershoot the 7-8% rate required to absorb urbanisation.

Unfortunately, the same cannot be said for a number of other emerging markets, particularly those reliant on financial flows to support growth and fund current account deficits. While fear of tapering was enough to trip up economies with large negative balances (such as India), actual tapering has forced a number of additional countries (including Brazil, South Africa and Turkey) to raise interest rates to ameliorate the impact of adverse financial flows and currency weakness. The magnitude of rate hikes in Turkey (+4.25% to 12%) - an economy that a few years ago was recently growing at 8% but could only muster +4.3% in 2013 - made plain the distress adverse flows were causing and, in our opinion, laid bare how much of the recent EM boom was due to global liquidity caused by fiscal and credit stimulus in the developed world. Today those boom years look like ancient history because we are (hopefully) past the point of maximum stimulus in the developed world while it seems unlikely that China GDP will ever grow in excess of 10% again.

As we outlined last year, systemic risk has diminished due to decisive intervention previously taken by policymakers. While many structural balances remain unaddressed, these are unlikely to flare up while interest rates/sovereign spreads remain near lows. Although Europe is likely to remain a focus given its output gap (and the upcoming ECB Asset Quality Review) tail risks associated with the Euro have clearly diminished. US political risk has also receded following the bipartisan Federal deficit deal signed at the end of last year. Social unrest remains a concern, electoral gains made by right wing parties in recent European Parliament elections acting as a timely reminder of the risks associated with prolonged stagnation and elevated youth unemployment. Once again, geopolitical risk remains the most significant exogenous factor to consider this year. While the Middle East remains a potential tinderbox, a new source of risk has emerged in the form of a resurgent Russia intent on defending what it sees as its regional interests while keeping NATO at bay. Geopolitical risk also appears to be extending into East Asia as China and the US begin to behave more like rivals, while more hawkish governments in China, India, Japan and Korea may result in greater regional tensions and heightened possibility of a foreign policy 'mishap'. Additional risks to consider include currency wars, should countries target exchange rates for competitive purposes and global tax reform.

MARKET OUTLOOK

Although markets have got off to a good start, we are hopeful that equities will add to their gains during the remainder of the year. Further improvement in investor sentiment and risk appetite that has continued to drive the revaluation of risk assets has seen equity valuations expand significantly over the past twelve months, the forward PE on the S&P expanding to 15.7x today. As such, absolute valuations are no longer 'cheap' with most traditional measures of value slightly above longer-term averages. However, we have consistently argued against the wisdom of 'long term averages', particularly when adulterated by periods of limited relevance to the world today (high inflation, collective bargaining, exchange controls, pre-globalisation). This healthy scepticism also extends to long term valuation analysis that rarely considers that during the last thirty years the US economy has only spent 9% of the time in recession versus 40% prior to WWII, let alone the peace dividend, low inflation and the improved structural composition of the US equity market. Of course we understand why investors are reticent to publically embrace higher valuations, but we believe that PE expansion should be both anticipated and welcomed by investors early to a new secular bull market. More importantly - despite outpacing Treasuries by c. 40% last year - stocks continue to look attractive compared to most alternatives, particularly versus cash where negative real returns appear all but guaranteed.

With corporate cash flow as a percentage of GDP close to all time highs and with US non-financials said to be sitting on $1.5tr in cash, stock buybacks are likely to remain at elevated levels having accounted for 68% of free cash flow less dividends and 3% of market capitalisation last year.  Some of this excess cash is likely to fuel additional merger activity that - after a disappointing 2013 - has exploded into life this year with worldwide M&A already exceeding $1.1tr - only the third time since records began that deal activity has exceeded $1tr this early in the year.  The return of mega-deals (such as AT&T's $48bn merger with DirectTV, Valeant Pharmaceuticals $53bn unsolicited bid for Allergan and Pfizer's aborted c. $100bn takeover of AstraZeneca), together with the potential return of private equity transactions (unspent commitments having risen for the first time in five years) should help further support equity valuations.

As we have moved further from the financial crisis, so 'echoes' have become more muted reflected in maximum drawdowns in US equity markets that have contracted every year since 2008. As we hoped, this has allowed for a more rational comparison between risk and risk-free assets resulting in significantly improved equity fund flows over the past year, at the expense of bond funds. The magnitude of this reallocation has surprised even those who anticipated it (ourselves included) resulting last year in (US) stocks outperforming bonds by the largest margin for at least forty years. While we do not expect "Act II"of the 'Great Rotation' to be nearly as dramatic, further reallocation appears likely given that in February 2014, global equity funds had suffered $100bn of net outflows since 2008 in contrast to $1.1tr inflows into global bonds funds. Although last year was a painful one for bond investors, ten year US Treasury yields troughed at 1.37% last year having peaked at 16% in 1981 which means that for many, "bonds have been a one-way bet all of their investing lives, just as equities (were) in the twenty five years from 1974-2000". As the global recovery gains firmer footing over the next few years, the fear of extremely low returns and/or negative real returns on cash should drive further rotation into equities, an asset class - lest we forget - that has outperformed bonds two thirds of the time since 1971.

That said, we expect our secular bull market thesis is likely to be tested at some point over the coming year since valuations already exceed long-term averages and because it is always easier to book profits than run winners! While we do not expect a significant setback, one is statistically overdue (10% corrections are said to occur on average every eighteen months during secular bull markets) while a number of equity markets appear a little extended versus their longer-term moving averages which may leave them vulnerable to seasonal profit taking. Investor sentiment has also recovered substantially (although it remains well below levels associated with complacency) while other contrarian indicators (IPO pipeline, M&A activity, mutual fund cash levels) point to modestly elevated risk of a pullback. Of course, the greatest risk to equity markets relates to loss of policymaker support given that since 2009 risk assets have been underpinned by the unusual alignment of interests between investors and policymakers. While recent turbulence in emerging markets suggests that monetary tightening (however gradual) was not priced in, we are hopeful that policy will remain 'data dependent' and somewhat 'behind the curve' in order to allow economic growth to become self-sustaining.

TECHNOLOGY OUTLOOK

Worldwide IT spending is estimated to reach $3.8tr in 2014, an increase of 3.1% below current expectations for 3.6% global GDP growth. In the past, we might have characterised a forecast below global GDP as conservative. However - after 2013, the first year we can recall when IT budgets essentially failed to grow absent a recession - our sense is that there is not nearly as much pent-up demand for enterprise technology as incumbent suppliers and their supporters suggest. Instead we suspect new cycle deflation is the most likely culprit with China-related weakness playing a significant supporting role. As such, while there could be a cyclical rebound should the global economy/CIO confidence improve, any recovery in capital spending is likely to prove muted. With low single digit IT spending growth entirely at odds with computing and storage needs that continue to grow inexorably, further reallocation of budgets in favour of cheaper next-generation technologies and vendors looks all but assured. This reallocation is being accelerated by the migration of computing workloads from the enterprise to the Cloud such that the 'new technology cycle' appears to have entered a second, more pernicious phase with many of these new technologies beginning to replace, rather than augment existing solutions.

As with the broader market, the technology sector re-rated during the past year leaving it trading on 15.1x next twelve months earnings, broadly in line with longer term averages. Once the sector's significant aggregate net cash balance is considered, absolute valuations look more attractive although much of this cash is held offshore and therefore subject to (significant) tax if repatriated. As in previous years, market cap weighted measures of value continue to be flattered by a number of inexpensive large-caps. Although sector valuations may drift higher with the broader market, it is difficult to argue for a substantial sector re-rating following a year when overall IT spending failed to keep apace with global GDP. Fortunately, a number of incumbents have at least acknowledged their slowing growth profiles by returning an increasing portion of their excess cash/cash flow via buybacks (the sector reducing its shares outstanding by 2% in 2013) and dividends, such that our benchmark today boasts a 1.7% dividend yield. This trend looks likely to continue given strong cashflow generation and bloated balance sheets, the top twenty five technology companies sitting on $832bn of cash and investments at the end of 2013.

While improved capital discipline has buttressed incumbent valuations, it has done nothing to alter our view that enterprise computing is looking increasingly anachronistic. Even without the Cloud risk and associated new cycle deflation, the PC market appears to be in secular decline, smartphone growth is likely to slow substantially in the years ahead while China appears to be transitioning from a key end market for mature technologies into a more potent competitor. The emergence of Chinese competition represents an entirely new risk to incumbent companies that are increasingly likely to undershoot already lacklustre industry growth rates. For instance, while  Intel-based server units (x86 servers) should grow c. 2% this year, the top four Chinese vendors are expected to increase their market share from 6% to c. 9% at the expense of the 'big three' (Dell, HP and IBM) where units will contract more than 8% y/y. Rising tensions over cyber espionage following the NSA/Snowden affair appears to be accelerating this trend, China said to be advising its banks against the use of IBM servers.

Given the growing divergence in sector fundamentals, we have been surprised by the magnitude and breadth of the recent high growth de-rating process. In hindsight, our hope that ebullience was limited to a select group of stocks was overly sanguine, as the remarkable de-rating of former hyper growth 'winners' that we had largely avoided on valuation grounds (such as Fireeye, Tesla and Workday) and those we previously owned but sold in late 2013 (including Concur, LinkedIn and Netsuite) has permeated throughout the next-generation technology universe. As painful as this recent rotation has been, the exodus from high growth stocks has had very little to do with next-generation fundamentals that remain remarkably strong. We strongly refute those who claim a late 1990s re-run or 'second technology bubble'. Not only do the statistics comprehensively fail to support the parallel but the charge also fails to acknowledge that high growth, disruptive technology companies addressing large market opportunities rarely trade cheaply, particularly when they are investing for growth. Instead, we believe that the increasingly apparent bifurcation in sector fortunes, together with supportive M&A activity, allowed the valuation 'elastic' between the sector's 'winners' and 'losers' to become stretched. While we cannot know when this sentiment-driven adjustment will run its course, we are comforted by the fact that the vast majority of our holdings have continued to deliver strong fundamental performance, in stark contrast to incumbents such as IBM and EMC that appear increasingly beleaguered by the new cycle, the shift to cloud computing and slowing emerging market growth.

NEW CYCLE UPDATE

The new technology cycle continues to be underpinned by three core themes: Internet infrastructure, broadband applications and mobility, with 'big data' playing an increasingly supportive role. As in prior years, this view is well supported by a recent Gartner annual CIO survey that revealed 'analytics', infrastructure and Cloud as three of the top five IT priorities this year. Having come of age during 2013 (evidenced by the Adobe model transition and the CIA decision in favour of Amazon), Cloud adoption looks set to accelerate with share of workloads expected to reach 17% this year with incremental units of compute and storage moving decisively in favour of public clouds that by 2016 could account for up to half of overall cloud computing. Already said to be worth more than $47bn, worldwide public cloud IT services are expected to reach $107bn by 2017.

The shift towards hybrid and public cloud computing is likely to prove extremely problematic for existing vendors because incremental capacity is added beyond the enterprise where the clearing price is vastly lower, $1 spent at Amazon Web Services (AWS) is estimated to be equivalent to between $4-12 of traditional IT spending. As workloads and IT budgets are increasingly diverted towards the Cloud, new cycle deflation is likely to intensify pressuring incumbent vendor shares and business models that are "incompatible with public cloud". Public cloud deflation is also likely to be felt within the firewall as organisations increasingly ape 'web scale' architectures pioneered by Internet companies that emphasise software centricity, commodity hardware and homogeneity allowing companies like Facebook to boast a ratio of better than one engineer per 1m users.

Broadband applications remain core beneficiaries of this new cycle deflation with growth supported by smartphone usage (mobile accounting for 25% of total Internet traffic) and benign penetration rates in key categories such as online advertising, e-commerce and SaaS. After a watershed year, the outlook for online advertising looks assured given that Internet and (surging) mobile usage accounts for 45% of US media consumption but just 26% of advertising dollars. This mismatch - worth $30bn in the US alone - is likely to come at the expense of the print and TV formats, the latter (a $236bn global market) so far having been remarkably resilient to the offline to online shift. While Google should continue to benefit from market growth (and the proliferation of the Android-based devices) incremental spending is likely to gravitate towards new formats, such as local (Yelp) and social (Facebook, Twitter etc.) advertising due to their increasing reach and superior ROIs.

Surging mobile usage is also helping support e-commerce - worth $260bn in the US last year - with mobile commerce ('m-commerce') growth of 100% y/y helping overall online spending maintain a mid teens growth trajectory, underpinned by modest penetration rates of retail sales at 8% and 10% in the US and Western Europe respectively. Increased smartphone usage is also continuing to drive extraordinary growth of new applications that are capable of changing user behaviour and reinventing markets as diverse as Cloud storage (Box, Dropbox), recruitment (Linkedin), travel (TripAdvisor) and video (YouTube, Netflix). In addition, high-profile private companies such as Airbnb (accommodation), Uber (taxis) and Spotify (streaming music) are also helping to "reimagine industries". Clearly this dynamic was not lost on Facebook when they acquired WhatsApp for $19bn, the world's leading instant messaging company that last year delivered 50bn messages per day (+178% y/y) for its 400m monthly active users (MAUs). Intense M&A and investment activity looks set to continue as incumbent Internet companies look to both defend and extend their leadership positions, epitomised by recent transactions by Baidu, Facebook and Alibaba, the Chinese Internet behemoth expected to shortly IPO in the US.

Mobility remains our third core theme although we expect smartphone growth to slow substantially in the years ahead now that global penetration exceeds 55% (and greater than 70% in developed markets among 18-54 year olds). As such, 2013 was probably the zenith for smartphones with units exceeding 1bn (+43% y/y) although the shift towards lower end devices and emerging markets meant that revenues 'only' increased 25%. The combination of deteriorating mix, sharply slower unit growth this year (+24% y/y) and disruptive new entrants (such as Xiomi and potentially Amazon) has seen us further reduce our smartphone (and tablet) exposure as it will not be easy for incumbents to navigate slowing industry growth. Although the same could be said of Apple now that Android devices outsell iOS by nearly 5:1, we continue to believe that the company remains a (very) special situation, not least because it is simultaneously one of our largest holdings and our largest underweight position! Although Apple's best years of growth are likely behind it, the company appears to fully understand the risks associated with chasing growth. Instead, we expect the company to increasingly manage itself along the lines of other mass affluent brands, a view supported by Apple's decision to poach the Burberry CEO. While this decision likely reflects a slower medium-term growth trajectory, this is unlikely to become apparent ahead of a major iPhone upgrade and the introduction of "more than one" new product category this year that could see the company expand into 'wearables', TV, home automation or possibly payments. For now, these new products should ameliorate slowing smartphone growth (and tablet share losses) while Apple's stock should be supported by its plan to return over $130bn to shareholders by the end of 2015.

Although we have pared our overall smartphone-related exposure, the mobility theme remains very well represented within the portfolio. Within devices, we continue to focus on faster growing segments such as China (expected to account for a quarter of global phone shipments this year) where higher-end devices are growing faster than the overall market (aiding Taiwanese chipmaker Mediatek). We also continue to like memory manufacturers such as Micron and SK Hynix who should benefit from increasing smartphone DRAM content, as well as from benign pricing following significant industry consolidation. Smartphone growth, together with increasing comfort on the part of consumers should continue to drive mobile payments, a market forecast to grow about threefold to $721bn by 2017. While there remains a distinct lack of a 'killer app' at present, companies such as Monetise and Starbucks are working hard to accelerate adoption. Other interesting applications include mobile remittance, geo-fencing and location-based services. For now, risks around electronic payments should continue to drive upgrades of existing point of sales (PoS) terminals (good for Ingenico and suppliers of secure elements to bank cards, such as NXP Semiconductor). While we do not know which monetisation model will prevail, adoption of mobile wallets should help accelerate the move from cash to card which benefits networks (Mastercard, Visa) although - given Paypal's approach - disintermediation remains a  risk. As previously discussed, Apple represents a wild card in payments with its fingerprint-enabled iPhone, Passbook application and a remarkable 575m iTunes accounts backed by credit cards and user information.

In addition to our core themes, there are a myriad of additional ones that we have exposure to within the portfolio. The most significant of these is so-called 'big data' - a term used to describe data that is forecast to grow fifty fold between 2010 and 2020, driven increasingly by Internet usage, smartphones and other "connected" devices. Although the market for big data is expected to be worth $16bn this year, incumbent vendors of compute, storage and business intelligence software are unlikely to benefit because vastly cheaper tools are required to store, process and extract value from 'low grade' datasets. In addition to a few 'pure plays' such as Splunk (machine log analysis) and Tableau (visualisation tools), we have significant exposure to 'big data' beneficiaries like Facebook and Google, companies that own or generate vast quantities of data that they rely on to deliver a service, derive insight or - ideally - reinvent an industry. As we discussed last year, insight derived from 'big data' is allowing the technology industry to penetrate adjacent markets at an accelerating rate, supplanting experience based on sample sets with algorithms and population data. As more and more physical objects are connected to the Internet (26bn by 2020, excluding PCs, tablets and smartphones), the so-called 'Internet of Things' (IoT) will become a vast additional data source to be tapped for insight, while 'big data' analysis will, in turn be the "cornerstone of the success of the Internet of Things".

Security is another theme that continues to be well represented within the portfolio as cyber-attacks have become both more frequent and more sophisticated while new threats such as malware and denial of service (DoS) attacks make existing defences based on the network perimeter look increasingly like the Maginot Line, c. 1939. In addition to high profile attacks on companies such as Target (in which 40m card readers may have been compromised) and most recently, eBay (large scale loss of personal data), cyber-crime is becoming increasingly state-sponsored with the Pentagon in May 2013 accusing the Chinese of widespread cyber espionage against US targets. One month later the NSA/Snowden scandal broke, making plain the scale of cyber spying conducted by departments of the US government (as well as GCHQ in the UK). The increasingly hostile threat environment is likely to underpin a security market expected to exceed $72bn this year (+8.7% y/y) with smaller vendors such as Palo Alto Networks (next generation firewall) and Proofpoint (secure email gateways/targeted attack protection) likely to grow significantly faster. Having lost Sourcefire to Cisco last year, we expect further M&A activity and strong underlying growth to support sector valuations.

We have also maintained significant exposure to Moore's Stress, a term used to describe the increasing difficulty faced by the semiconductor industry in keeping to 'Moore's Law' (an observation made by Intel co-founder Gordon Moore that transistor counts on semiconductor circuits double every two years), evidenced by the challenge faced by ASM Lithography bringing Extreme Ultraviolet Lithography (EUV) to market. While this may undermine the historic relationship between capital investment, lower prices and volume growth that has underpinned the industry since the 1970s, Moore's Stress is likely to continue benefiting semiconductor production companies (SPE) such as Applied Materials and Lam Research as the EUV 'delay' forces chip manufacturers to introduce more complex processes ('steps') as they shrink nodes.

The combination of rising manufacturing complexity and supply side consolidation appears to be introducing some long-overdue capital discipline to an industry that (excluding Intel) destroyed c. $47bn in shareholder value between 1996 and 2009. Early signs of structural improvement are most evident in the memory market where DRAM prices rose 91% on a volume weighted basis last year, despite lacklustre PC volumes. While many of our Moore's Stress plays have already enjoyed strong performances, we are hopeful that these recent improvements will prove structural (and therefore longer-lasting) rather than merely cyclical.

Within the portfolio we also have exposure to a number of exciting, emerging themes such as 3D printing that enables the creation of objects through 'additive manufacturing' directly from three-dimensional digital designs. While near-term expectations may be ahead of themselves, the growth profile of the industry is impressive having grown worldwide at a c. 25% CAGR over the last twenty-five years. However, the recent excitement about 3D printing relates to the idea of 'direct digital manufacturing' which should materially expand the opportunity from c. $2.2bn in 2012 to $10.8bn by 2021 with functional parts already accounting for 28% of the market. Other secondary themes that we have exposure to today include biometrics (fingerprint sensors), healthcare IT, industrial automation (sensors/robotics), personalised medicine (gene sequencing), renewable energy (solar), resource efficiency (LED lighting/smart agriculture) and the 'Internet of Things'.

CONCLUSIONS

Although absolute valuations are no longer 'cheap', we are hopeful that global equities will add to their post-financial crisis gains over the coming year. Not only do long-term averages fail to capture the uniqueness of the present investment backdrop (record low interest rates, alignment of interests with policymakers, return of capital to shareholders) but - even after outpacing Treasuries by c. 40% in 2013 - stocks continue to look attractive versus most alternatives and especially so against cash where negative real returns appear certain. While we do not expect a significant setback, a number of equity markets look a little extended while a number of contrarian indicators and seasonality point to an elevated risk of a pullback that is anyway statistically overdue. However, the greatest risk to our 'secular bull market' thesis relates to the loss of policymaker support that has underpinned risk assets since 2009. On this count, we remain hopeful that the tightening cycle (that commenced with the tapering decision in December) will remain 'data dependent' with policymakers likely to remain somewhat 'behind the curve' for now.

Turning to our sector, we continue to believe that the cycle has entered a second, more pernicious phase now that new technologies (epitomised by cloud computing) have begun to substitute rather than merely complement existing ones. While a number of legacy companies have enjoyed significant PE expansion over the past year (aided by their decision to 'bless' the Cloud), this feels entirely at odds with our view that enterprise computing is looking increasingly anachronistic given the "dramatic acceleration to the Cloud over the last six to nine months". While incumbent valuations could continue to drift higher, earnings progress is likely to be constrained by modest IT spending growth, new cycle deflation and the emergence of Chinese competition. In contrast, we expect next-generation companies to continue meeting or exceeding expectations as recipients of reallocated budgets and/or beneficiaries of new, untapped pools of technology spending as the sector permeates into other industries, such as marketing and travel.

This growing divergence in sector fundamentals drove our decision to move more significantly away from our underlying benchmark, a call that - until a few months ago - had appeared a good one. Clearly we have been surprised by the magnitude and breadth of the recent high growth de-rating process, particularly as we had previously avoided most of the 'high-fliers' on valuation grounds. So far, the exodus from high growth stocks has been divorced from next-generation fundamentals. While we cannot know when this sentiment-driven adjustment will run its course, the present divergence between fundamentals and share price performance cannot persist indefinitely. As such, we have been taking advantage of the current hiatus to add to our next-generation exposure at the expense of growth-challenged incumbents that we expect to also take advantage of reset prices by returning to public market M&A as they seek to reinvent themselves with ever greater urgency.

To those who claim the current de-rating process represents the bursting of "another tech bubble" we (politely) suggest they re-examine the facts, rather than to lean lazily on an intellectually beguiling but ultimately fallacious parallel between today and the late 1990s. In terms of overall technology valuations, there is clearly no case to make as the sector today accounts for c. 19% of S&P500 market capitalisation and earnings, in contrast to 35% and <15% respectively  at the March 2000 highs. Although headline next-generation valuations appear less compelling, high growth disruptive technology companies are never easy to value, particularly when incumbents are trying to reinvent themselves. In hindsight, the increasingly apparent divergence in sector fortunes (together with supportive M&A) allowed the valuation gap between 'old' and 'new' to become extended which the current bout of profit taking has substantially addressed. A resurgent IPO market is also cited as evidence of another bubble. Again, the parallel is weak; while recent IPO activity has been robust, there have only been c. 66 technology debuts since the end of 2012 as compared to 431 global technology IPOs between 1999-2000, with capital raised 73% below the 1999 watermark. Rather than a return to peak levels, IPO activity (like equity valuations) has merely recovered to (just above) long-term averages, obscured by years of sub-trend activity in the same way that the first decent summer, after years of poor weather, may feel like 1976 even if the statistics fail to support it.

While recent 'longer-duration' M&A epitomised by Facebook's acquisition of WhatsApp may be reminiscent of 1990s transactions such as the ill-fated AOL/Time Warner combination, the parallel is a brilliantly imperfect one. At its peak in December 1999, AOL (then champion of the Internet cause) enjoyed a $222bn market capitalisation based on $4.8bn revenues and $762m of profits generated from just c.23m subscribers. Today, Facebook trades with c. 70% of the market capitalisation of AOL at its peak, with almost double its revenues and more than four times its profits while boasting a user base that is 55x larger! If recent market action rhymes with the 1990s it isn't because we are in the midst of another bubble. It is because the Internet and the technology industry are finally delivering on their earlier promise.

Ben Rogoff

HISTORIC PERFORMANCE FOR THE YEARS ENDED 30 APRIL

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Total Assets less current liabilities(£m)	306.6	236.4	358.2	335.5	300.4	274.2	398.6	468.7	503.3	528.8	606.6
Share price (pence)	164.8	165.5	245.0	228.0	190.8	183.0	306.8	373.5	387.0	398.5	442.0
NAV per share (pence)
- undiluted for warrants which expired in 2005	208.1	205.0	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a	n/a
- diluted for warrants which expired 20051	193.7	189.8	255.9	239.7	226.7	216.8	315.1	368.7	392.6	412.4	458.4
Indices of Growth2
Share price	100.0	100.5	148.7	138.4	115.8	111.1	186.2	226.7	234.9	241.9	268.3
NAV per share3	100.0	98.5	132.2	124.0	117.3	112.1	163.2	191.0	203.3	213.6	237.4
Dow Jones World Technology Index 4	100.0	90.6	119.7	117.2	119.0	112.5	157.1	164.4	178.1	188.8	213.4

The Company commenced trading on 16 December 1996 and the share price on the first day was 96.0p per share and the NAV per share was 97.5p.

Notes:

1 There is no dilatation to the NAV per share as the result of the subscription share conversion

2 Rebased to 100 at 30 April 2004.

3 The net asset value per share growth is based on diluted NAV per share as adjusted for warrants.  From 2005 onwards the total net assets figures have been calculated in accordance with IFRS, with investments valued at market bid price. Prior to 2005 investments were valued at market mid price.

4 Dow Jones World Technology Index, total return, sterling adjusted and from April 2013 with withholding taxes removed.

All data sourced from Polar Capital LLP

Market Capitalisation of underlying investments
	<£1bn	$1bn-$10bn	>$10bn
% of invested assets as at 30 April 2014	9.0%	20.6%	70.4%
(as at 30 April 2013)	9.1%	24.3%	66.6%
Breakdown of Investments by Geographic Region		As at April 30 2014	As at April 30 2013
North America		68.8	71.3
Europe		7.7	9.3
Asia (incl. Middle East) & Pacific		19.9	15.8

CLASSIFICATION OF INVESTMENTS AS AT 30 APRIL 2014

	North  America %	Europe %	Asia & Pacific %	Total 30 April 2014 %	Total 30 April 2013 %
Internet Software & Services	16.0	-	4.7	20.7	14.9
Semiconductors & Semiconductor Equipment	10.1	2.7	7.7	20.5	22.1
Software	16.0	2.1	1.9	20.0	21.6
Computers & Peripherals	11.2	-	1.3	12.5	10.9
Communications Equipment	6.5	1.1	0.7	8.3	10.1
Electronic Equipment, Instruments & Components	1.5	0.5	1.7	3.7	3.6
IT Services	2.5	0.4	0.6	3.5	5.1
Internet & Catalog Retail	2.5	-	-	2.5	2.2
Machinery	0.4	0.4	0.7	1.5	0.6
Health Care Technology	1.0	-	-	1.0	0.7
Media		-	0.6	0.6	-
Other	-	0.5	-	0.5	1.0
Life Sciences Tools & Services	0.4	-	-	0.4	-
Chemicals	0.3	-	-	0.3	2.0
Household Durables	0.3	-	-	0.3	0.4
Aerospace & Defence	0.1	-	-	0.1	0.2
Commercial Services & Supplies	-	-	-	-	0.5
Health Care Equipment & Supplies	-	-	-	-	0.5
Total investments	68.8	7.7	19.9	96.4	96.4
Other net assets (excluding loans)	1.4	4.4	1.5	7.3	7.3
Loans	(1.2)	-	(2.5)	(3.7)	(3.7)
Grand total (net assets of £606,633,000)	69.0	12.1	18.9	100.0	-
At 30 April 2013 (net assets of £528,845,000)	71.0	10.4	18.6	-	100.0

Statement of Comprehensive Income (uNAUDITED)

for the year ended 30 April 2014

	Notes	Year ended 30 April 2014			Year ended 30 April 2013
		Revenue return £'000	Capital return £'000	Total return £'000	Revenue return £'000	Capital return £'000	Total return £'000
Investment income	3	7,161	-	7,161	6,600	-	6,600
Other operating income		3	-	3	3	-	3
Gains on investments held at fair value		-	60,662	60,662	-	25,774	25,774
Other currency (losses)/gains		-	(1,657)	(1,657)	-	367	367
Total income		7,164	59,005	66,169	6,603	26,141	32,744
Expenses
Investment management fee		(6,026)	-	(6,026)	(5,234)	-	(5,234)
Other administrative expenses		(717)	-	(717)	(694)	-	(694)
Total expenses		(6,743)	-	(6,743)	(5,928)	-	(5,928)
Profit before finance costs and tax		421	59,005	59,426	675	26,141	26,816
Finance costs		(411)	-	(411)	(637)	-	(637)
Profit before tax		10	59,005	59,015	38	26,141	26,179
Tax		(796)	-	(796)	(739)	-	(739)
Net (loss)/profit for the year and total comprehensive income		(786)	59,005	58,219	(701)	26,141	25,440
Earnings per ordinary share (basic) (pence)	4	(0.61)	45.78	45.17	(0.55)	20.39	19.84
Earnings per ordinary share (diluted) (pence)	4	(0.61)	45.78	45.17	(0.55)	20.39	19.84

The total column of this statement represents the Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

The Company does not have any other comprehensive income.

Statements of Changes in Equity (UNAUDITED)

for the year ended 30 April 2014

		Share capital	Capital redemption reserve	Share premium	Special non-distributable reserve	Capital reserves	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Total equity at 1 May 2012		32,300	12,588	123,271	7,536	397,869	(70,272)	503,292
Total comprehensive income:
Profit/(loss) for the year to 30 April 2013		-	-	-	-	26,141	(701)	25,440
Transactions with owners, recorded directly to equity:
Issue of ordinary shares on exercise of subscription shares		6	-	107	-	-	-	113
Total equity at 30 April 2013		32,306	12,588	123,378	7,536	424,010	(70,973)	528,845
Total comprehensive income:
Profit/(loss) for the year to 30 April 2014		-	-	-	-	59,005	(786)	58,219
Transactions with owners, recorded directly to equity:
Issue of ordinary shares		175	-	3,121	-	-	-	3,296
Issue of ordinary shares on exercise of subscription shares		817	-	15,456	-	-	-	16,273
Cancellation of subscription shares		(214)	214	-	-	-	-	-
Total equity at 30 April 2014		33,084	12,802	141,955	7,536	483,015	(71,759)	606,633

 Balance Sheet (UNAUDITED)

AT 30 April 2014

		30 April 2014	30 April 2013
		£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		584,799	510,957
Current assets
Receivables		7,229	9,882
Overseas tax recoverable		96	35
Cash and cash equivalents		54,950	33,419
		62,275	43,336
Total assets		647,074	554,293
Current liabilities
Payables		(17,668)	(5,559)
Bank loans		(22,773)	(19,725)
Bank overdraft		-	(148)
Derivative financial instruments		-	(16)
		(40,441)	(25,448)
Net assets		606,633	528,845
Equity attributable to equity shareholders
Share capital		33,084	32,306
Capital redemption reserve		12,802	12,588
Share premium		141,955	123,378
Special non-distributable reserve		7,536	7,536
Capital reserves		483,015	424,010
Revenue reserve		(71,759)	(70,973)
Total equity		606,633	528,845
Net asset value per ordinary share (pence)		458.40	412.41
Net asset value per ordinary share (diluted) (pence)		458.40	412.41

Cash Flow Statement  (UNAUDITED)

for the year ended 30 April 2014

		2014	2013
		£'000	£'000
Cash flows from operating activities
Profit before tax		59,015	26,179
Adjustment for non-cash items:
Foreign exchange losses/(gains)		1,657	(367)
Adjusted profit before finance costs and tax		60,672	25,812
Adjustments for:
Increase in investments		(73,842)	(20,151)
Decrease/(increase) in receivables		2,653	(5,155)
Increase/(decrease) in payables		12,093	(356)
		(59,096)	(25,662)
Net cash generated from operating activities before tax		1,576	150
Overseas tax deducted at source		(857)	(760)
Net cash generated from/(used in) operating activities		719	(610)
Cash flows from financing activities
Issue of share capital		19,569	113
Loans matured		(6,171)	(9,845)
Loans drawn		11,638	-
Net cash generated from/(used in) financing activities		25,036	(9,732)
Net increase/(decrease) in cash and cash equivalents		25,755	(10,342)
Cash and cash equivalents at the beginning of the year		33,271	43,599
Effect of foreign exchange rate changes		(4,076)	14
Cash and cash equivalents at the end of the year		54,950	33,271

NOTES TO THE FINANCIAL STATEMENTS

FOR the year ended 30 April 2014

1.	General Information
	The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS and IFRSIC guidance. The Company's presentational currency is pounds sterling. Pounds sterling is also the functional currency of the Company because it is the currency which is most relevant to the majority of the Company's shareholders and creditors and the currency in which the majority of the Company's operating expenses are paid. The trading subsidiary, PCT Finance Limited was dissolved from the Companies House register on 29 October 2013.  As such, there is no longer a group in existence and therefore the financial statements, including comparatives, have been presented on a Company only basis.
2.	Accounting Policies
	The principal accounting policies, which have been applied consistently for all years presented are set out below:
	(a)     Basis of Preparation The financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the inclusion of investments and derivative financial instruments at fair value through profit or loss. Where presentational guidance set out in the Statement of Recommended Practice (SORP) for investment trusts issued by the Association of Investment Companies (AIC) in January 2009 is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The financial position of the Company as at 30 April 2014 is shown in the balance sheet. As at 30 April 2014 the Company's total assets exceeded its total liabilities by a multiple of over 16. The assets of the Company consist mainly of securities that are held in accordance with the Company's investment policy and these securities are readily realisable. The Directors consider that the Company has adequate financial resources to enable it to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Company's accounts.

3.	Investment Income		Year ended	Year ended
			30 April 2014	30 April 2013
			£'000	£'000
	Franked: Listed investments
	Dividend income		1,282	1,123
	Unfranked: Listed investments
	Dividend income		5,879	5,477
			7,161	6,600

4.	Earnings per ordinary share	Year ended 30 April 2014			Year ended 30 April 2013
		Revenue return pence	Capital return pence	Total return pence	Revenue return pence	Capital return pence	Total return pence
	The calculation of basic earnings per share is based on the following data:
	Net (loss)/profit for the year (£'000)	(786)	59,005	58,219	(701)	26,141	25,440
	Weighted average ordinary shares in issue during the year	128,889,051	128,889,051	128,889,051	128,215,984	128,215,984	128,215,984
	From continuing operations
	Basic - ordinary shares (pence)	(0.61)	45.78	45.17	(0.55)	20.39	19.84

Portfolio

/ North America

		Value of holding		% of net assets
		30 April	30 April	30 April	30 April
		2014	2013	2014	2013
		£'000	£'000	%	%
Google	Internet Software & Services	47,813	38,476	7.9	7.3
Apple	Computer & Peripherals	46,722	34,726	7.7	6.6
Microsoft	Software	27,875	18,975	4.6	3.6
Facebook	Internet Software & Services	22,543	8,729	3.7	1.7
Qualcomm	Communications Equipment	13,153	13,373	2.2	2.5
Intel	Semiconductors & Semiconductor Equipment	13,015	9,384	2.1	1.8
Oracle	Software	11,555	7,882	1.9	1.5
Amazon.com	Internet & Catalog Retail	10,764	8,738	1.8	1.7
Cisco	Communications Equipment	10,128	11,901	1.7	2.3
Texas Instruments	Semiconductors & Semiconductor Equipment	8,069	8,917	1.3	1.7
Yahoo	Internet Software & Services	8,068	-	1.3	-
Western Digital	Computers & Peripherals	7,974	-	1.3	-
SanDisk	Computers & Peripherals	7,348	3,435	1.2	0.6
Salesforce.com	Software	7,101	9,490	1.2	1.8
Splunk	Software	6,535	2,733	1.1	0.5
Micron Technology	Semiconductors & Semiconductor Equipment	6,077	2,299	1.0	0.4
VMware	Software	5,648	2,283	0.9	0.4
Microchip Technology	Semiconductors & Semiconductor Equipment	5,208	-	0.9	-
Applied Materials	Semiconductors & Semiconductor Equipment	4,998	-	0.8	-
F5 Networks	Communications Equipment	4,768	-	0.8	-
Adobe	Software	4,556	6,940	0.8	1.3
Synaptics	Semiconductors & Semiconductor Equipment	4,438	-	0.7	-
Corning	Electronic Equipment, Instruments & Components	4,177	6,261	0.7	1.2
Ultimate Software	Software	3,978	-	0.7	-
Cognizant Technology Solutions	IT Services	3,905	4,525	0.6	0.9
Mastercard	IT Services	3,627	4,379	0.6	0.8
Stratasys	Computers & Peripherals	3,619	2,801	0.6	0.5
Nvidia	Semiconductors & Semiconductor Equipment	3,490	-	0.6	-
Intuit	Software	3,453	2,759	0.6	0.5
Yelp	Internet Software & Services	3,379	-	0.6	-
Netscout Systems	Software	3,288	1,793	0.5	0.3
Cree	Semiconductors & Semiconductor Equipment	3,232	3,147	0.5	0.6
Ishares Nasdaq Biotechnology	Health Care Technology	3,203	-	0.5	-
Demandware	Internet Software & Services	3,109	-	0.5	-
TripAdvisor	Internet & Catalog Retail	2,984	2,865	0.5	0.5
Gigamon	Software	2,890	-	0.5	-
Aruba Networks	Communications Equipment	2,888	3,410	0.5	0.6
Fidelity National	IT Services	2,850	-	0.5	-
Lam Research	Semiconductors & Semiconductor Equipment	2,714	3,507	0.4	0.7
Juniper Networks	Communications Equipment	2,712	2,965	0.4	0.6
Proto Labs	Machinery	2,708	-	0.4	-
Cavium	Semiconductors & Semiconductor Equipment	2,631	2,130	0.4	0.4
Proofpoint	Software	2,494	2,520	0.4	0.5
Sapient	IT Services	2,460	1,500	0.4	0.3
LinkedIn	Internet Software & Services	2,450	5,021	0.4	0.9
Invensense	Electronic Equipment, Instruments & Components	2,430	-	0.4	-
Trimble	Electronic Equipment, Instruments & Components	2,429	-	0.4	-
Visa	IT Services	2,381	-	0.4	-
eBay	Internet Software & Services	2,321	5,351	0.4	1.0
Illumina	Life Sciences Tools & Services	2,297	-	0.4	-
Palo Alto Networks	Communications Equipment	2,259	2,449	0.4	0.5
PROS Holdings	Software	2,238	1,690	0.4	0.3
KLA-Tencor	Semiconductors & Semiconductor Equipment	2,235	4,145	0.4	0.8
Concur Technologies	Software	2,185	3,264	0.4	0.6
Nimble Storage	Computer & Peripherals	2,137	-	0.4	-
Athenahealth	Health Care Technology	2,098	-	0.3	-
Xilinx	Semiconductors & Semiconductor Equipment	2,051	-	0.3	-
Sciquest	Internet Software & Services	1,990	610	0.3	0.1
Infinera	Communications Equipment	1,982	-	0.3	-
Servicenow	Software	1,836	-	0.3	-
Synopsys	Software	1,835	4,466	0.3	0.8
Infoblox	Software	1,822	3,768	0.3	0.7
LogMeIn	Internet Software & Services	1,670	-	0.3	-
Imperva	Software	1,644	2,773	0.3	0.5
Harman International	Household Durables	1,636	2,314	0.3	0.4
Monsanto	Chemicals	1,586	3,171	0.3	0.6
Sunpower	Semiconductors & Semiconductor Equipment	1,527	567	0.3	0.1
Cornerstone OnDemand	Internet Software & Services	1,510	-	0.2	-
FireEye	Software	1,325	-	0.2	-
Callidus Software	Software	1,222	-	0.2	-
Qualys	Software	1,193	2,001	0.2	0.4
PLX Technology	Semiconductors & Semiconductor Equipment	1,191	-	0.2	-
Sunedison	Semiconductors & Semiconductor Equipment	1,098	-	0.2	-
Calamp	Communications Equipment	1,082	-	0.2	-
Akamai Technologies	Internet Software & Services	1,074	2,672	0.2	0.5
Marin Software	Internet Software & Services	1,068	-	0.2	-
Cerner	Health Care Technology	1,062	2,198	0.2	0.4
Evolving Systems	Software	1,043	-	0.2	-
Priceline.com	Internet & Catalog Retail	922	-	0.2	-
Taser International	Aerospace & Defence	865	-	0.1	-
Amber Road	Internet Software & Services	228	-	-	-
Cermetek Microelectronics	Other	-	-	-	-
Total North American investments		416,069		68.8

/ Europe

		Value of holding		% of net assets
		30 April	30 April	30 April 2014 %	30 April
		2014	2013		2013
		£'000s	£'000s		%
SAP	Software	9,071	10,380	1.5	2.0
Ericsson	Communications Equipment	4,923	5,926	0.8	1.1
NXP Semiconductors	Semiconductors & Semiconductor Equipment	4,899	-	0.8	-
ASML	Semiconductors & Semiconductor Equipment	4,533	4,821	0.7	0.9
ARM Holdings	Semiconductors & Semiconductor Equipment	3,745	6,330	0.6	1.2
Impax Environmental Markets	Other	3,054	4,674	0.5	0.9
Ingenico	Electronic Equipment, Instruments & Components	2,755	1,731	0.5	0.3
Infineon Technologies	Semiconductors & Semiconductor Equipment	2,385	1,104	0.4	0.2
Arcam	Machinery	2,344	-	0.4	-
Monitise	Software	2,266	-	0.4	-
Amadeus IT	IT Services	2,264	-	0.4	-
Telit Communications	Communications Equipment	2,022	819	0.3	0.2
Fleetmatics	Software	1,388	-	0.2	-
Aixtron	Semiconductors & Semiconductor Equipment	1,261	1,050	0.2	0.2
Herald Ventures Limited Partnership	Other	275	327	-	0.1
Herald Ventures Limited Partnership II	Other	219	291	-	-
Low Carbon Accelerator	Other	-	31	-	-
Total European investments		47,404		7.7

/ Asia & Pacific

		Value of holding		% of net assets
		30 April	30 April	30 April	30 April
		2014	2013	2014	2013
		£'000s	£'000s	%	%
Samsung Electronics	Semiconductors & Semiconductor Equipment	15,462	17,742	2.5	3.4
Taiwan Semiconductor	Semiconductors & Semiconductor Equipment	8,997	9,861	1.5	1.9
Tencent Holdings	Internet Software & Services	8,783	5,621	1.4	1.1
Baidu	Internet Software & Services	8,249	864	1.4	0.2
Mediatek	Semiconductors & Semiconductor Equipment	6,521	4,268	1.1	0.8
SK Hynix	Semiconductors & Semiconductor Equipment	6,053	4,286	1.0	0.8
Check Point Software Technology	Software	4,582	3,193	0.8	0.6
Radware	Communications Equipment	4,460	3,101	0.7	0.6
SMS	Internet Software & Services	4,114	-	0.7	-
Hirose Electric	Electronic Equipment, Instruments & Components	3,957	2,992	0.7	0.6
Allot Communications	Software	3,797	2,421	0.6	0.5
Keyence	Electronic Equipment, Instruments & Components	3,717	2,955	0.6	0.6
Next	Media	3,669	-	0.6	-
Bitauto	Internet Software & Services	3,551	-	0.6	-
Quanta Computer	Computer & Peripherals	3,540	1,116	0.6	0.2
Konica Minolta	Computer & Peripherals	3,139	-	0.5	-
Disco Corporation	Semiconductors & Semiconductor Equipment	2,729	-	0.5	-
Harmonic Drive Systems	Machinery	2,600	-	0.4	-
GMO Payment Gateway	IT Services	2,496	-	0.4	-
Silicon Precision Industries	Semiconductors & Semiconductor Equipment	2,317	547	0.4	0.1
Nice Systems	Software	2,192	-	0.4	-
Himax Technologies	Semiconductors & Semiconductor Equipment	2,110	-	0.3	-
Nabtesco	Machinery	2,093	-	0.3	-
Omron	Electronic Equipment, Instruments & Components	2,045	-	0.3	-
Naver	Internet Software & Services	1,941	-	0.3	-
SYSTEX	IT Services	1,499	-	0.2	-
Advanced Semiconductor	Semiconductors & Semiconductor Equipment	1,014	-	0.2	-
Avago Technologies	Semiconductors & Semiconductor Equipment	1,003	-	0.2	-
Eizo	Computer & Peripherals	941	-	0.2	-
Sina	Internet Software & Services	903	2,264	0.1	0.4
Yahoo Japan	Internet Software & Services	880	2,963	0.1	0.6
Nippon Ceramic	Electronic Equipment, Instruments & Components	686	-	0.1	-
Sourcenext	Software	673	-	0.1	-
Access	Internet Software & Services	613	-	0.1	-
Unus Technologies	Communications Equipment	-	-	-	-
Total Asian investments		121,326		19.9

Status of announcement 

The figures and financial information contained in this announcement do not constitute statutory accounts for the year ended 30 April 2014.   The Financial Statements for the year ended 30 April 2014 will be finalised on the basis of the information presented to the Directors in this preliminary announcement. The Annual Report and financial statements for the year ended 30 April 2014 have not yet been delivered to the Registrar of Companies but will be following the Annual General Meeting of the Company on 4 September 2014.

The figures and financial information for 2013 are extracted from the published Annual Report and Financial Statements for the year ended 30 April 2013 and do not constitute the statutory accounts for that year.  The Annual Report and Financial Statements for the year to 30 April 2013 has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or Section 498(3) of the Companies Act 2006.

Annual Report and AGM 

The Annual Report and Financial statements for the Year ended 30 April 2014 and a separate Notice of Meeting for the Annual General Meeting will be posted to shareholders in July and will be available thereafter from the company secretary at the Registered Office, 4 Matthew Parker Street London SW1H 9NP or from the company's website at www.polarcapitaltechnologytrust.co.uk

The AGM will be held on 4 September 2014 at 12.00 noon at the Royal Automobile Club, 89 Pall Mall, London SW1Y 5HS.

Forward Looking Statements

Certain statements included in this announcement and in the Annual Report and Accounts contain forward-looking information concerning the Company's strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which the Company operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Company's control or can be predicted by the Company. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the principal risks and uncertainties included in the Business Review of the Annual Report and Accounts. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Polar Capital Technology Trust plc or any other entity, and must not be relied upon in any way in connection with any investment decision. The Company undertakes no obligation to update any forward-looking statements.

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.

 

END

 

 

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