PRELIMINARY RESULTS
POLAR CAPITAL TECHNOLOGY TRUST PLC
UNAUDITED PRELIMINARY RESULTS ANNOUNCEMENT
FOR THE FINANCIAL YEAR TO 30 APRIL 2012
3 July 2012
THIS ANNOUNCEMENT CONTAINS REGULATED INFORMATION
Financial Highlights
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Year ended 30 April 2012 |
Year ended 30 April 2011 |
Movement %
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Total net assets |
£503,292,000 |
£468,716,000 |
+7.4 |
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Net assets per ordinary share |
392.56p |
368.74p |
+6.5 |
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Ordinary shares in issue |
128,208,023 |
127,111,211 |
+0.9 |
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Price per ordinary share |
387.00p |
373.50p |
+3.6 |
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Subscription shares in issue |
24, 798, 179 |
25,294,991 |
-2.0 |
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Price per subscription share |
12.75p |
25.75p |
-50.5 |
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Benchmark Change over the year to 30 April 2012 Dow Jones World Technology Index (total return, sterling adjusted) |
+8.3
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For further information please contact: |
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Ben Rogoff |
Ed Gascoigne-Pees / Jack Hickey |
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Polar Capital Technology Trust PLC |
FTI Consulting |
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Tel: 020 7227 2700 |
Tel: 020 7269 7132 |
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.
Chairman's Statement
Michael Moule
Results and Performance
In my first year as Chairman I am pleased to report an increase in net assets in what has been a challenging year for our Managers. The net asset value per share increased by 6.5% and the share price by 3.6% over our financial year to 30 April 2012. The gain in net assets was mildly assisted by a stronger dollar and our benchmark, the Dow Jones World Technology Index rose by 5.5% in local currency and 8.3% in sterling. It is disappointing that we were unable to post a third consecutive year of outperformance against our benchmark. Our performance versus the limited peer group of other technology investment trusts and the wider peer group of technology OEICS however, puts us at or near the top on a one, three and five year basis. In the USA and the other main geographical regions, technology has been one of the better performing sectors, so an investment in the broader market via the FTSE World Index would have shown a sterling adjusted decline of 2.6% over our financial year.
Review of the Past Year
Our financial year started quite well, however optimism surrounding the global economic recovery suddenly evaporated leading to a rapid 15% decline in equity markets by the second week of August. There were other factors which added to the bearish sentiment, with the re-emergence of the European sovereign debt crisis, the ending of QE in the USA, regime instability in the Middle East, slowing growth in China and a stubbornly high oil price. By the end of September implied equity volatility and other market indicators were showing excessive levels of pessimism and our Manager felt happy to introduce a modest level of gearing. Equity markets rallied strongly in October but not sufficiently to erase the earlier declines and our NAV was down by 5% at the half year.
After a faltering November a revival in confidence was mainly attributable to an uncharacteristic decision by the European Central Bank in December to provide cheap and abundant three year loans to EU banks. As the fear of European bank failures receded the plight of the weaker members of the Eurozone was ignored. Investors began to focus on the more positive aspects of the world economy outside the Eurozone, resulting in a sustained rally from mid December to the end of March. Fears about Greece resurfaced and April was volatile but our NAV for the second six months rose by 12%.
High and sustained levels of global economic uncertainty and slow growth present a challenge for all equity managers, so it is not surprising that investors have favoured bonds over equities and mega cap defensives over mid and smaller capitalisation stocks. The technology sector has not been immune to this trend so it has been a challenge to avoid losing money in even the best mid and small cap stocks. By contrast the major technology stocks both young and old have attracted the attention of generalist investors seeking visible growth, cash laden balance sheets and dividend growth. Growth investors were delighted with the performance of Apple and Samsung, up 72% and 51% respectively and value investors equally happy with a 27% rise for Microsoft and a 25% increase for IBM.
Sadly for the less nimble investors we were reminded of one of the other attributes of technology investing, rapid obsolescence. RIM, the manufacturer of the much admired BlackBerry mobile phone, fell by 70% and Nokia declined by 60% over our financial year.
Portfolio Diversity & Restrictions
Your Board and manager are acutely aware of the dangers of an overly concentrated portfolio, and individual stock risk. Any industrial specialist trust has a smaller pool of investments to choose from but we are fortunate to be in a dynamic and rapidly evolving sector which is home to many new entrants each year. The Board monitors geographic, sector and stock concentration and diversification both absolute and relative to our benchmark at each Board meeting. At our year end we had 131 separate holdings with the top 20 accounting for 51.8% of the portfolio. Apple, our largest holding, was 12.1% of the portfolio at year end (8.2% in 2011), and 14.3 % of our benchmark. The current single investment limit is a maximum of 5% measured at the time of acquisition. Under the current restrictions if we were to sell or reduce our Apple holding we would only be allowed to buy back circa 40% of the current holding. The Board feels it is sensible to remove this investment restriction linked to book cost but is mindful of the need to ensure portfolio diversity while having regard to the constituents of our benchmark. Accordingly, the Board proposes to change the 5% limit in any single investment at the time of investment to a 10% limit from time to time, except where the investment forms a larger percentage of our benchmark, in which case the Company will be permitted to take a position not exceeding the weighting in the benchmark, or if lower, 20% of gross assets. Such a limit will permit our manager to be aligned with our benchmark but will not necessarily lead to a more concentrated portfolio.
More generally the Board also feels that the changes in the HMRC rules for investment trust approval and the changes in the requirements of the Listing Rules, which have occurred since the formation of the Company, occasions a need to carry out an updating of some of the investment restrictions which were imposed by the previous rules and have now fallen out of date. Also we feel it is prudent to request the flexibility to pay dividends out of capital, which is permitted under recent changes to the rules to qualify as an investment trust. We are not proposing to pay any dividends in the near future but believe it is of benefit to shareholders to have the freedom so to do. The Board is very conscious of the importance to shareholders of ensuring a clear investment policy and appropriate restrictions. Full details of all the changes proposed are set out in the Notice of Annual General Meeting.
Board
On behalf of the Board and the management team, I should like to extend my thanks to our former chairman, Richard Wakeling, who chaired the trust in an exemplary fashion through both thick and thin since its inception in December 1996. I feel honoured to be chosen to chair this trust and am very grateful to Richard for handing me the baton in such good order. To attract and retain the right blend of experience and diversity we need to plan ahead and my appreciation goes to Peter Dicks who has indicated his willingness to retire from the board in September 2013
Management Team
We are fortunate to have an experienced and enthusiastic manager in Ben Rogoff, who has managed the trust since 2006. Ben is responsible for the whole portfolio encompassing geographical and sector allocation, gearing and cash management. His expertise is principally in the USA & Canada and he heads a six person team.
We continue to have the benefit of Brian Ashford-Russell as a member of your Board and while the former manager has no involvement in portfolio management his years of technology investing provides the Board with immense experience. My job would be considerably more complicated but for the strength of the whole team and I extend my thanks to Ben and his team, and our company secretary for helping me in my first year as Chairman.
AGM
We are holding our AGM on the 4 September 2012 at 12 noon at the RAC Club in Pall Mall, London. This is a month later than last year because the club was fully booked for the Olympics. Transport will hopefully be back to normal in September and I look forward to meeting shareholders at our later date. Full details of the meeting are given in the separate Notice of Meeting which accompanies this annual report.
Outlook
As I write all markets are transfixed by the economic problems of the most heavily indebted members of the Eurozone and the future survival of the Euro. None of the various options to deal with the problems are remotely positive and with recent declines in commodities, including oil and gold, markets are bracing themselves for a growth shock. We have limited exposure with just under 7% of our portfolio in Europe, and weaker growth can sometimes be a benefit as companies may need to spend more on technology in order to become more efficient.
Despite the difficult backdrop for Europe and the Eurozone there are several reasons to be more cheerful: oil and commodity prices have declined, inflation is falling, non indebted nations of the Pacific Rim, South America, and Africa are growing . In the USA there are good signs of modest growth continuing; industrial production, auto sales, housing and unemployment figures are all slightly better than expected. Longer term the US energy position could be transformed by shale gas. Finally companies have learnt how to operate in a slow growth environment, balance sheets are robust, valuations inexpensive and cash is being returned increasingly to shareholders.
Michael Moule
Chairman
investment manager's report
Ben Rogoff
Market review
Global equities fell sharply during the first half of the fiscal year as an early 'growth scare' quickly developed into a proto sovereign crisis. However, decisive (if somewhat overdue) intervention by the European Central Bank (ECB) in December drove a dramatic recovery in risk assets through April significantly ameliorating earlier losses, the FTSE World index falling just 2.6% during the year. Sterling based returns were augmented by the strength of the US Dollar (+2%) and Yen (+5%) but offset by Euro weakness (-9%). Despite a plethora of seemingly existential challenges, the global economy managed to expand by 3.9% in 2011, once again driven by emerging economies (+6.2%). Although China defied its critics by growing GDP above 9%, a number of other significant emerging economies such as India and Brazil slowed as the combination of tighter monetary policy and lower commodity prices took their toll. Developed economies also decelerated meaningfully during 2011 (+1.6%) reflecting the impact of fiscal consolidation, the deepening European sovereign crisis and economic dislocation in Japan following the devastating March 2011 tsunami. Fortunately corporate earnings continued to materially outpace the global economy (S&P 500 earnings growing in excess of 14% in 2011), aided by additional margin expansion reflecting the diminished position of labour.
Although equities ended the previous fiscal year at highs, risk appetite had already begun to wane in other asset classes reflecting a deepening of the Greek crisis, Chinese policy tightening, US budget brinkmanship and soaring oil prices. The tragic Japanese tsunami brought the equity rally to an abrupt end, triggering a contraction in risk appetite that marked the start of a 'risk off' period that prevailed until December. Characterised by deteriorating macroeconomic data and growing social unrest as austerity programmes began to bite, the key measure of risk appetite, US ten year Treasuries, saw yields fall below 3% for the first time since November 2010, finishing the year at 1.92%. Despite a growing need for massive, coordinated intervention to break negative feedback loops, US policymakers appeared more partisan than ever while Germany refused to countenance Eurobond issuance and/or QE ahead of fiscal reform. Faced with worst case outcomes, capital poured into safe havens, leaving volatility at post Lehman highs, cross correlation at record levels and global equities at the nadir more than 19% below their April highs. Rallies from depressed levels in both August and September proved evanescent until soaring sovereign spreads and a growing funding crisis in Europe presaged massive intervention from the ECB in December.
The ECB commenced the Long Term Refinancing Operation (LTRO), which allowed banks to apply for unlimited quantities of three-year ECB loans at an interest rate of 1%. Quickly understood to be 'quantitative easing' (QE) in all but name, the eventual Euro 1 trillion take-up represented the biggest infusion of credit into the European banking system in the Euro's history. The ECB's balance sheet expanding by more than Federal Reserve's during 'QE2'. Moreover, it prevented a potential sovereign crisis from developing by prefunding a substantial portion of European bank bonds due in 2012/3. A collapse in sovereign yields resulted in a sharp rebound in risk assets through our year end, with global equities posting their strongest first (calendar) quarter gains since 1998. During the year, the strongest regional returns (taking into account the impact of foreign exchange movements) were generated by US stocks due to their perceived 'safe haven' status and aided by a stronger Dollar. Japanese equities also outperformed as they rebounded from post-tsunami lows, returns augmented by Yen strength. Unsurprisingly, given the re-emergence of sovereign risk, European stocks trailed, exacerbated by the weaker Euro. Asian equity markets also underperformed reflecting the combination of slower regional growth and diminished risk appetite.
Technology Review
Technology shares materially outperformed the broader market over the year, the Dow Jones World Technology index rising 8.3% in Sterling terms. While some of the sector's relative strength was passive (reflecting the significant outperformance of US equities and a somewhat stronger Dollar), stellar performances from a number of large-cap technology stocks contributed materially to the sector's relative returns. This was especially evident in the US where Apple (+72%), IBM (+25%) and Microsoft (+27%) helped large caps (as measured by the Russell 1000 technology index) gain c. 15% in Sterling terms during the year. While Apple's performance was all the more remarkable given the death of CEO Steve Jobs in October, the stock's ascent essentially mirrored its earnings progress. In contrast, the strong performance of both IBM and Microsoft reflected their appeal as inexpensive 'stores of wealth' epitomised by the revelation in November that Warren Buffett's Berkshire Hathaway had built up a 5.4% stake in IBM having previously eschewed the technology sector. The combination of Apple's strength and the allure of inexpensive large-caps resulted in a 'crowding out' of riskier assets; small caps trailing their large-cap peers by more than 22% as measured by the difference between the Russell 1000 and 2000 Technology Indices.
The magnitude of large-cap outperformance helped obfuscate the implosion of a number of incumbents such as Hewlett Packard (- 20%), Nokia (-60%) and Research in Motion (-70%) as tablet and smartphone growth began to negatively impact both the personal computer (PC) and traditional handset markets. In addition to those incumbents plainly impacted by the new cycle, there were a number of 'tell tale' acquisitions of next-generation companies by legacy vendors. While the £6.7bn purchase of Autonomy by HP for a 79% premium in August was undoubtedly the most dramatic attempt at reinvention during the year, there were a number of other 'new-cycle thesis' affirming M&A transactions, particularly in the Software as a Service (SaaS) space as IBM, Oracle and SAP each acquired next-generation companies. The semiconductor equipment space also saw further consolidation following the acquisitions of equipment suppliers Novellus Systems and Varian Semiconductor by Lam Research and Applied Materials respectively. However, the largest transaction of the year saw Google pay $12.5bn for Motorola Mobility in order to bolster the intellectual property (IP) position of its Android operating system. At the sector level, late cycle areas such as software and IT services outperformed while earlier cycle stocks trailed. Weakest performance was reserved for networking stocks (primarily due to a hiatus in service provider spending) and the alternative energy sector due to the persistence of oversupply conditions.
Our performance
The outperformance of large-cap technology stocks created a formidable relative performance headwind that we were unable to overcome, our own net asset value rising 6.5% over the year. In addition to small-cap underperformance, relative performance was hindered by (modest) exposure to the Chinese IT services sector where share prices were particularly weak due to the combination of slowing growth and corporate malfeasance. At the sector level, the Trust was negatively impacted by its exposure to the semiconductor companies that fared poorly due to weakening macroeconomic conditions, exacerbated by inventory adjustments following the Japanese earthquake and Thai floods. Networking stocks also detracted from performance as service provider capital spending decelerated materially during the second half of 2011, in part due to a strike at Verizon and AT&T's (failed) attempt to acquire T-Mobile. In terms of positives, our new cycle thesis appeared to come through a difficult year relatively unscathed as next generation fundamentals proved remarkably robust despite the more challenging backdrop. This was reflected in a number of strong individual stock performances including Amazon (+22%), Red Hat (+29%), Salesforce.com (+16%) and Teradata (+28%). Relative performance was also generated by minimal exposure to struggling incumbents such as Hewlett Packard, and from M&A activity, with two of our holdings (Netlogic Microsystems and Demandtec) being acquired, each for a 57% premium.
Economic Outlook
Although set to decelerate in 2012, we remain hopeful that the global economy (forecast to grow 3.5%), will continue to 'muddle through' led by developing economies with some contribution from advanced markets despite the likelihood of a recession in Europe. In the developed world, inflation looks well contained courtesy of slack labour markets and slowing growth that all but guarantee the continuation of remarkably accommodative monetary policy, the Federal Reserve recently reiterating its commitment to its Zero Interest Rate Policy (ZIRP) until late 2014. Emerging markets are also likely to benefit from more accommodative policy as slower growth and lower food / energy prices have assuaged inflationary risk. The US economy is expected to grow above 2% in 2012, due to improvement in labour markets, consumer confidence and more limited headwinds associated with government spending and the housing market. Japan is also forecast to grow (+2.0%) although this recovery appears largely tsunami-related. While the Eurozone economy is expected to contract by c.0.3% in 2012 this modest recession belies the likelihood of deeper (c.2%) contractions in both Italy and Spain, offset by modest growth in both Germany and France. Fortunately Asia should remain an economic bulwark over the coming year, driven by China and India which are expected to grow by 8.2% and 6.9% respectively. While the lowering of China's annual growth target in March raised the spectre of a potential 'hard landing', easing inflationary pressures should afford authorities the necessary monetary and fiscal firepower to augment growth if required.
Clearly risks to this view have increased since the year end, evidenced by soaring European sovereign yields other than Germany and sharp price declines across the spectrum of risk assets. While we had hoped that the LTRO programmes would buy more time for European leaders to tackle structural issues, the spectre of sovereign default and / or Eurozone collapse have once again taken centre stage. Although we cannot tell how the current Greek imbroglio will end, we are hopeful that economic sense will prevail given the massive cost that an exit would involve for Greece and the impact it would have on peripheral deposits. Likewise we remain confident that a broader Eurozone collapse (presaged potentially by a Greek exit or self-fulfilling contagion should Spain default) remains a tail-risk given the magnitude of its potential impact (estimated at between 5-10% of Euro-area GDP), a scenario "too awful to seriously consider". However, as recent electoral setbacks to ruling parties in France and Greece (and to a lesser extent Germany and the UK) attest, policymakers may be unable (even if they are willing) to administer the necessary medicine. Additional risks include inflation that might jeopardise record low interest rates, prevent additional quantitative easing and curtail policy options in China. As in previous years, political risk remains the most potent exogenous factor; in particular the prospect of military action being taken against a recalcitrant Iran and the impact this would have on energy prices.
Market Outlook
Despite the disappointing start, we remain hopeful that equity markets can generate positive returns over the coming year although volatility is likely to persist as markets attempt to climb a 'wall of worry' of Hadrianic proportions. While we continue to believe that the current 'top-down' challenges are best understood as echoes (rather than repeat performances) of the financial crisis investors clearly think otherwise, evidenced by negative real yields in safe-haven sovereigns and sentiment readings approaching levels commensurate with previous market lows (excluding 2008/9). Elevated risk aversion has clearly weighed on equity valuations that today not only look undemanding versus history (the S&P trading at 12x current year estimates) but also appear remarkably good value versus both cash and bonds; US equity dividend yields surpassing ten year US Treasury yields for only the second time in the last 40 years. While individual investors appear unmoved by this valuation divergence (having withdrawn $68bn from equity mutual funds in 2011), we expect companies to continue to take full advantage of it via bond issuance and share repurchases, 2011 proving one of the biggest years for corporate buybacks since 1985. M&A activity is likely to remain at elevated levels as companies look to re-deploy excess cash in order to augment growth, which should provide additional support to equities over the coming year.
While confident that the current valuation dislocation between risk and risk-free assets will resolve favourably in time, we are mindful of a number of headwinds which challenge this prognosis nearer term. Although we remain hopeful that the current European crisis will be contained, the longer the current uncertainty persists the greater the risk of reflexivity. With second quarter earnings season approaching, we would not be surprised to see companies take the opportunity to recalibrate forecasts although we suspect that a modest reset is already partially priced in. Additional risks to consider include negative seasonal trends ('sell in May…') and the potential for negative leverage. Despite these (and other) risks, we continue to take succour from the alignment of our interests with those of policymakers who should be every bit as keen as us to not see the global economy either fall into the abyss, or slip into a Japanese-style deflationary spiral. As such we remain hopeful that European debtor and creditor nations will yet be able to fashion a solution acceptable to both sides. We also take significant comfort from recent comments made by Federal Reserve Chairman Ben Bernanke when he stated that the "FOMC was ready to take additional… actions if necessary" as the current growth scare is unlikely to prove the last.
Technology Outlook
Assuming that worst case outcomes are avoided, subtrend global growth should continue to provide a relatively positive backdrop for the technology sector by driving greater focus on productivity. However, the combination of slower economic growth and the deflationary impact of a new technology cycle is continuing to dampen global technology spending. IT experts Gartner are forecasting growth of just 2.5% in current US Dollars and a 5.3% CAGR between 2011 and 2016.Unfortunately for IT managers, muted budget growth is entirely at odds with computing needs that are increasing inexorably. According to IDC, the 'digital universe' (every electronically stored piece of data) is doubling every two years while IP traffic is expected to grow at a 29% CAGR over the next five years. This mismatch is continuing to force a significant reallocation of IT budgets in favour of new technologies and vendors that help bridge this gap. We expect this dynamic to accelerate over the coming year as a number of key, disruptive themes (in particular, cloud and tablet-based computing) appear to have achieved levels of penetration often associated with rapid subsequent adoption. This is likely to auger a more pernicious period resulting in significantly more uneven value creation and elevated M&A activity as incumbents attempt to reinvent themselves with even greater urgency.
Despite outperforming over the past year the sector has continued to de-rate, US technology stocks today trading on 11.8 times forecast next twelve month earnings. This not only compares favourably versus history (the median forward PE post 1976 is 15.3x) but once the sector's superior balance sheet is considered, cash adjusted forward PEs are even more compelling. While sector-wide valuations are flattered by a number of inexpensive large caps seemingly threatened by the new cycle, this appears to be well understood given the sector is currently trading at a rare market multiple. Prospects for a modest re-rating over the coming year look reasonable, especially as the sector has begun to attract new investors epitomised by Warren Buffet's $10.9bn investment in IBM. The sector continues to boast the strongest aggregate balance sheet (accounting for 30% of the $1.5tr cash on US balance sheets as compared to c. 20% of US market capitalisation) and has become intrinsically more profitable as higher margin software / Internet companies have grown their share of revenues. This shift, together with the adoption of less capital intensive business models, has helped ameliorate cyclicality, improve economic returns while helping the sector generate record cash flows. Furthermore technology companies have become significantly better at sharing the spoils via buybacks and dividends as more than half of the Russell 1000 technology index constituents reduced their shares outstanding (on average by 3.8%) during 2011. Similarly it has become the norm for larger technology companies to pay dividends, a volte-face epitomised by Apple's recent decision to reinstate its first dividend in seventeen years.
In addition to buybacks and dividends, M&A activity is also likely to account for a significant portion of 'excess' corporate cash / cash flow over the coming year as competition between incumbents intensifies, exacerbated by slowing IT budget growth and the move from enterprise towards cloud computing. This was certainly the case in 2011, which was the third largest year for global technology M&A by value since 2000. Just as the acquisition of 3PAR by Hewlett Packard in 2010 made it clear that a new cycle had commenced, so the increasingly 'strategic' nature of last year's M&A transactions were reflected in premiums that averaged a remarkable 50% and cloud-related M&A (both private and public) that rose 244% year on year to $11.7bn. Given that the largest global technology companies boast more than $350bn in cash and generate annual cash flow in excess of $100bn, the pace of M&A should remain at an elevated level - IBM reiterating that they intend to spend an additional $18bn on M&A by 2015. While we were disappointed that the Trust did not directly benefit from more acquisitions during the past year, we are hopeful that M&A will continue to provide positive tailwinds, disproportionately helping small and mid caps as incumbents continue to retool for the new cycle.
New Cycle
We believe this new technology cycle continues to be driven by three key themes: cloud computing, Internet applications and ubiquitous computing (mobility). Gartner's recent CIO survey supported this view as it revealed that 'mobile technologies' and 'cloud computing' represent two of the top three IT priorities today. The third, 'business analytics', of which 'big data' forms part, is discussed at length during the "thought piece" that follows this report. Cloud computing continues to make significant progress as early objections relating to security (and disintermediation) have eased as CIOs, under massive pressure to deliver 'more with less', have begun to embrace the cheaper and more flexible computing associated with this mass production form of IT. The shift towards cloud architectures has been significantly aided by the adoption of virtualisation which today has become pervasive; by the end of 2012, 52% of workloads (units of computing) are likely to have been virtualised. Cloud adoption has also been advanced by the US Federal government's 'Cloud First Policy' designed to migrate $20bn of its $80bn annual IT budget to the Cloud. This policy benefited one of our holdings (Concur Technologies) recently when they received a $1.4bn, fifteen year contract to supply Cloud-based travel booking and expense management across all federal agencies. With 65% of CIOs already using some form of public Cloud environment we anticipate rapid adoption over the coming years as the provision of IT as a service becomes increasingly the norm. (57% of workloads will be processed in the Cloud by 2015)
Internet Applications are also likely to experience continued strong growth over the coming year reflecting low penetration rates in key application categories such as e-commerce (4.9%), online advertising (17%) and Software-as-a-Service (SaaS). We are hopeful that this growth should prove relatively insulated from economic uncertainty, evidenced by US e-commerce growth of 15.4% year on year in Q1'12 despite the difficult backdrop. Increased smartphone penetration is certainly helping by creating new opportunities in e-commerce (eBay expects its mobile gross merchandise value to exceed $8bn this year) and online advertising while spawning a plethora of new applications made possible by the Cloud and afforded relevance by mobile computing including social (Facebook), communications (Twitter), storage (DropBox) and content synchronisation (iCloud). Increased comfort with the Cloud is also driving "the most significant revolution in database and application architectures in twenty years". As companies transition towards virtualised environments, they must decide whether to migrate (keep) or consolidate (end of life) their existing applications. This dynamic is likely to intensify over the coming years as decisions are made on tier one workloads that are only 32% virtualised today. The SaaS sector is likely to prove the greatest beneficiary of this application migration process (forecast to grow by 18% this year) while incumbent vendors and IT developers responsible for existing applications appear to have the most to lose which helps explain why IBM (Demandtec), Oracle (RightNow, Taleo) and SAP (Successfactors, Ariba) have all made acquisitions in the SaaS space.
Once again ubiquitous computing enjoyed the most remarkable growth last year, driven by further smartphone and tablet adoption. Having grown 75% in 2010, the smartphone market expanded by a further 58% in 2011. However, the market coalesced around two key vendors, Apple and Samsung, who began to dominate industry profits. Despite the death of CEO Steve Jobs, Apple increased its dominance of the high-end smartphone market achieving 85% share following the release of the iPhone 4S. Similarly Samsung realised a commanding share of Android-based devices that this year are forecast to account for 61% of the overall smartphone market. This potential duopoly is likely to put further strain on former leaders such as HTC, Nokia and Research in Motion and their supply chains. While smartphones should enjoy another good year of growth this year (+39%) overall penetration rates already exceed 30% and are substantially higher in developed markets. As such we expect to pare our smartphone exposure over the coming year although we are in no immediate rush given that the tablet market represents a significant incremental opportunity, with units forecast to grow from 82m units in 2011 to more than 400m by 2017. In addition to both Apple and Samsung (and their supply chains), we believe that the most exciting investment opportunities in this space relate to new applications made possible by the growing ubiquity of computing such as mobile payments, remote access and application delivery. We are also hopeful that wireless data traffic growth which is forecast to increase eighteen-fold between 2011 and 2016, together with the adoption of 4G LTE deviceswill drive a recovery in mobile infrastructure spending.
While smartphone and tablet growth significantly outpaced the PC industry in 2011, a more important watermark was established last year when total smartphone and tablet shipments surpassed combined desktop and notebook PC shipments. Although rumours of the PC's demise may appear greatly exaggerated given that worldwide shipments (ex netbooks) increased 5.6% in 2011, industry growth has become increasingly reliant on emerging markets that accounted for just over 50% of the PC market last year. In the developed world, the PC market already appears to be in decline as US unit shipments fell 5.9% year on year during the fourth quarter of 2011 with share gains by Apple and Lenovo making life worse still for encumbent vendors HP and Dell. Little wonder then that Michael Dell, having only recently argued that the idea of a post PC-world was "nonsense", appears to have accelerated the acquisition strategy that has seen Dell buy more than 25 (non PC) companies since 2007. Although 'Windows 8' and the introduction of 'ultrabooks' may reaccelerate PC units in 2012/3, this renaissance is likely to prove fleeting as the personal computer continues to cede ground to more mobile alternatives.
The disruption already being experienced by handset and PC vendors is likely to be repeated across the technology universe over the coming years as 'cloud computing' gains significant traction. Just as it took the skyscraper two decades to begin to alter the skyline, so our sense is that after a number of years of being 'stress-tested' by CIOs with relatively unimportant workloads, the Cloud is about to change the landscape of computing. Best understood as the IT industry moving away from complex enterprise computing towards a mass production alternative, the Cloud is likely to cause disruption across the technology universe by delivering a highly automated, elastic form of computing at vastly lower prices. Datacentre technologies such as virtualisation, tiered storage, solid state drives and, in the future, software defined networking are significantly increasing hardware utilisation rates. Application consolidation and the shift towards SaaS will likely come at the expense of incumbent software vendors and IT services companies responsible for legacy applications while creating rare fluidity in the database market. Not only does the transition away from enterprise computing diminish the value of incumbency, new opportunities in the Cloud are almost always associated with lower pricing and a rental model. On the client side, smartphone and tablet growth will continue to change user behaviour while undermining PC applications such as printing, end-point security, operating systems and office productivity suites. Faced with the prospect of significant disruption, M&A activity looks set to continue at a frenzied pace even though success is hardly guaranteed evidenced by declining year on year licence revenue growth at Autonomyand the departure of Mike Lynch so soon after HP acquired it for £6.7bn.
Conclusions
It looks inevitable that equity markets are going to have to continue climbing a formidable 'wall of worry' over the coming year. While we do not claim expertise in macroeconomic analysis, we continue to trust in our remarkable alignment of interests with policymakers who are every bit as keen as we to avoid worst case outcomes. As such we remain hopeful that the global economy will once again 'muddle through' despite myriad challenges. However, the current situation in Europe is unlikely to prove the last 'echo' of the credit crisis, as multi-year deleveraging will invariably result in further 'growth scares' in the years ahead. Therefore investors should anticipate greater volatility going forward, although we believe that this dynamic is substantially captured by undemanding equity valuations particularly as compared to cash and bonds.
Turning to technology, we believe that the new cycle is likely to enter a more disruptive phase as the growth in each of our core themes increasingly comes at the expense of incumbent technologies and vendors. This is entirely consistent with previous periods of economic uncertainty that have been associated with rapid adoption of new technologies. While this new cycle should disproportionately benefit small and mid-cap companies without legacy exposure, 'top-down' concerns have resulted in investors seeking refuge in inexpensive mega-cap 'stores of wealth' leading to a significant 'crowding out' of smaller companies. Fortunately we were alive to this risk and opted to slow the process of moving more materially away from our benchmark, a decision signalled in our half-year report. With markets significantly below their 2012 highs, small-cap technology stocks having given up all of their FY10 outperformance and with the 'new cycle' likely to become significantly more disruptive, we believe now is an appropriate time to increase our small/mid and next-generation exposure, a process which we have begun. Naturally this involves us moving further away from the benchmark, which will invariably result in greater volatility in our relative performance profile. However, a less benchmark sensitive approach is entirely consistent with our long held view that new cycles are rarely good for incumbents.
The Internet and the mass adoption of IT
Last year we discussed how 'cloud computing' was allowing the IT industry to transition towards a mass production model. With reference to other industries that had previously made this transition (automotive, agriculture and construction) we argued that standardisation, automation and the Internet deliver mechanisms which would likely transform the IT industry. This year we consider how cheap and plentiful bandwidth, aided by the adoption of smartphones, tablets and a plethora of new applications has enabled the Internet to become truly ubiquitous. This process bears close resemblance to the post-war experience of the aviation industry, which was transformed by the technological advances and changes in the competitive landscape that drove the mass adoption of air travel.
The overlapping histories of the aviation and technology industries began in earnest after WWII as Cold War related defence spending accelerated the development of solid state electronics used to control propulsion systems in missiles and later, the US space programme. This not only advanced the trend towards miniaturisation that led to the development of integrated circuits (ICs) in the 1970s but also spawned a nascent 'computing' industry around San Francisco's Bay Area, primarily serving the needs of Los Angeles' booming aviation industry. Companies such as Hewlett Packard, Teledyne and others long forgotten (such as Bendix, Sylvania and Litton Industries) prospered amid rising demand for electronic products. Thus the growth of aviation electronics, or 'avionics' improved almost all aspects of air travel (speed, cost, safety) and helped accelerate the computing cause. A good example of this was the role played by Lawrence Rand, inventor of the autopilot and artificial horizon, as his company Rand (later Sperry Rand) later developed the UNIVAC line of mainframe computers, which went on to achieve early computing notoriety when it successfully predicted an Eisenhower landslide during the 1952 Presidential election in which Adlai Stevenson was widely expected to prevail. Since then the two industries have enjoyed a symbiotic relationship, which at times has significantly advanced each other's cause. For instance, a booming computing market in the 1970s provided the genesis of the idea behind FedEx (the need to manage high value parts) which facilitated 'build to order' businesses like Dell Computer. Today the Internet continues to redefine the airline and the overall travel industry by driving higher load factors while reducing distribution costs by disintermediation of travel agents.
Early iterations of both aviation and the Internet were cumbersome and costly, which limited their appeal. In the case of aviation, early commercial flight was characterized by small, slow aircraft whose range was limited by the amount of fuel they could carry on take off. To overcome the lack of airports, a short lived solution was provided by seaplanes ('flying boats') but these required flight crews to be proficient in areas as diverse as seaplane anchorage, over-water navigation, aircraft repair and marine tides. The combination of complexity and cost meant that early passenger travel remained the preserve of the wealthy (a return fare from San Francisco to Hong Kong in 1937 would have cost $26,400 in today's money) and the patient (a flight from London to Tokyo in 1953 still took seventy-four hours). However, the speed advantage enjoyed over traditional transport modes resulted in the birth of a new application - airmail. The Internet also began its life as the preserve of the few as ARPANET, the packet switched network built for the US Department of Defense in 1969. Although the Internet expanded as regional networks became interconnected using TCP/IP (Transmission Control Protocol / Internet Protocol), it remained primarily an academic network. As with early aviation, initial applications (such as file transfers and remote login) were constrained by speed and cost while the Internet's limited reach meant it had little relevance beyond academic or IT communities. However, in a remarkable repeat of the aviation experience, one early application - electronic mail ('e-mail') dramatically increased the appeal of the Internet, contributing greatly to its future development.
Technological improvements have had a dramatic impact on the cost / performance equation of both aviation and the Internet, resulting in their broadening appeal. The modern era of air transportation began with jet-powered airliners that increased the speed, reliability and comfort of air travel. By 1965 the airline industry had captured 95% of the transatlantic travel market. Technological advances have also had a dramatic impact on Internet speeds. In 1986, the Internet backbone (the principal data routes between large interconnected networks) operated on lowly 56kbit/s links. Today, advances in fibre optics, transport and routing technology means that much of the Internet backbone runs at 10Gbit/s. Internet access speeds have also increased dramatically since the likes of US Robotics introduced 28.8kbit/s dial-up modems in the mid 1990s. In 2010, 90% of OECD Internet access subscriptions were broadband (always on) connections that achieved averaged speeds of 9.1Mb/s in 2011. Internet speeds continue to climb; companies such as Infinera are beginning to ship 100Gbit/s backbone products while average broadband speeds are expected to quadruple by 2016. Mobile broadband speeds are also set to increase significantly over the next few years as new standards (4G / 802.11ac) are rolled out.
Advances in technology have also played a significant role in lowering the cost of air travel. More powerful jet engines not only allowed aircraft to travel faster, they also enabled them to carry larger payloads. Combined with airframe improvements, this presaged the development of larger aircraft, epitomised by the introduction of the Boeing 747 in 1969. The "Jumbo" carried 400 passengers and achieved three times greater hourly productivity than the Boeing 720B introduced a decade earlier, resulting in sharply lower unit costs per seat. Larger aircraft also helped drive improvements in fuel efficiency as fuel burned per seat today is 70% less than that of early jets. Advances in avionics also lowered costs by reducing the size of the flight crew from five to just two; navigation systems eliminated the need for a navigator, jet engines no longer required in-flight adjustment making obsolete the flight engineer's role while flight control and collision avoidance systems removed the need for a third pilot. Other significant cost reductions came from improved utilisation (load factor) and fleet standardisation. Many of these factors are remarkably similar to those currently driving the transition towards 'Cloud' computing. Larger datacentres are able to deliver vastly cheaper computing by adopting technology such as virtualisation that can dramatically improve server utilisation and more computing per unit of labour, evidenced by Facebook's 400:1 server/Full Time Employee (FTE) ratio and reports that Apple's $1bn datacentre in North Carolina created just fifty jobs.
However, as the US airline industry had been regulated since 1938, the impact of lower costs was not fully felt. Instead, the Civil Aviation Board (CAB) was responsible for controlling routes, competition and prices,deregulation. Other aviation markets followed a similar pattern; in the UK, the Civil Aviation Act (1946) ensured that only state carriers could operate regular schedules. Pre-deregulation price based competition in the US only existed in large states such as Texas, where new carriers such as Southwest offered intrastate service that escaped the CAB's reach. In the UK, competition came primarily from charter operators such as Britannia Airways. The telecommunications industry followed a similar pattern and remained regulated until 1980s liberalisation ended British Telecom's monopoly in 1981 ahead of its privatisation in 1984, the same year that AT&T was broken-up.
The Airline Deregulation Act of 1978 allowed airlines to enter or exit markets, expand routes and set their own fares. This led to forty-seven new carriers entering the market by 1984. Long distance carriers faced particularly disruptive competition from the likes of People's Express and Freddie Laker's Skytrain service. Similarly, the break-up of AT&T led to both MCI and Sprint entering the long distance telecom market while the Telecommunication Act (1996) introduced competition into the "local loop", which resulted in an explosion of new telecom operators and capital investments reached an incredible $1.3 trillion. Competitive Local Exchange Carriers (CLECs) spent nearly $100bn trying to compete with the incumbent Regional Bell Operating Companies (RBOCs). While nearly two-dozen of these companies failed in the process (echoing the exit of 48 carriers three years post airline deregulation), they left behind significant excess capacity that continued to weigh on pricing long after their demise.
The combination of technology, competition and excess capacity following the collapse of the first wave of new entrants post deregulation resulted in downward pressure on consumer pricing in both industries. In real terms, air fares have declined by almost 2% per year since 1960 which, due to compounding, has seen them fall by 45% in inflation-adjusted terms since 1978. Deregulation of the air cargo market in 1977 presaged even more substantial declines in rates (freight yields falling 4.7% on average between 1989 and 2009). The impact of lower prices was magnified by post-war increases in standards of living. Falling prices have been a consistent feature of the technology industry since its advent. Telecom regulation had acted like a dam, holding back cost improvements. Once this had been removed, a dramatic impact on pricing occurred; between 1984 (the break-up of AT&T) and 1996 (deregulation), long distance voice pricing fell by 62%. Data costs have fallen even more sharply, due to excess capacity post the dot-com bubble and cost reductions in key technology components such as hard drives, where cost/Gb has fallen on average by 40% per annum. As a result, the cost per gigabit of streaming video has fallen from $193 in 2000 to less than 3cents by 2010, while monthly web hosting per Gb has collapsed from $2.58 to less than 1/100th of one cent over the same timeframe.
Lower prices have driven dramatic increases in both airline and Internet traffic. Between 1950 and 2000, worldwide passenger growth compounded at a remarkable 7.0%, with newer aviation segments such as international travel and US air cargo revenue growing faster still. Growth in Internet traffic has expanded even faster, driven by users (US subscribers grew from 20m in 1996 to 245m in 2011) and a 54-fold increase in time spent online. This potent combination has seen global e-commerce reach an estimated $10 trillion in 2010 while global Internet traffic has recorded a CAGR of 126% since 1990. More recently, cheaper and more pervasive mobile Internet usage has become a significant contributor to overall growth due to the adoption of smartphones and tablets. These smaller, lighter devices have significantly improved the reach of the Internet in the same way that regional jets and 'hub and spoke' networks allowed the airline industry to significantly expand its served market post deregulation. They have also contributed greatly to the ubiquity of their respective networks, whose value 'is proportional to the square of the number of connected users of the system' (Metcalfe's Law). In practice this 'network-effect' helps explain why Apple enjoys 85% of the high-end smartphone market today and how the combination of more routes and greater frequency of service led to the rise of airline commuter markets and the substitution of other transport modes.
However, neither the airline or telecommunications industries have been able to fully capture the value associated with this traffic growth. In the case of airlines, the industry's maladies are well documented: capital intensity, high fixed costs, unionised workforces (and their defined benefit pensions), and oil sensitivity magnified by debt (as assets are often collateralised). These factors have resulted in some truly spectacular losses, with 170 airlines having entered bankruptcy since 1978. However, in light of the airline industry's travails the emergence of successful low cost carriers (LCCs) such as Southwest (1967) and Ryanair (1985) is illuminating. While incumbents successfully repelled the first wave of new entrants post regulation, they did so by developing hubs and computer reservation systems that gave them an advantage. Although the Top 10 airlines accounted for 95% of the US market by 1992, this had been achieved via consolidation, while their structural deficiencies remained unaddressed. In contrast, Southwest Airlines and Ryanair have remained focused on delivering the cheapest average seat mile (ASM) possible, highly reminiscent of Infrastructure-as-a-Service (IaaS) from a public cloud; a no frills service (raw computing) with unassigned seating (multi-tenanted) on a standardised fleet (servers) with a high load factor (82% in Q4'11 vs. industry of 77%) operating out of secondary airports (own datacentres). These structural advantages allowed the LCCs to generate profits for much of aviation's 'lost decade' (post 9/11) in contrast with the industry that lost over $50bn . While an imperfect parallel, the plight of legacy carriers once the overall market decelerates (or goes into decline) is a useful parable to the risk posed to technology incumbents by a cheaper form of computing now that IT budgets are under pressure from sub-trend global growth.
While airlines have proven largely un-investable, almost every area within the aviation infrastructure market has benefited from traffic growth. Increased traffic has naturally benefited the aircraft market (and its suppliers) which enjoyed a 6.5% CAGR between 1975-1985 and a 4.6% CAGR during the following decade. After significant consolidation, the airliner market today is a duopoly between Boeing and Airbus, with some nascent competition provided by the Commercial Aircraft Corporation of China. This is similar to the duopoly enjoyed by Cisco and Juniper in core routers (devices that forward, rather than carry traffic). The large civil aircraft jet engine market has also been a big beneficiary of increased traffic, aiding key suppliers GE Aviation and Rolls Royce. Growing electronic content, that today accounts for 10% of civil aircraft material costs, have made avionic suppliers such as Honeywell and Rockwell Collins excellent long-term investments. Other beneficiaries include companies exposed to the $38.5bn airport infrastructure market, driven by traffic growth, secondary airports and emerging market demand (for instance, India expects to grow its airport count from 80 to 500 over the next decade). The growth in airports closely resembles the development of Internet datacentres run by the likes of Telecity, which allow (telecom) carriers to hand off or terminate (data) traffic. Likewise, the threats faced by airports and airlines that underpin the huge airport security market equally apply to the security software market with shared focus on perimeter security (firewalls) and screening technologies (IPS). Just as traffic growth drove the need for Air Traffic Control (ATC) in order to prevent collisions and expedite traffic flow, so the migration of applications to the Cloud is generating demand for technologies that provide application control (ADCs), network visibility (DPI) and route (WAN) optimisation.
While companies that carry, manage and secure traffic are likely to continue to benefit from ongoing growth, the experience of the aviation market appears to confirm our view that new applications made possible by cheap and highly available traffic are likely to provide the best investment opportunities. The Kelly Act of 1925, which handed over airmail service to private operators, resulted in airmail becoming the first commercial aviation application, and led to the formation of Pan American Airways and other airmail operators. As is common with new applications, limited initial success was followed by dramatic adoption - a new ten-day airmail service between Rose Bay, New South Wales and Southampton resulted in the volume of mail actually exceeding aircraft storage space. The availability of charter airlines made it possible for Vladimir Raitz in 1950 to establish the package holiday industry when he organised a trip to Corsica using a non-scheduled flight. By chartering an aircraft and filling (almost) every seat, Raitz significantly reduced the unit costs of his air transport, which he then bundled with accommodation in order not to fall foul of minimum fares set by the regulator. While organised tours were already well-established (by Thomas Cook in 1841), cheap package holidays made possible by Raitz's company Horizon Holidays (and competitors such as Thomson and Lunn Poly) delivered "low cost travel for the masses". While less than 2% of the British population took overseas holidays in 1952, 2.5m Britons were taking package holidays abroad by the end of the 1960s, rising to 11m by the end of the 1980s. The relaxation of foreign exchange controls in 1970 marked the apogee for the package holiday industry, which subsequently became increasingly price competitive as supply caught up with demand. Soaring oil prices following the 1973 Yom Kippur war resulted in the bankruptcy of a number of operators including Horizon and Clarksons, whose infamous collapse left 49,000 UK holidaymakers stranded overseas. However they played a key role in advancing a number of new 'applications' (such as travel agencies, bureau de change and fractional ownership) while contributing greatly to mass travel, which resulted in tourism becoming the world's largest single industry by the early 1990s.
While package holidays helped accelerate the trend towards mass travel, the advent of the express transportation industry is the most dramatic example of new market creation made possible by cheap and highly available air travel. While an air cargo market had existed since the early days of commercial aviation, it was fragmented and reliant on use of space in passenger airlines, which meant that freight depended on interlining (cooperation between carriers). Prompted by a booming computer market and its use of high value parts, Fred Smith established Federal Express (today: FedEx) in 1973 as an integrated air-ground cargo service which introduced the idea of one carrier being responsible for a piece of cargo from pick-up to delivery. Once the 1977 Airline Deregulation Act removed route restrictions that had previously limited all-cargo airlines, the concept of time definite delivery could become a practical reality. The simplicity of the product summed up in a 1978 advertising campaign- ''When it absolutely, positively has to be there overnight' - belied its impact. By delivering high value inputs at the right time, express delivery enabled 'just in time' (JIT) manufacturing - a concept pioneered by Toyota that minimised the interval between processes, allowing companies to significantly reduce their inventories. In the 20 years after deregulation, integrated carriers like FedEx and DHL experienced a 250-fold increase in traffic which had a significant impact on the US inventory to sales ratio and helped reduce logistic costs from 15.7% of GDP in 1980 to just 8.3% by 2010. Express delivery has also been an important enabler for the technology industry by significantly reducing working capital and making possible 'build to order' businesses such as Dell Computer.
Echoing the advent of new applications in the aviation market, plentiful bandwidth and cheap computing have presaged the development of a number of key Internet applications (online advertising, e-Commerce, SaaS and social networking) described elsewhere in this report. Superior economics associated with public Clouds are likely to drive an additional wave of applications over the coming years. A number of these will build on the success enjoyed by SaaS by similarly combining mass scale and multi-tenancy with an Internet delivery model that eliminates upfront costs and enables customers to 'try before they buy'. In addition to 'Platform as a Service' (application development tools and runtime services) and 'Infrastructure as a Service" (the provision of raw computer, memory, storage and networking), other applications such as 'desktop', 'gaming', surveillance' and 'translation' are likely to be increasingly delivered as services. Cloud storage is likely to gain further traction as enterprises increasingly turn to public clouds to store data. At the end of 2011, Amazon's Simple Storage Service (S3) cloud storage service stored 762bn objects, nearly tripling during the year. On the consumer side, Cloud storage offerings from Dropbox and others are likely to benefit from increased bandwidth speeds and a proliferation of Internet-enabled devices. Cloud synchronisation, which automates synchronisation of digital content across multiple devices, should also benefit from these same trends. One other 'application' worthy of mention is the so-called 'Internet of Things' made possible by the proliferation of sensors and actuators, cheap connectivity and the adoption of IPv6 which will create sufficient Internet addresses for every device on the planet. While the vision of the "physical world becoming a type of information system" is by nature more long-term, ubiquitous wireless connectivity is likely to advance the cause of a number of sub-themes including home automation and smart metering.
These new applications will further add to the explosion of data that has already accompanied increased ubiquity of computing and pervasive applications such as social networking. According to IDC, the amount of information created and replicated in 2011 surpassed 1.8 zettabytes (equivalent to 1.8tr gigabytes), growing more than nine-fold since 2006. Much of this data is being generated naturally through smartphone (the world's 5 billion mobile phones transmit 6 petabytes of data every month) and social media usage, IDC estimating that 75% of all information is today created by consumers. Due to their large user bases, applications such as Facebook and Twitter are generating particularly vast data sets; Facebook's c. 900m monthly users each create 90 pieces of content every month while uploading 100m photos per day. Twitter's 140m daily active users generate 340m 'Tweets' and a staggering 1.6bn search queries every day. Throughout the Twitter ecosystem, the company is said to produce eight terabytes of data per day, eight times greater than that produced by the New York Stock Exchange. Massive data sets can also be generated by transactional data (Walmart handles more than 1m customer transactions every hour) and in the real world due to the proliferation of sensors; a GE90 jet engine generates 20 terabytes of operational information during just one hour of use, roughly equivalent to all the information held in the Library of Congress. In addition, vast data sets have been created via application such as Google Earth (70Tb of raw data), YouTube (45Tb in 2006) and Wikipedia (which is fifty times bigger than the Encyclopædia Britannica).
The ability to process this vast data (courtesy of cheap computing, storage and open-source tools) has created a significant new market, so-called 'big data' which is projected to grow at a 40% CAGR from 2010 and will represent a $16.9bn opportunity by 2015. Internet companies are among the most aggressive adopters of big data solutions; Facebook is reportedly powering the world's largest Hadoop analytic data warehouse while eBay uses Teradata to process more than 100 petabytes every day. While both eBay and Facebook are likely to use their vast databases to improve recommendations to users, Boeing believes that better jet engine analytics will help them improve fuel consumption and optimise fleet performance. While large companies (especially Internet ones) have been using 'big data' applications for some time, the Public Cloud is beginning to enable smaller organisations to access the significant and scalable computing required. CycleComputing, an Amazon Web Services (AWS) customer that creates high performance computing (HPC) clusters in the Cloud, recently linked 51,000 computer cores from across AWS to test potential cancer compounds. According to its CEO, it took just three hours and cost less than $15k to complete analysis that would have required between $20-25m worth of supercomputing infrastructure. This idea of Cloud supercomputing is also being used by Constellation Technologies to process human genome data in order to deliver personalised medicine. Just as express delivery allowed companies to manage inventories in real-time, 'big data' (together with 'in-memory analytics') may result in companies being able to optimise revenue aspects of their business in real-time.
Dramatic improvements in cost and speed, together with the adoption of mobile computing have made the Internet as ubiquitous as air travel. With more than 2.2bn users (32% of the world's population) the Internet has become so all-encompassing that it is (genuinely) running out of IP addresses. Usage patterns are truly staggering - 4.7bn Google searches, 526m Facebook visits, and over 98m hours of YouTube video watched every day. As yet there are few signs of a slowdown: while it took seven years to sell 20m smartphones it took only twenty months to sell 20m tablets. Since its inception in 2008, the Apple app store has delivered 25 billion cumulative downloads. The Internet is in rude health - and yet it remains in its infancy, given that 90% of it has been created in the last two years alone. Cloud computing and its mass produced IT has barely begun to scratch the surface beyond 'software as a service', which augers well given the $241bn opportunity it is forecast to represent by 2020. 'Big data' is a big deal, as it appears to be the application most likely to change business processes in the way that Federal Express did. Incumbents are unlikely to fare well in what is likely to prove the most disruptive period for the technology sector post the PC. Having repelled the earliest (dot com) entrants, legacy technology companies appear in the midst of a period of frenzied M&A, reminiscent of airline consolidation that bought a little time for incumbents in the mid 1980s. Unfortunately for them, we expect the impact of the new technology cycle to play out in a way similar to the experience of the UK travel industry, which in real terms tripled in size between 1951 and 1996. However all the growth occurred in overseas travel, which increased more than eighteen fold while domestic travel flat-lined for more than four decades.
Ben Rogoff
|
Key data as at 30 April 2012 |
|||
|
Financial highlights |
Unaudited As at 30 April 2012 |
Audited As at 30 April 2011 |
Movement % |
|
Total net assets |
£503,292,000 |
£468,716,000 |
+7.4 |
|
Net assets per ordinary share |
392.56p |
368.74p |
+6.5 |
|
Ordinary shares in issue |
128,208,023 |
127,111,211 |
+0.9 |
|
Price per ordinary share |
387.00p |
373.50p |
+3.6 |
|
Subscription shares in issue |
24, 798, 179 |
25,294,991 |
-2.0 |
|
Price per subscription share |
12.75p |
25.75p |
-50.5 |
|
Exchange rates |
As at 30 April 2012 |
As at 30 April 2011 |
|
US$ to £ |
1.6239 |
1.6680 |
|
Japanese Yen to £ |
129.66 |
135.34 |
|
Euro to £ |
1.2269 |
1.1242 |
|
|
For the year to 30 April 2012 |
|
|
Benchmark Change over the year to 30 April 2012 |
Local Currency % |
Sterling adjusted % |
|
Dow Jones World Technology (total return) |
+5.5 |
+8.3 |
|
Other Indices over the year to 30 April 2012 (total return) |
|
|
|
FTSE World |
- |
-2.6 |
|
FTSE All-share |
- |
-2.0 |
|
S&P 500 composite |
+4.8 |
+7.6 |
|
|
For the year to 30 April |
|
|
|
Unaudited 2012 |
Audited 2011 |
|
Ongoing charges ratio |
1.22% |
1.23% |
|
Ongoing charges ratio including performance fee |
1.22% |
2.01% |
Historic Performance for the years ended 30 April
|
|
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
|
Total Assets less current liabilities (£m) |
287.2 |
221.0 |
306.6 |
236.4 |
358.2 |
335.5 |
300.4 |
274.2 |
398.6 |
468.7 |
503.3 |
|
NAV per share (pence) |
|
|
|
|
|
|
|
|
|
|
|
|
- undiluted for warrants which expired in 2005 |
192.8 |
148.3 |
208.1 |
205.0 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
|
- diluted for warrants which expired 2005 |
178.5 |
141.3 |
193.7 |
189.8 |
255.9 |
239.7 |
226.7 |
216.8 |
315.1 |
368.7 |
392.6 |
|
- undiluted for subscription shares issued in February 2011 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
368.7 |
392. 6 |
|
Share price (pence) |
165.0 |
120.5 |
164.8 |
165.5 |
245.0 |
228.0 |
190.8 |
183.0 |
306.8 |
373.5 |
387.0 |
|
Indices of Growth |
|
|
|
|
|
|
|
|
|
|
|
|
Share price |
100.0 |
73.0 |
99.9 |
100.3 |
148.5 |
138.2 |
115.6 |
110.9 |
185.9 |
226.4 |
234.5 |
|
Net asset value per share (diluted) |
100.0 |
79.2 |
108.5 |
106.3 |
143.4 |
134.3 |
127.0 |
121.4 |
176.5 |
206.6 |
219.9 |
|
Dow Jones World Technology Index (Sterling) |
100.0 |
71.8 |
86.2 |
78.1 |
103.1 |
101.0 |
102.5 |
96.9 |
135.4 |
141.7 |
153.5 |
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:
Rebased to 100 at 30 April 2002.
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.
Sources: HSBC Securities Services and Polar Capital LLP.
|
Market Capitalization of underlying investments |
|
||
|
|
<£2bn |
$2bn-$10bn |
>$10bn |
|
% of invested assets as at 30 April 2012 |
14.5% |
15.4% |
70.1% |
|
(as at 30 April 2011) |
(18.1%) |
(15.3%) |
(66.6%) |
|
Classification of group investments as at 30 April 2012 |
|||||
|
|
|
|
|
Total |
|
|
|
North America % |
Europe % |
Asia % |
30 April 2012 % |
30 April 2011 % |
|
Computing |
20.1 |
0.5 |
2.2 |
22.8 |
21.0 |
|
Components |
0.5 |
- |
0.5 |
1.0 |
0.8 |
|
Software |
18.7 |
1.8 |
0.5 |
21.0 |
20.7 |
|
Semiconductors |
11.7 |
1.8 |
8.3 |
21.8 |
23.1 |
|
Healthcare |
- |
- |
- |
- |
1.0 |
|
Telecoms / media |
- |
0.4 |
- |
0.4 |
0.9 |
|
Services |
1.5 |
0.1 |
0.2 |
1.8 |
4.5 |
|
Communications equipment |
11.6 |
1.7 |
1.6 |
14.9 |
17.1 |
|
Internet / consumer |
8.1 |
- |
3.8 |
11.9 |
7.6 |
|
Clean energy |
0.6 |
- |
- |
0.6 |
0.1 |
|
Defence / security |
- |
0.2 |
- |
0.2 |
0.2 |
|
Other sectors |
0.1 |
- |
0.4 |
0.5 |
0.6 |
|
Unquoted investments |
- |
0.2 |
- |
0.2 |
0.2 |
|
Total investments |
72.9 |
6.7 |
17.5 |
97.1 |
97.8 |
|
Other net assets (excluding loans) |
5.4 |
1.9 |
1.5 |
8.8 |
8.4 |
|
Loans |
(4.2) |
- |
(1.7) |
(5.9) |
(6.2) |
|
Grand total (net assets of £503,292,000) |
74.1 |
8.6 |
17.3 |
100.0 |
- |
|
At 30 April 2011 (net assets of £468,716,000) |
70.9 |
9.7 |
19.4 |
- |
100.0 |
Consolidated Statement of Comprehensive Income (UNAUDITED)
for the year ended 30 April 2012
|
|
|
Unaudited Year ended 30 April 2012 |
Audited Year ended 30 April 2011 |
||||
|
|
Revenue return £'000 |
Capital return £'000 |
Total return £'000 |
Revenue return £'000 |
Capital return £'000 |
Total return £'000 |
|
|
Investment income |
|
3,539 |
- |
3,539 |
3,548 |
- |
3,548 |
|
Other operating income |
|
29 |
- |
29 |
37 |
- |
37 |
|
Gains on investments held at fair value |
|
- |
34,317 |
34,317 |
- |
75,384 |
75,384 |
|
Loss on derivatives |
|
- |
(307) |
(307) |
- |
(303) |
(303) |
|
Other currency losses |
|
- |
(108) |
(108) |
- |
(770) |
(770) |
|
Total income |
|
3,568 |
33,902 |
37,470 |
3,585 |
74,311 |
77,896 |
|
Expenses |
|
|
|
|
|
|
|
|
Investment management fee |
|
(4,885) |
- |
(4,885) |
(4,452) |
- |
(4,452) |
|
Performance fee |
|
- |
- |
- |
- |
(3,337) |
(3,337) |
|
Other administrative expenses |
|
(718) |
- |
(718) |
(751) |
- |
(751) |
|
Total expenses |
|
(5,603) |
- |
(5,603) |
(5,203) |
(3,337) |
(8,540) |
|
(Loss)/profit before finance costs and tax |
|
(2,035) |
33,902 |
31,867 |
(1,618) |
70,974 |
69,356 |
|
Finance costs |
|
(835) |
- |
(835) |
(826) |
- |
(826) |
|
(Loss)/profit before tax |
|
(2,870) |
33,902 |
31,032 |
(2,444) |
70,974 |
68,530 |
|
Tax |
|
(497) |
- |
(497) |
(445) |
- |
(445) |
|
Net (loss)/profit for the year and total comprehensive income |
|
(3,367) |
33,902 |
30,535 |
(2,889) |
70,974 |
68,085 |
|
Earnings per ordinary share (pence) |
|
(2.64) |
26.56 |
23.92 |
(2.28) |
56.05 |
53.77 |
The total column of this statement represents the Group's 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.
All income is attributable to the equity holders of Polar Capital Technology Trust plc. There are no minority interests.
The net profit for the year of the Company was £30,535,000 (2011: profit of £68,085,000).
The Group does not have any other Comprehensive Income and hence the net profit, as disclosed above, is the same as the Group's total Comprehensive Income.
Consolidated and Company Statements of Changes in Equity (UNAUDITED)
for the year ended 30 April 2012
|
|
|
Ordinary share capital £'000 |
Capital redemption reserve £'000 |
Share premium £'000 |
Warrant exercise reserve £'000 |
Capital reserves £'000 |
Revenue reserve £'000 |
Total £'000 |
|
Group |
|
|
|
|
|
|
|
|
|
Total equity at 30 April 2010 |
|
31,624 |
12,588 |
117,902 |
7,536 |
290,774 |
(61,797) |
398,627 |
|
Total comprehensive income: |
|
|
|
|
|
|
|
|
|
Profit/(loss) for the year to 30 April 2011 |
|
- |
- |
- |
- |
70,974 |
(2,889) |
68,085 |
|
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
|
|
Bonus issue of subscription shares |
|
254 |
- |
(254) |
- |
- |
- |
- |
|
Subscription shares issue costs |
|
- |
- |
(381) |
- |
- |
- |
(381) |
|
Issue of ordinary share capital |
|
138 |
- |
1,994 |
- |
- |
- |
2,132 |
|
Issue of ordinary shares on exercise of subscription shares |
|
15 |
- |
238 |
- |
- |
- |
253 |
|
Total equity at 30 April 2011 |
|
32,031 |
12,588 |
119,499 |
7,536 |
361,748 |
(64,686) |
468,716 |
|
Total comprehensive income: |
|
|
|
|
|
|
|
|
|
Profit/(loss) for the year to |
|
- |
- |
- |
- |
33,902 |
(3,367) |
30,535 |
|
Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
|
|
Subscription shares issue costs |
|
- |
- |
(2) |
- |
- |
- |
(2) |
|
Issue of ordinary share capital |
|
150 |
- |
1,901 |
- |
- |
- |
2,051 |
|
Issue of ordinary shares on conversion of subscription shares |
|
119 |
- |
1,873 |
- |
- |
- |
1,992 |
|
Total equity at 30 April 2012 |
|
32,300 |
12,588 |
123,271 |
7,536 |
395,650 |
(68,053) |
503,292 |
*The Company Statement of Changes in Equity is as disclosed above with the exception of the Capital and Revenue reserves, the details of which are provided in notes 24 and 25.
Consolidated and Company Balance Sheets (UNAUDITED) at 30 April 2012
|
|
|
Unaudited 30 April 2012 |
Audited 30 April 2011 |
||
|
Group £'000 |
Company £'000 |
Group £'000 |
Company £'000 |
||
|
Non current assets |
|
|
|
|
|
|
Investments held at fair value |
|
488,587 |
490,806 |
458,094 |
460,288 |
|
Current assets |
|
|
|
|
|
|
Derivative financial instruments |
|
- |
- |
307 |
307 |
|
Overseas tax recoverable |
|
14 |
14 |
18 |
18 |
|
Other receivables |
|
1,334 |
4,727 |
9,630 |
13,023 |
|
Cash and cash equivalents |
|
49,211 |
43,599 |
45,505 |
39,918 |
|
|
|
50,559 |
48,340 |
55,460 |
53,266 |
|
Total assets |
|
539,146 |
539,146 |
513,554 |
513,554 |
|
Current liabilities |
|
|
|
|
|
|
Other payables |
|
(5,909) |
(5,909) |
(15,857) |
(15,857) |
|
Bank loans |
|
(9,974) |
(9,974) |
(28,981) |
(28,981) |
|
|
|
(15,883) |
(15,883) |
(44,838) |
(44,838) |
|
Total assets less current liabilities |
|
523,263 |
523,263 |
468,716 |
468,716 |
|
Non current liabilities |
|
|
|
|
|
|
Bank loans |
|
(19,949) |
(19,949) |
- |
- |
|
Derivative financial instruments |
|
(22) |
(22) |
- |
- |
|
|
|
(19,971) |
(19,971) |
- |
- |
|
Net assets |
|
503,292 |
503,292 |
468,716 |
468,716 |
|
Equity attributable to equity shareholders |
|
|
|
|
|
|
Share capital |
|
32,300 |
32,300 |
32,031 |
32,031 |
|
Capital redemption reserve |
|
12,588 |
12,588 |
12,588 |
12,588 |
|
Share premium |
|
123,271 |
123,271 |
119,499 |
119,499 |
|
Special non-distributable reserve |
|
7,536 |
7,536 |
7,536 |
7,536 |
|
Capital reserves |
|
395,650 |
397,869 |
361,748 |
363,942 |
|
Revenue reserve |
|
(68,053) |
(70,272) |
(64,686) |
(66,880) |
|
Total equity |
|
503,292 |
503,292 |
468,716 |
468,716 |
|
Net asset value per ordinary share (pence) |
|
392.56 |
392.56 |
368.74 |
368.74 |
Consolidated and Company Cash Flow Statements (UNAUDITED)
for the year ended 30 April 2012
|
|
Unaudited 2012 |
Audited 2011 |
||
|
Group £'000 |
Company £'000 |
Group £'000 |
Company £'000 |
|
|
Cash flows from operating activities |
|
|
|
|
|
Profit before finance costs and tax |
31,867 |
31,867 |
69,356 |
69,356 |
|
Adjustment for non-cash items: |
|
|
|
|
|
Foreign exchange losses |
108 |
108 |
770 |
770 |
|
Adjusted profit before finance costs and tax |
31,975 |
31,975 |
70,126 |
70,126 |
|
Adjustments for: |
|
|
|
|
|
Increase in investments |
(30,186) |
(30,211) |
(72,370) |
(72,388) |
|
Decrease/(increase)in receivables |
8,296 |
8,296 |
(3,404) |
(3,410) |
|
(Decrease)/increase in payables |
(9,931) |
(9,931) |
7,556 |
7,556 |
|
|
(31,821) |
(31,846) |
(68,218) |
(68,242) |
|
Net cash from operating activities before tax |
154 |
129 |
1,908 |
1,884 |
|
Overseas tax (deducted)/refunded at source |
(493) |
(493) |
15 |
15 |
|
Net cash (used in)/generated from operating activities |
(339) |
(364) |
1,923 |
1,899 |
|
Cash flows from financing activities |
|
|
|
|
|
Issue of share capital |
4,043 |
4,043 |
2,385 |
2,385 |
|
Subscription share issue costs |
(2) |
(2) |
(381) |
(381) |
|
Loans matured |
(30,461) |
(30,461) |
(59,286) |
(59,286) |
|
Loans taken out |
30,250 |
30,250 |
59,786 |
59,786 |
|
Finance costs |
(830) |
(830) |
(836) |
(836) |
|
Net cash from financing activities |
3,000 |
3,000 |
1,668 |
1,668 |
|
Net increase in cash and cash equivalents |
2,661 |
2,636 |
3,591 |
3,567 |
|
Cash and cash equivalents at the beginning |
45,505 |
39,918 |
42,070 |
36,507 |
|
Effect of foreign exchange rate changes |
1,045 |
1,045 |
(156) |
(156) |
|
Cash and cash equivalents at the end of the year |
49,211 |
43,599 |
45,505 |
39,918 |
Notes to the Consolidated Financial Statements For the year ended 30 April 2011
1. General Information
The consolidated 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 IFRIC guidance. The Company's presentational currency is pounds sterling. Pounds sterling is also the functional currency because it is the currency which is most relevant to the majority of the Company's shareholders and payables and the currency in which the majority of the Company's operating expenses are paid.
2. Accounting Policies
(a) Basis of Preparation
The consolidated financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation 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 Group as at 30 April 2012 is shown in the balance sheet. As at 30 April 2012 the Group's total assets exceeded its total liabilities by a multiple of over 15. The assets of the Group 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 Group's accounts.
Investment income
|
|
Unaudited Year ended 30 April 2012 £'000 |
Audited Year ended 30 April 2011 £'000 |
|
Franked: Listed investments |
|
|
|
Dividend income |
133 |
140 |
|
Unfranked: Listed investments |
|
|
|
Dividend income |
3,406 |
3,408 |
|
|
3,539 |
3,548 |
Earnings per ordinary share
|
|
Unaudited Year ended 30 April 2012 |
Audited Year ended 30 April 2011 |
||||
|
Revenue return |
Capital return |
Total return |
Revenue return |
Capital return |
Total return |
|
|
The calculation of basic earnings per share is based on the following data: |
|
|
|
|
|
|
|
Net (loss)/profit for the year (£'000) |
(3,367) |
33,902 |
30,535 |
(2,889) |
70,974 |
68,085 |
|
Weighted average ordinary shares in issue during the year |
127,651,825 |
127,651,825 |
127,651,825 |
126,620,066 |
126,620,066 |
126,620,066 |
|
From continuing operations |
|
|
|
|
|
|
|
Basic - ordinary shares (pence) |
(2.64) |
26.56 |
23.92 |
(2.28) |
56.05 |
53.77 |
The Company has in issue 24,798,179 (30 April 2011: 25,294,991) subscription shares which are convertible into ordinary shares. The subscription shares were issued on 14 February 2011.
There was no dilutive effect on the return per ordinary share in respect of the conversion rights attaching to the subscription shares.
Status of announcement
The figures and financial information contained in this announcement do not constitute statutory accounts for the year ended 30 April 2012. The Financial Statements for the year ended 30 April 2012 will be finalised on the basis of the information presented by the Directors in this preliminary announcement. The Annual Report and financial statements for the year ended 30 April 2012 have not yet been delivered to the Registrar of Companies but will be following the Annual General Meeting of the Company on 4 September 2012.
The figures and financial information for 2011 are extracted from the published Annual Report and Financial Statements for the year ended 30 April 2011 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements for the year to 30 April 2011 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 2012 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 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 on pages 32 to 37 of this 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.
This information is provided by RNS
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