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Polar Cap Tech Tst (PCT)

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Monday 15 July, 2019

Polar Cap Tech Tst

AUDITED RESULTS FOR THE YEAR TO 30 APRIL 2019

RNS Number : 4509F
Polar Capital Technology Trust PLC
15 July 2019
 

POLAR CAPITAL TECHNOLOGY TRUST PLC

 

AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2019

 

 

FINANCIAL HIGHLIGHTS

FINANCIAL SUMMARY

 

As at

30 April 2019

As at

30 April 2018

Movement

Total net assets

£1,935,646,000

£1,551,611,000

+24.8%

Net assets per ordinary share

1446.40p

1159.69p

+24.7%

Benchmark (see below)

1205.67

992.81

+21.4%

Price per ordinary share

1354.00p

1148.00p

+17.9%

Premium/(Discount) of ordinary share price to the NAV per ordinary share~

(6.4%)

(1.0%)


Ordinary shares in issue*

133,825,000

133,795,000

+0.02%

*The issued share capital on 12 July 2019 is 133,825,000 shares.

KEY DATA

 

For the year to 30 April 2019

Local Currency %

Sterling Adjusted %

Benchmark


Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes)

 

14.9

 

21.4

Other Indices over the year (total return)


FTSE World

5.7

11.6

FTSE All-Share


2.6

S&P 500 Composite

13.5

19.8

Nikkei 225

1.1

5.3

Eurostoxx 600

5.2

2.9

 


As at 30 April

EXCHANGE RATES

 

2019

2018

US$ to £

1.3037

1.3774

Japanese Yen to £

145.19

150.72

Euro to £

1.1632

1.1400

 


For the year to 30 April

EXPENSES

2019

2018

Ongoing charges ratio# ~

0.95%

0.99%

Ongoing charges ratio including performance fee # ~

1.33%

1.76%

 

Data supplied by Polar Capital LLP and HSBC Security Services.

# Ongoing charges represents the total expenses of the Company, excluding finance costs, expressed as a percentage of the average daily net asset value, in accordance with AIC guidance issued. From 3 January 2018 until 31 December 2018, the research cost borne by the Company is included in the ongoing charges calculation.  With effect from 1 January 2019 all research costs have been absorbed by the Manager.

~ Alternative performance measure (see section below)

HISTORIC PERFORMANCE

As at 30 April

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Net Assets (£m)

274.2

398.6

468.7

503.3

528.8

606.6

793.0

801.3

1,252.5

1,551.6

1,935.6

Share price (pence)

183.0

306.8

373.5

387.0

398.5

442.0

592.0

566.0

947.0

1148.0

1354.0

NAV per share (pence)

216.8

315.1

368.7

392.6

412.4

458.4

599.2

605.5

945.4

1159.7

1446.4

Indices of Growth1












Share price

100.0

167.7

204.1

211.5

217.8

241.5

323.5

309.3

517.5

627.3

739.9

NAV per share2

100.0

145.3

170.1

181.1

190.2

211.5

276.4

279.3

436.1

534.9

667.2

Dow Jones World Technology Index 3

100.0

132.0

138.2

149.7

158.6

179.4

232.2

232.0

355.8

416.4

505.7

 

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 Rebased to 100 at 30 April 2009.

2 The NAV per share growth is based on NAV per share as adjusted for warrants and subscription shares. 

3 Dow Jones World Technology Index (total return, Sterling adjusted) and from April 2013 with the removal of relevant withholding taxes.

 

All data sourced from Polar Capital LLP.

 

For further information please contact:

Ben Rogoff

Ed Gascoigne-Pees

Polar Capital Technology Trust PLC

Camarco

Tel: 020 7227 2700

Tel: 020 3757 4984

 

Page number references are made to the Annual Report and Financial Statements

for the year ended 30 April 2019, which is available on the Company's website.

 

MANAGEMENT REPORT - STRATEGIC REPORT

CHAIR'S STATEMENT

 

DEAR SHAREHOLDER,

When I wrote to you in July 2018, I indicated that your Company had just provided another strong performance in both absolute and relative terms, following the rise of more than 50% in the year to April 2017. I wrote that we had tried to make sure that we avoided the riskiest companies, cash levels were a little higher than usual, and we had a small investment in put options to provide a small amount of protection in case of market setback.

In some ways, I find myself writing a similar set of sentences this year. In the year to 30 April 2019, the net assets per share of your Company have risen by 24.7%, taking net assets per share to 1446.40p and the total net assets of your Company to £1,935,646,000. The share price rose by almost as much, providing a return of 17.9%. There was, though, a period of significant weakness during the year, as our index fell by 7.7% from October to December 2018. Markets have bounced significantly since December.

Currency moves have had a significant impact over the last three years, following the result of the Brexit referendum. In 2018/19, sterling weakened, and some 4.5% of the gross return achieved was a result of that weakness.

Our Benchmark is the Dow Jones World Technology index (total return, Sterling adjusted with relevant withholding taxes removed). The Polar Capital technology team, led by Ben Rogoff, has delivered further returns by outperforming that Benchmark, both last year by 5.6% and this year by 3.3%. He and the team have outperformed their benchmark over 1, 3, 5 and 10 years.

DISCOUNT

The discount, however, has widened over the last year, from 1.0% to 6.4%. We have not observed any significant major shareholders selling. Our wish, over time, is to diversify gently our shareholder base to expand that proportion of it accounted for by direct shareholders. However, we are also cautious of trying to attract large numbers of new direct shareholders all at once. We do our best to maintain a good dialogue with the wealth managers, who are the core of our shareholder base. Your Manager has spent a significant amount of time doing so, and members of your Board also attended various presentations to wealth managers and hosted an event at which representatives of some 44% of our shareholder register attended. We will continue to work on our shareholder relations, and make sure that our communications are easy to access and helpful. We have seen further development of the Company's website this year with Tech Talks now including a number of Manager presentations and articles which demonstrate your Manager's belief in the sector and continued consistency of approach.

INVESTMENT APPROACH

Technology continues to be a very volatile sector, and we seek to pay attention to risk both in absolute and relative terms. Ben Rogoff's approach, which he established in 2006, continues to be that of running a diversified portfolio. He has the aim of delivering comprehensive exposure to the opportunities he sees in the sector in order to deliver good long-term outperformance, but he also seeks to avoid the worst of the inevitable downturns. We were therefore pleased to see that he outperformed during the period of market downturn in this financial year.

Ben's report describes at some length the opportunities he sees in the sector, and the actions he has taken over the period. It is pleasing that his long-term thesis, that cloud computing would have a radical effect on the sector, continues to prove correct and, in his report, he writes about one of the technologies being developed based on cloud computing, the concept of 'containerisation'. It is possible to observe the consistency of his approach by looking at our website, which hosts his TechTalks. Those talks date back several years, so shareholders can see the consistency of his long term arguments.

Over the last year, we have been interested in the analysis provided by Inalytics for Polar Capital, which looked at the ways Ben's actions add to or detract from portfolio performance. I think it is reasonable to suggest that investment in technology shares is not quite the same as investing in less volatile companies. We note from this analysis that Ben and the team demonstrate the skill which can be observed quite frequently in successful managers, of buying shares and holding shares which go on to outperform (and the Polar team can demonstrate this across all market capitalisation categories). Where he can demonstrate skill which is less usual is in selling stocks. That is, Ben and the team in general, sell stocks which subsequently underperform. It is often the case that fund managers detract from their performance by selling too early. In Ben's case, and perhaps because of the sector in which he invests, he can demonstrate that he has added value from selling at the right time.

PERFORMANCE FEE

We are paying a performance fee once again this year (£6.6m, 2018: £11.2m). This is the third performance fee paid since 2011. The payment of a performance fee reflects both good absolute returns and outperformance of the Benchmark. A ''high water mark'' is in place, which means that in order for a performance fee to be paid, the NAV per share must have outperformed since the last time a performance fee was paid and in the year under review. Full details of this fee are in the Notes to the Financial Statements below.

FEES

We said last year that we would continue to review the fees paid to Polar Capital (the Manager). We consider that the business model of Polar Capital, which includes performance fees, has worked well for shareholders and we do understand the ethos of Polar Capital in managing the capacity constraints of their investment teams according to the markets and sectors in which they invest. The context is that assets have grown and performance has been strong in both absolute and relative terms. In addition, we took account of the impact of MiFID II with regard to contributions to research costs.

Following a negotiation process, on 15 April we announced revised fee arrangements with Polar Capital with effect from 1 May 2019. We asked our major shareholders for their views on the principles involved, and are grateful for the responses which were provided. The revised arrangements include: the removal of any contribution by the Company to research costs; a reduction in the marketing spend of the Company in favour of a higher contribution being made by the Manager; additional tiering of the base management fee; and, a number of changes to the performance fee structure:

1. A reduction in the percentage of outperformance paid to the Manager from 15% to 10%;

2. A reduction in the annual cap on any such performance fees payable from 2% to 1%; and

3. An amendment to the performance fee arrangements so as to allow the earning and carrying forward (but not the cash payment) of a fee in respect of outperformance when the Net Asset Value (NAV) has fallen.

4. The introduction of payment conditions such that in any year, no performance fee is paid unless:

·      The NAV has risen both since the last performance fee was paid, and in the year; and

·      The NAV has outperformed in the year being reported.

As a Board we believe these revised arrangements will be beneficial to Shareholders and the Board considers that this set of incentives better aligns the Manager's interests with Shareholders by giving the Manager a clearer incentive to reduce risk. Full details are set out in the Strategic Report below and in the Notes to the Financial Statements.

BORROWINGS

As reported in the Company's Half Year Report, on 2 October 2018, the Company repaid the two, three-year loan facilities with ING Bank N.V of USD 23.0m and JPY 2.8bn which were drawn down in 2015 and expired on 2 October 2018. In place of these, the Company drew down two, two-year fixed rate, term loans of USD 23.3m and JPY 5.2bn, which will expire on 2 October 2020. The Company also agreed a one-year, revolving credit facility of USD 46.6m, expiring on 2 October 2019. Full details of the fees associated with these loans and facility are provided in the Strategic Report. We believe the use of gearing provides the investment team with greater flexibility in managing the portfolio at relatively low cost. Currently, the loans are not being used, but they provide the investment team with the ability to take advantage of market setbacks. The Board has been discussing with the Manager the diversification of cash held within the Company, and a plan to do so is expected to be implemented during 2019.

THE BOARD

Following the appointment of Charlie Park and Stephen White to the Board last year, we continue to work on succession. Brian Ashford-Russell, who had been actively involved with the Company since its inception, originally as the investment manager and latterly as a Non-executive Director, retired at the AGM on 6 September 2018. The Board is very grateful for Brian's enormous contribution: his understanding of tech investment and tech investment cycles has provided guidance and support over the years.

There has been something of a kerfuffle over the issue of Board tenure and it is helpful that the AIC's new Corporate Governance Code has been endorsed for use by investment companies by the Financial Reporting Council. This Board does take its succession responsibilities seriously and has continued to plan carefully. The new AIC Code requires us to set out a more detailed tenure and succession policy for boards overall, but in particular for the chair. In order to avoid any conflicts, a sub-committee of the Nomination Committee has developed a new tenure policy which is set out within the Report on Corporate Governance in the Annual Report. It includes a maximum tenure period, (subject to circumstances), of 12 years for the Chair of the Board. Given our respective tenures, neither Peter Hames, the SID, nor I (as Chair) participated in the sub-committee.

The Nomination sub-committee has therefore suggested that I should remain as Chair until the AGM in 2022 and I have accepted that kind invitation. Peter Hames, having served 9 years by June 2020, will retire with our great thanks for his considerable contribution, at that point. We will announce Peter's replacement as SID in due course. Assuming all goes to plan, we will be recruiting a new director to the Board in 2021/2022, and will of course seek to maintain and expand the diversity of our Board members and their approaches.

During the year, the Board also engaged Lintstock Limited to facilitate an independent Board evaluation. More information on the outcome of the evaluation is provided within the relevant sections of the Report on Corporate Governance in the Annual Report.

AGM DETAILS

We are pleased to confirm a new location for the AGM this year. The AGM will be held at Haberdashers' Hall, 18 West Smithfield, London EC1A 9HQ; a map and local station details are provided on the Notice of AGM, along with the formal business of the AGM. The Notice is available on the Company's website. The meeting will commence at 2.30pm on 4 September and will be followed by afternoon tea. I would again encourage shareholders not to miss this event. Ben Rogoff, the lead manager, will give shareholders a presentation which should provide insight into the development and impact of new technologies on the Company's portfolio. There will also be an opportunity to ask questions and to meet the Board, Ben and his team after the meeting. A video of the presentation will be placed on the Company's website shortly after the AGM (where you can also watch previous year's presentations, along with interviews Ben has given).

OUTLOOK

In the Manager's Report, Ben Rogoff describes in detail his view of the long-term direction of the sectors in which Polar Capital Technology Trust invests. He was correct to warn about the volatility in the sector last year, and he remains concerned about both macroeconomic and geopolitical conditions and the valuations of some parts of the sector. As a Board, we also expect regulators and tax authorities to continue to seek to exercise some control over entities which have extraordinary global reach and influence.

Nevertheless, from an investment perspective, the sector provides an opportunity to benefit from returns from disruptors, as other parts of the economy suffer from disruption. It will not be a smooth ride, but it will be exciting.

 

Sarah Bates

Chair

12 July 2019

 

 

 

INVESTMENT MANAGER'S REPORT

 

MARKET REVIEW

 

In many ways, 2018 was a year of negative superlatives with equity markets witnessing their most substantial declines since the financial crisis and the US market recording its second worst December on record. Yet at the same time, equity markets added to their post-financial crisis gains during a significantly more volatile year for risk assets, with the FTSE World Index delivering total returns of 11.6%, in sterling terms. Last year also proved a particularly tough one for investors as the trade war-related slowdown and the Federal Reserve, via interest rate hikes and a balance sheet reduction, succeeded in deflating asset prices - no major asset class generated returns above 5% for the first time since 1982. However, the final third of our fiscal year saw a dramatic reversal of fortunes with Q1 2019 proving the best quarter for US stocks since Q2 2009. This was driven by a no less remarkable volte-face from the Fed in January when its Chairman, Jerome Powell, suggested it could become ''patient'' on interest rate normalisation, having hiked rates only a month earlier. This was followed by intimation that the central bank could also alter the pace of its balance sheet reduction, while the removal of references to ''further gradual increases'' suggested that the tightening cycle might be over.

 

The catalyst for this policy reversal was deteriorating macroeconomic data which showed that monetary tightening, the trade war and Brexit uncertainty was beginning to be felt globally. Several developed economies (including Germany, Japan and Switzerland) experienced GDP contraction in the third quarter and the China Caixin manufacturing PMI entered contraction territory in December. Reflecting this deterioration (and sharply lower asset prices) other central banks also adopted significantly more dovish stances, with the ECB stating it was ready to 'adjust all of its instruments' if required while the Chinese embarked on another stimulus programme. Having peaked at above 3.2% in December, when the market was pricing in two interest rate hikes during 2019, 10-year US treasury yields ended the year at just 2.5% with 1%-1.5% rate cuts anticipated by the end of 2020. Despite this dramatic reappraisal of global growth prospects, the return of the so-called Fed Put combined with increasing hopes of a US/Sino trade deal presaged a sharp recovery in risk appetite and asset prices as investors looked through more mixed economic and earnings news flow and refocused instead on the potential for a second half recovery.

 

Positive equity market returns were substantially driven by the the US market which delivered total returns of 19.8%, in sterling terms, with currency playing a significant part as the trade-weighted dollar rose 6.1% during the year. In contrast, most other markets delivered total returns +/- 5%. US exceptionalism reflected diverging fundamentals with most major economies negatively impacted by dollar strength, trade tensions and tariffs while the tech-rich US economy remained relatively unscathed, aided by late-cycle fiscal stimulus and more limited China exposure. US market outperformance also reflected a resilient earnings backdrop, supportive buyback and M&A activity that filled the void left by skittish equity investors in Q1 and the significant outperformance of the technology sector (and more broadly, growth over value) during the year as investors gravitated back towards sectors and stocks able to deliver growth despite the more uncertain economic backdrop, as per our Nifty Fifty thesis outlined in last year's report.

 

TECHNOLOGY REVIEW

 

The technology sector enjoyed another impressive year of absolute and relative returns, our benchmark, the Dow Jones World Technology Index, advancing 21.4%, in sterling terms. Mirroring the broader market, this outperformance was significantly aided by the sector's disproportionate exposure to the US and the dollar. Despite growing macroeconomic headwinds, the US technology sector delivered impressive earnings results with revenues and earnings per share increasing by 15% and 27% respectively during 2018, well in excess of worldwide IT budgets that grew by 4%. However, technology earnings and returns beyond the US were more moribund, the Dow Jones World Technology ex US index returning little more than 4%. This contrast in regional fortunes reflected outperformance by a narrow group of (largely US) stocks in the software, cloud and payment subsectors where growth remained strong and companies are relatively insulated from trade-war related disruption.

 

Conversely, semiconductor and other cyclical subsectors fell foul of trade war escalation and uncertainty, with weaker demand trends in several important (and increasingly China-dependent) end markets such as smartphones and autos. What began as weaker NAND prices extended into other component parts including DRAM, lower semiconductor capex and a nascent inventory correction. While associated stock price weakness was ameliorated by the sharp rally during the final third of our year, semiconductor-heavy markets such as Korea and Taiwan underperformed, as did Japan which also had to contend with sustained selling pressure in robotic stocks that suffered from smartphone and automotive exposure.

 

2018 also proved a more testing year for internet companies following the Cambridge Analytica scandal. The year was book-ended by adverse regulatory developments with the introduction of the much-anticipated General Data Protection Regulation (GDPR) in May and comments the following March calling for the break-up of the internet giants by Senator Elizabeth Warren, a candidate for the Democratic presidential nomination in 2020. Aside from the odd fine and/or Congressional hearing, the spectre of greater regulation was most visible in company operating margins as the internet giants significantly increased spending on expanding their geographic footprint (to address the question of data sovereignty) and improving and securing their platforms. Facebook had a particularly eventful year with a series of blows during a torrid first half (including an earnings miss and a guidance reset following changes to the news stream) that saw its stock fall by more than 40% from highs. However, better than feared results during the second half resulted in the stock recapturing three-quarters of its earlier losses by year end. Chinese internet stocks also struggled against a backdrop of slower growth, increased investment and, in the case of Tencent, the government restricting the granting of new gaming licences. Fortunately, the other FANG stocks fared significantly better with sustained strength in cloud computing benefitting Amazon and Alphabet, as well as Microsoft.

 

Next-generation software stocks performed particularly well as beneficiaries of increased spending, IT budget reallocation and increased focus on digital transformation with most delivering strong growth and for the most part improved profitability. The software subsector also proved to be a relative sanctuary from the trade war due to its minimal exposure to China, while the acquisitions of the likes of Ellie Mae, Mindbody, Red Hat and Ultimate Software helped support expanded sector valuations. However, gaming software companies proved notable exceptions due to disruption from free-to-play Fortnite. Former enterprise computing winners such as IBM, Oracle and SAP all struggled to meet market expectations as cloud adoption continued unabated. IBM's $34bn acquisition of Red Hat spoke volumes about the prospects for on-premise computing, while Broadcom's curious acquisition of a legacy software company made plain how difficult large semiconductor deals will be to consummate going forward. The most disappointing performance was reserved for Intel which surrendered its technology lead to TSMC following the decision to further delay its 10nm volume production. However, a few incumbents bucked the trend with Cisco and Qualcomm both outperforming, the latter following its surprise legal settlement with Apple in April.

 

Apple itself enjoyed a rollercoaster ride during an uncharacteristically eventful year, becoming the first US company to achieve a trillion dollar market capitalisation during the first half. However, the company delivered disappointing guidance in November and announced it would no longer disclose iPhone, iPad and Mac unit sales. We significantly pared our exposure as less disclosure would make it significantly more difficult to gauge the health and value of the company's installed base. We further reduced our position following the company's first negative pre-announcement in over a decade in January, with management pinning the blame on the magnitude of economic deceleration in China. However, the stock enjoyed a remarkable final third of the year, recapturing most of its earlier losses, as investors refocused on Apple's services business and hopes that a trade deal would presage a second-half recovery.

 

PORTFOLIO PERFORMANCE

Our total return performance came in ahead of our benchmark, our own net asset value (NAV) per share rising 24.7% during the year versus a 21.4% gain in the sterling-adjusted benchmark. In the US, by far the most significant positive contribution to performance was made by AMD (227%) as the company began to better execute on its CPU and GPU product roadmaps. In addition, the portfolio benefited from its significant overweight exposure to software-as-a-service (SaaS) with companies such as Twilio (235%), Zendesk (89%), Alteryx (199%) and ServiceNow (72%) delivering outstanding returns amid strong growth and multiple expansion. Payment assets also contributed positively, with PayPal (58%), GMO Payments (67%) and Visa (37%) each benefitting from cashless payment and eCommerce growth. Unlike the previous year when stock selection was positive across all major regions, the US drove most of the outperformance reflecting its (and our) disproportionate exposure to the software subsector. In contrast, Europe and Japan both underperformed due to our outsized exposure to semiconductor and robotics companies in those markets.

However, stock selection remained positive across all market-capitalisation tiers, although mid-caps were responsible for a significant majority of overall outperformance. Relative performance was also positively impacted by underweight/zero positions in a number of large index constituents including IBM, Baidu and Intel that delivered disappointing returns during the year. The portfolio also benefited directly from one acquisition following the purchase of Red Hat by IBM at a 63% premium. This, together with a number of financial/private equity transactions, helped buttress software valuations during the year.

In terms of negatives, our position in GrubHub (-44%) proved the most significant stock level detractor to NAV as a more aggressive pricing environment in the online food and delivery market took its toll on margins. Microsoft - a large but underweight holding - was our largest stock level detractor to relative performance as it outperformed significantly during the year on further Office 365 and Azure-related growth. Computer gaming stocks were also a negative due to Chinese regulatory headwinds, delayed game launches and concern about the risk to existing franchises posed by Fortnite. Relative performance was also hindered by underweight positions in positive index contributors such as Qualcomm, Cisco and Broadcom. In addition, performance was impacted by a number of other individual stock moves due to disappointing earnings progress and/or valuation deratings such as Start Today, 2U and Spotify. While helpful during the late 2018 plunge, our decision to hold a modest amount of liquidity and index put options also detracted from performance in what proved to be another strong year for technology returns.

 

MARKET OUTLOOK

 

In contrast with hopes for more synchronised growth, 2018 proved anything but as the US economy (2.9% v 2.7% estimated (E)) surprised to the upside while most other major economies were negatively impacted by trade tensions, tariffs and other political uncertainty. The combination of slower and more uneven growth is expected to persist in 2019 with growth in advanced economies expected to slow to 1.8% (2018: 2.2%) with the US still forecast to grow at c2.3%, almost three times faster than Germany. While domestic demand is expected to remain robust (courtesy of tight labour markets and cycle-low unemployment), US growth is expected to moderate due to tighter monetary conditions, unwinding fiscal stimulus and some trade-related weakness. Weakening external demand (largely China) is expected to have a greater impact in Europe, particularly in export-heavy Germany with one-offs such as revised auto emission standards and industrial action further weighing on the growth forecast at just 1.3% (2018: 1.8%). Despite the expiry of the March Brexit deadline, there remains considerable risk to current expectations of 1.2% growth in the UK. Japan should grow c1% this year (2018: 0.8%) with the government pledging to use 'every measure possible' to mitigate the impact of a planned consumption tax increase scheduled for October. After a more challenging year, developing economies are expected to downtick modestly in 2019 with growth pegged at 4.4% (2018: 4.5%E) supported by another year of more than 7% growth in India (2018: 7.1%). In contrast, growth in China (2018: 6.6%E) is expected to slow further to 6.3% due to the combination of trade tensions/tariffs and financial regulatory tightening (aimed at shadow banking) offset by fiscal stimulus necessary to sustain growth above 6%.

 

The more challenging economic backdrop has taken its toll on earnings expectations with EPS growth contracting to between 4-9% for most major markets in 2019. In the US, estimates have been revised sharply lower with forecasts for 2019 operating earnings almost halving from where they stood in October. According to Factset, revenues and earnings are now expected to increase 4.7% and 3.4% respectively this calendar year. Estimates also remain significantly back-end loaded with earnings forecast to contract in Q2 before improving through the rest of the year. However, at the time of writing, this (Q1) earnings season has proved better than feared with blended revenue growth of 5.2% with 76% of companies beating earnings by 5.6%, above the five-year average. As in previous years, margins and buybacks remain key determinants of earnings progress this year. Buybacks have formed a key part of the US earnings story and, together with corporate net buying, have accounted for 20% of earnings growth since 2012. This looks set to continue in 2019 with buybacks likely to remain an important source of bottom-line growth this year as companies trade cheap debt and plentiful cashflow for equity. However, record levels of repurchases last year ($1trn) were buoyed by repatriation incentives which will be a tough act to follow.

 

However, policy and liquidity conditions are likely to prove significantly more supportive this year following the Fed volte-face in January compared to six months ago when interest rate normalisation and quantitative tightening in the US and UK signalled a less market friendly environment. Looking increasingly at odds with deteriorating international data, trade war uncertainty and weakening commodity prices, President Trump called out the Federal Reserve as the 'greatest threat' to his presidency in October. Having stuck to the script at the December meeting, the decision to 'radically shift course' in January presaged the return of the so-called Fed put. While data has certainly weakened since January, the volte-face was likely prompted by steep declines in risk assets and the Fed's assessment of the knock on effect this might pose given the connection between markets and the economy with c70% of corporate lending being carried out by the credit market and half of household wealth in equities.

 

Not only has the return of the 'Fed put' had the desired effect, but the about-turn has left markets increasingly resembling 1998, the last time the Fed altered/reversed monetary policy to reflect international turmoil at a time when the US economy was in good health. At that time, the Fed - having largely ignored plummeting oil prices and a deepening Asian monetary crisis - sprung into action following the Russian default in August, and the collapse of Long-Term Capital Management (LTCM) the following month. A $3.5bn Fed-engineered bailout in September was quickly followed by three interest rate cuts with Alan Greenspan explaining that it was 'not credible that the US can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress'. The c19% waterfall decline in US markets was soon forgotten - by July 1999, the S&P was almost 20% above its pre-correction high attained a year earlier.

 

As in previous years, policymaker latitude reflects a benign inflationary backdrop that continues to underpin risk assets. While the tighter labour market has begun to apply a little upward pressure, core PCE remains well below the Fed's target of 2%, registering 1.6% in March. More importantly (and quite remarkably), inflation expectations remain relatively unchanged despite unemployment falling from 7.4% in 2003 to 3.8% today. Over the same period, the average rate of expected CPI inflation hardly budged while the five-year TIPS pegs a year-end 2019 annual rate of CPI inflation at just 1.6%. Beyond the US, inflation remains well below central bank targets with core measures in Europe at c1% y/y while five-year breakeven swap rates are at their lowest level since 2016 at just >1.5%. Chinese inflation also remains unproblematic, and supportive of the need for further stimulus, with March PPI of just 0.4% y/y while core CPI remained subdued at 1.8% y/y.

 

Having set the tone for markets during 2018, trade war tensions should alleviate this year, although this appears largely priced in at present. The de-escalation process that began with the December truce has extended with talks thought to be making good progress during their fourth round of negotiations. However, this view was challenged post period end when President Trump declared in May that China had 'broke the deal' and upped the ante by imposing a second round of duties on $200bn of Chinese goods. That said, both sides sound like a deal can still be hammered out which not only addresses the trade deficit but also US concerns about IP and technology transfer, ownership restrictions, licensing requirements and cyber theft. Our sense is that the Chinese are willing to reach accommodation on most of these issues but will find it extremely difficult to make concessions on reforming state-owned enterprise (SOEs). President Xi cautioned in December that 'no one is in a position to dictate to the Chinese people what should or should not be done', something reiterated recently by Vice Premier Liu He. While this could yet prove a dealbreaker, both sides remain well incentivised to deliver a deal; both economies are feeling the impact of what is largely a phony war today and President Trump will not want to seek re-election in 2020 against a recessionary backdrop and/or with equities in a bear market.

 

The combination of rebounding equity markets and negative earnings revisions has seen the forward PE on US stocks recover to c16.8x (2018: 16.5x) having reached a high of 17.9x in October and sub-14x in late December. This valuation metric is modestly above five and 10-year averages of 16.4x and 14.7x respectively. As in previous years, international markets appear better value, but less so on a sector-adjusted basis, with the exception of the UK which remains a cheap outlier following record Brexit/Corbyn-related outflows. The recent recovery in equity markets has been offset by lower US treasury yields and subdued measures of inflation so that the relative valuation gap between stocks and bonds remains relatively unchanged from last year. While the Fed Model (which compares earnings and bond yields) continues to suggest that equities remain substantially undervalued versus both treasuries and corporate bonds, the so-called Rule of 20 (where the fair value PE is equivalent to 20 - CPI) suggests that equities are only modestly undervalued today having traded at fair value briefly last year. Although equity valuations remain appropriate for the current environment, we do not expect them to expand easily from here given political/trade uncertainty and the potential for further negative earnings revisions. Given our expectations that a trade deal will be concluded, we suspect downside risk to valuations should prove modest absent deflation or inflation, the two primary causes of sharply lower PEs. Rather, we expect a return of volatility, which largely explains the current elevated level of cash in the portfolio that reflects heightened macroeconomic uncertainty and the magnitude of the recent bounce.

 

While there are myriad risks to this relatively sanguine view, the odds of a melt-up - the idea that bull markets tend to go out with a bang not a whimper - have lengthened this year with many measures of excess having moderated over the past 12 months. At that time there was plentiful evidence of investment fads (bitcoin, marijuana stocks), while investor sentiment was ebullient. In addition, long-term risk-free rates were threatening levels incompatible with an accommodative investment backdrop. In addition, fund manager positioning has completely reversed, with last year's confidence and cycle-low cash being replaced with consternation and in January, the highest levels of institutional cash held since the financial crisis.

 

While investor antipathy reflects the weakening macro and downward earnings revisions, both Q4 and Q1 reporting seasons have been better than feared. Recession fears have also weighed but the duration of the expansion (118 months at the time of writing) only tells half the story as the cumulative GDP gain this cycle (23.3%) remains below the post-war average (24.9%) while annual GDP is lacklustre at 2.3%/year, half the post-war average. As such, rumours of the death of this cycle may therefore be greatly exaggerated, particularly following the return of the Fed put, leaving 2018-19 increasingly resembling 1998-99. If so, the melt-up could be substantial given that between September 1998 and March 2000, the S&P rose 60% while emerging markets advanced by 114%. While a repeat performance of the same magnitude is both unlikely and undesirable, many of the same ingredients exist today and, as history has repeatedly shown, there is nothing quite like technology disruption to ignite the animal spirits.

 

RISKS

 

As ever, there are myriad risks that could challenge our view. The most significant of these relates to the slowdown in the global economy and associated recession risk. While markets have rebounded strongly on trade deal/recovery hopes, the global economy continues to lose momentum with the IMF recently cutting its 2019 global growth forecast to 3.3% from 3.5%, its third downward revision in six months. More ominously, the JP Morgan Global Manufacturing PMI is at post-2016 lows and at just 50.6 in March was flirting with contraction. Uncertainty looks largely to blame, unsurprising given trade war, Brexit and other political concerns all looming large. In addition, Europe has been negatively impacted by a number of specific issues including tougher emissions regulations that brought German car production to a temporary halt, and the Gilets Jaunes protests that cost France 0.2% of Q4 GDP. In January, the German IFO index fell to a three-year low, Italy slipped into recession for the third time in a decade while in March, the German government sold 10-year bunds with a negative yield for the first time since 2016. China has already cut the RRR twice while introducing fiscal measures in order to ameliorate its slowdown. Although US momentum has moderated as fiscal stimulus fades, there appears to still be plenty of residual strength too - non-farm payrolls jumped by 263,000 in March and US hourly earnings grew 3.4% y/y. This resilience is a good reminder of how closed the world's largest economy is with just 27% of S&P 500 sales coming from overseas. As such, odds of a US recession this year appear low and as outlined in previous reports, we remain focused on a number of indicators such as market breadth, credit spreads and yield curve inversion to help us navigate choppier waters.

 

However, it is also abundantly clear that clarity on trade is essential to restore confidence and return the global economy to firmer footing. As such, another significant risk to our base case is the failure of the US and China to conclude a trade deal. While we believe a deal will be done, the February summit in Hanoi (where negotiations with North Korea ended without agreement) was a good reminder that President Trump believes that 'sometimes you just have to walk away'. At the same time as pursuing a deal, the US is also continuing to act unilaterally to address trade or IP violations. This twin track approach has seen US lawmakers propose banning the sale of US semiconductors to ZTE, charge Huawei with violation of US sanctions on Iran and stealing technology, and trying to persuade its allies to shut Huawei out of 5G network builds on security concerns. This twin approach also speaks to the bigger issue of whether a grand bargain is even possible. The trade war began with an imbalance between the two superpowers that accounted for nearly half of the US's $375bn overall trade deficit which could have been resolved by the Chinese agreeing to purchase more US goods and promising to improve market access and IP rights. However, a bellicose speech given by Vice President Michael Pence in October positioned China as America's rival and accused Beijing of 'employing a whole-of-government approach' in order to carry out a 'litany of economic, political misdeeds'. This hardening of rhetoric reflected China's rapid ascent and years of missed opportunities to narrow differences between the two countries. While resolution may ultimately require the US to 'share economic and strategic power with a rising China', the US - hardly a stranger to the use of a big stick - will not surrender its economic, technological and what it perceives to b) moral leadership without a fight.

 

In addition, loss of policymaker support remains a key risk to our base case, although the recent Fed reversal has allayed policy error fears. The alignment of policymakers and shareholders that has underpinned risk assets since 2009 depends on central banks fearing deflation more than inflation which still holds today. Much rests on wage inflation (the driver of c60% of inflation) and inflation expectations, both of which have remained contained in part thanks to technology. However, there is no guarantee that this will persist, particularly given how tight the US labour market is. The Fed could also resume its rate-tightening path once external conditions improve and reflexivity risk has passed. Returning to 1998-99 as a guide, a low 1.4% core PCE did not prevent the Fed from raising interest rates three times during 1999 once the emerging market crisis had passed and in response to a re-acceleration of global growth and a sharply higher equity market. In other words, data dependency ,and the neutral rate, are open to considerable interpretation - should the US economy once again show signs of 'remarkable dynamism', 2020 could easily follow the path of 1999. Other reasons interest rates could surprise to the upside include policy error, higher oil prices that feed into inflation expectations, a record US budget deficit and rising government debt:GDP ratio.

 

With Brexit looking less certain and President Trump limited by gridlock in Congress, populism appears a less potent risk this year. The chastening experience of Brexit (not a subject I intend to dwell on) and the prospect of a potential second referendum 'would be an even starker retreat from peak populism'. In addition, Italy's populist governing coalition, having said they would not 'backtrack by a millimetre', ended up backtracking by nearly 0.4% of GDP following a prolonged standoff with the EU over the size of its budget deficit. However, the underlying causes of the discontent that has manifested as populism have not dissipated and, as the Gilets Jaunes protests demonstrated, can resurface at any moment. In Germany, populism has left Angela Merkel a lame duck following regional elections which saw both mainstream parties (CDU and SPD) cede c10% share each while the AfD captured 12%. Populist right-wing governments remain in control in a number of the Visegrad countries (Czech Republic, Hungary, Poland and Slovakia) while Jair Bolsonoro, the recently elected president of Brazil, has adopted some of the rhetorical themes of Trumpism. Other political risks relate to Iran (Trump renounced the nuclear deal signed by Obama and sent an aircraft carrier to the Persian Gulf), North Korea and a more belligerent Russia.

 

In addition to those outlined above, there are a number of additional risks that investors should consider. China represents a key risk to the global economy and financial markets. Following the slowest official GDP growth in 28 years (6.6%) and the first negative year for auto sales since 1992, avoidance of a hard landing in China remains imperative. However, benign inflation should allow the government sufficient monetary and fiscal firepower to deliver GDP growth in line with the official target of 6-6.5% set in March despite trade war uncertainty and tariffs. Debt, or more specifically the systemic risk posed by its magnitude is another risk that needs monitoring given non-financial credit as a share of GDP hit a near-record 46.4% in Q3 2018, surpassing the previous high of 45.2% recorded during the financial crisis. Although actual credit risk is unlikely to materialise until the cycle turns, high levels of corporate leverage ($2.7trn worth of corporate debt is outstanding) may prolong any downturn while the positive correlation between US equities and investment grade spreads could leave stocks at the mercy of a relatively illiquid corporate bond market. Other risks include the ongoing challenge to nation states posed by terrorism and unintended consequences of dollar strength and policy divergence, particularly in emerging markets.

 

TECHNOLOGY OUTLOOK

 

Worldwide IT spending is expected to reach $3.76trn in 2019 representing 3.2% y/y growth. This represents a modest deceleration from last year (2018: 3.9%) and is likely due to the weaker macroeconomic backdrop as well as difficult comparisons (as we anniversary tax cuts that acted as a tailwind for business spending). Stronger than expected 2018 growth, together with a more uncertain macroeconomic backdrop and negative y/y growth at Apple and a number of more cyclical stocks has left 2019 expectations for both revenues and earnings at a moribund 2% y/y, However, these numbers are misleading because internet and computer gaming stocks were reclassified as communication services and consumer discretionary respectively during the year. In addition, while sector growth is expected to recover in 2020 (revenues and EPS forecast to rebound by 6% and 11% respectively) there is likely upside to 2019 forecasts given that 89% of technology companies beat earnings in 1Q19, the highest proportion of any sector.

 

Buybacks are also likely to remain supportive with the technology sector accounting for 36% of total buybacks during the first nine months of 2018, up from 22% a year earlier.

The combination of superior growth and marked outperformance saw the technology sector enjoy a well deserved rerating over the past year leaving it trading on a forward PE of 18.9x as compared to 18x at the previous prior year end. However, this minor change belies a remarkable range of valuations experienced during the past year or so with the sector making a post-2008 high in January 2018 at c19.5x and troughing at c14.5x in December 2018. The recent market recovery combined with negative earnings revisions has led to the sharpest rerating of stocks since the financial crisis which leaves them exposed should a trade deal and/or a second half earnings recovery fail to materialise. The sector's relative rating represents a c8% premium to the broader market, ignoring the sector's relative balance sheet strength. While this is a little elevated versus recent history, we do not expect the sector to materially de-rate over the coming year given its growth and balance sheet profile. As in previous years, the technology sector is the only one which boasts net cash. According to our own estimates, this is equivalent to 8% of current market capitalisation which, at face value, reduces cash-adjusted valuations to c17.3x enterprise value/earnings.

 

Although cyclical names have performed strongly since January on trade deal hopes, our own excitement remains underpinned by a new cycle/cloud thesis that appears to be gathering strength with every earnings season. We expect the Nifty Fifty-type market to persist as investors gravitate towards growth stocks against a backdrop of an uneven, sub-par global economy and limited upside to PE multiples. As previously discussed, we have many of the necessary ingredients for a Nifty Fifty-type market with the added bonus this year of lower risk-free rates (helpful for longer-duration names like Netflix) and negative earnings revisions in the broader market helping to create even greater distinction between winners and losers from technology-driven disruption. Continuation of a thinner market is consistent with the idea that leadership rarely changes during a late-stage bull market while the flat yield curve should be supportive of technology outperformance versus financials. In addition, a raft of high profile IPOs (potentially including Airbnb, Palantir, Slack and Stripe) support the idea of a 1998-99 rerun.

 

CLOUD UPDATE

 

Now more than a decade old, the cloud (the kernel of our long-held new-cycle thesis) has become the default computing platform today with 88% of organisations adopting a cloud-first strategy. What began as a way to increase utilisation and reduce IT costs has morphed into a strategic imperative in order for companies to 'achieve greater business agility or access infrastructure capabilities they do not have within their own data centre'. Like electricity before it, the public cloud has become both the source of and saviour from disruption. Early concerns around security and vendor lock-in have all but disappeared as companies attempt digital transformations, modernisation efforts critical for survival. As a result, Infrastructure as a Service (IaaS) - the compute, storage and network building blocks of any cloud service - has quadrupled in value over the past three years and is worth $42bn today. This remarkable growth was evident at each of the hyperscale cloud vendors during 4Q18; Amazon AWS reached $6.7bn in revenues (up 45% y/y), Microsoft Azure delivered $3.1bn (76% y/y) while Google's GCP (which includes G Suite/Google Apps) achieved $2.7bn (102% y/y).

 

Despite elevated levels of capex necessary to sustain growth, the industry is also becoming significantly more profitable, with AWS operating margins at 29% and Azure gross margins now probably greater than 50%. As is the norm with disruptive technologies, we appear to have hit an adoption sweet spot; having taken 10 years to reach the first $10bn (2006-2016), IaaS is now adding $10bn every 1-2 years. While growth must invariably slow at some point, the market is expected to sustain rates of between 28-36% which, at the higher end of forecasts, means the Infrastructure as a Service market could be worth as much as $150bn by 2023. Software as a Service (SaaS) - significantly larger than IaaS today - has also continued to deliver strong growth over the past year and is forecast to expand 22% annually to $236bn by 2023.

 

Confidence in these medium-term forecasts depends heavily on where cloud penetration is today and where it is heading. This time last year, we suggested that the public cloud accounted for 21% of workloads. A year on and the process of ascertaining cloud penetration still remains highly uncertain. CIO surveys suggest that workload penetration remains at/around 22% heading to 29% this year and 50% by the end of 2022. However, as measured by share of enterprise IT spending, cloud penetration may only be 19% today heading to 28% by 2022. Although this difference may be explained by cloud deflation, the penetration question is further complicated by the fact that as cloud offerings continue to both broaden and deepen so the total addressable market (TAM) becomes a moving target and open to considerable interpretation. Today, Gartner sizes the opportunity at more than $1trn while KeyBanc believe that c$1.8trn is up for grabs. Fortunately, either scenario should provide sufficient runway to sustain cloud growth 'well into the next decade'.

 

Following its bid for Red Hat in October 2018, IBM CEO Ginny Rometty explained that the decision to part with $34bn was driven by Big Blue's desire to participate in the so-called hybrid cloud which would form 'the second chapter of the cloud'. In her opinion, the migration of the first 20% of workloads had been 'easy work' but, by implication, the next wave would be tougher. We are not convinced. As a rule, incumbents are rarely useful guides during a new cycle. While the current consensus believes that public, private and on-premise compute will co-exist for years, it was also true that, for a brief period, cars and carriages shared roads, while tanks and cavalry shared battlefields. For us, the rearguard action being fought by yesterday's winners is to be expected - after all, no condemned person ever ran to the gallows. Returning to hybrid cloud, there have been a number of other developments aside from IBM/Red Hat that support the idea of coexistence including AWS's relationship with VMware, Google's on-premise Kubernetes offering and Amazon's recent introduction of Outposts, on-premise rack servers delivering AWS Cloud.

 

However, in time we believe that each of these mollifying developments will either be forgotten or remembered with fondness like when we see old black and white photographs showing cars and horse-drawn carriages sharing roads in New York. Using that earlier period as a guide, it took just eight years from the time of the first US modern auto show held in 1900 for the number of cars to match the number of horses in New York. 1908 was also the year when Ford introduced the Model T which, as we know, changed everything. Over the next 10 years, the number of cars and trucks registered in the US increased 33x and 134x respectively while the horse, carriage and buggy were largely driven from the roads. Thus, coexistence is better understood as a temporary state during which new technologies complement, rather than replace legacy ones. In time - once the disruptive technology becomes vastly superior - there will be no coexistence. Today the cloud is capturing every incremental computing workload; not only will cloud offerings grow nearly 5x faster than traditional ones between 2017-2022, but by 2025 80% of enterprises will have shut down their traditional data centres (as compared to 10% in 2018).

 

City dwellers breathed a huge sigh of relief (without having to hold their noses) once streets were free of horses. In New York, horses created almost five million pounds of manure every day, while in 1894 the Times newspaper predicted that "in 50 years, every street in London will be buried under nine feet of manure". Now uber-fashionable, brownstone stoops were originally introduced to allow homeowners to 'rise above a sea of manure'. Of course, the automobile was the solution then just as the cloud is today. In time the streets will no longer be foul with the detritus associated with enterprise computing.

 

As per our long-held mass production thesis (and highly analogous to the automotive experience), the cloud also appears to be entering a stage where it is becoming increasingly difficult for on-premise alternatives to keep up, not just in terms of scale and reach but also because of the increasing abstraction between hardware and software. This process began with virtual machines (VMs) which allowed multiple VMs to run on the same physical server leading to server consolidation, higher utilisation rates and the adoption of private clouds. Today, abstraction is significantly more complex as a result of microservices (where applications are split into isolated components and connected via APIs) and containers (similar to VMs but where abstraction happens at the app layer). While these technologies were born and developed in the cloud, where rapid application deployment, continuous innovation and massive scaling are prerequisites, they are becoming more mainstream as enterprises increasingly embrace DevOps and as the loci of compute shifts towards the cloud. Twice as efficient as VMs (and taking seconds to spin up, rather than minutes), containers only account for 7% of workloads today but this is forecast to more than quadruple over the next three years.

 

The impact on cloud adoption and workload growth could be significant, aping the impact that McLean's standardised container had on the shipping industry (it is no accident that the company synonymous with containers is named Docker). Loading time and costs plummeted, ships got bigger and maritime trade exploded. By the 1980s, 90% of countries had container ports, up from 1% in 1966. By 2020, more than half of enterprises will run mission-critical, containerised, cloud-native applications - up from less than 5% today. We explore the container parallel in greater depth elsewhere in this report but the 'unglamorous, little-noticed shipping container' transformed cities, made outsourcing/globalisation possible and changed the world. Serverless computing (where machine resources are dynamically allocated to an app) will only add to abstraction and the trend towards cloud-native apps. Pioneered by AWS with its Lambda offering introduced in 2014, serverless computing is ideal for applications that require near-instantaneous provisioning of back-end services like reacting to sensor readings and other IoT uses. Able to spin up resources in milliseconds, Lambda usage is metered in increments of 100 milliseconds - remarkable stuff, and only available in the cloud.

 

Despite relatively low levels of penetration, the IaaS market is rapidly coalescing around a handful of companies. A year ago, the Gartner Infrastructure as a Service 'magic quadrant' featured 15 providers; this year it only has six. Gone are the telcos and managed service providers, leaving Oracle, IBM and four hyperscale cloud vendors who, thanks to their massive scale, are able to deliver high levels of performance, throughput and redundancy to enable fault tolerance and high availability - and Oracle and IBM. However, even this thinning field belies an industry with oligopolistic (if not duopolistic) tendencies; today Amazon (AWS) remains the runaway leader with an estimated 61% market share, followed by Microsoft with 23%, while the top five vendors enjoy 84% combined share. In addition to their scale, the hyperscale providers continually add new features to their platforms while applying machine learning (ML) to help them optimise their own internal operations. To date, neither IBM nor Oracle have been able to make much of a dent in the market (likely prompting IBM's acquisition of Red Hat and Oracle's decision to stop disclosing cloud numbers) which points to formidable entry barriers and more consolidation in the years ahead.

 

Against this backdrop, it goes without saying that incumbents have much to fear from the new cycle. Budgets continue to be reallocated away from legacy areas such as hardware and infrastructure software in favour of cloud, cybersecurity, workflow automation and BI/analytics. Naturally this will continue to weigh on incumbent (enterprise) vendors such as Dell, Oracle, HP and EMC - all of which appear as budget losers in CIO surveys - in favour of cloud vendors such as Amazon, Microsoft, Salesforce.com and Google. Legacy markets remain troubled, even after last year's cyclical reprieve when IT budgets were buoyed by tax cuts and repatriation. High levels of penetration and weaker demand from China will continue to weigh on overall device growth, pegged at just 1.6% this year following a flattish 2018. Having peaked in 2011, the PC market has been declining ever since with units falling 1.3% last year and is expected to remain flat until 2020. Tablets peaked in 2014 when 250 million units were shipped but since then sales have declined for 16 consecutive quarters, with units declining 6% in 2018. The smartphone market continues to falter amid high penetration and a slowing pace of innovation with units declining c1% in 2018 and growth expected at just 1.4% between 2017-2022.

 

Within the enterprise, storage spending is expected to decline by 1.8% per annum through 2022 despite expectations of a 10x increase in data creation between 2017-2025 due to cloud migration and deflation. The outlook for mainframes also looks problematic with more than half of CIOs using mainframes today expecting to move off them within the next five years. Printing remains pressured too, with global ink demand growing just 1%pa between 2014-2018 and HP reporting a 3% y/y decline in supply sales in Q4 driving the stock sharply lower. While servers have been a bright spot, this largely reflects white box/hyperscale demand and pass-through of higher component prices (which are currently reversing). Even within software, budgets continue to be reallocated away from legacy areas such as infrastructure while more widespread use of open-source databases is expected to have a 2.5% negative spend impact on Oracle.

 

By the end of 2021, hyperscale data centres are expected to account for 53% of installed data centre servers by which point the cloud battle will have been won. Until then, those incumbents and legacy vendors that have thus far escaped the grasp of private equity (or refuse to go quietly) seem fated to exist in a state of eternal punishment and damnation. While M&A may appear to offer the quickest route to redemption, we believe that this well-trod path will instead destroy value for shareholders (the word 'perdition' fortuitously deriving from the Latin word perdere - to destroy).

 

THEMATIC UPDATE

 

Beyond cloud computing and the bifurcation of fortunes within the technology sector, there are a number of other core themes that are captured within the portfolio. As we have previously articulated, internet platforms remain some of the greatest beneficiaries of smartphone ubiquity, the cloud and plentiful bandwidth with more than 4.3 billion people accessing the internet, c57% of the world's population. Despite a disappointing year for internet stocks, we remain upbeat about their medium-term prospects although we expect regulatory headwinds to persist, while slowing global growth represents (hopefully) a more transitory risk. With GDPR being implemented in May 2018, the risk associated with data privacy appears to have been absorbed well. While GDPR-type legislation is gaining traction globally, we expect the leading platforms to be relatively strengthened in a world where compliance costs and the value of first-party data are rising. Likewise, we are relatively sanguine about antitrust concerns, epitomised by Senator Warren calling for the break-up of Amazon, Facebook and Google. While this scenario remains a tail-risk, greater levels of scrutiny may see the internet giants tread more carefully. Growing political pressure may also manifest as higher tax rates as the EU and others explore so-called digital taxes based on revenue, rather than profits. Although we expect worst case scenarios to be avoided (overhauling the global taxation system for the digital age will take time), internet companies may look to mitigate this risk by moving to country-based taxation as Facebook will this year.

 

While the headlines continued to be dominated by regulatory risk, the internet economy continues to capture a disproportionate share of global growth while user engagement is healthy. The outlook for online advertising remains positive (up 18% in 2018) driven by mobile. Alphabet and Facebook continue to dominate the market and deliver significant ROI advantages for advertisers. However, Amazon is a significant new entrant leveraging its vast purchase history data, attracting direct mail and trade spend budgets to its advertising platform. Social media continues to grow its share of advertising dollars; Facebook remains the undisputed leader with over 2.7 billion monthly active users (MAU) across its family of apps and an astonishing two billion daily active users. In China, Tencent's WeChat boasts c1.1bn MAU.

 

The growth in e-commerce continues apace and is set to increase from $2.9trn in 2018 to $4.9trn by 2022 representing a CAGR of 20%. Mobile commerce (m-commerce) continues to outgrow the overall market and in 2018 represented c40% of total US eCommerce but only 4% of overall retail spending. Omnichannel is likely to remain a focus with Paypal announcing the acquisition of iZettle to boost its offline strategy.

 

Internet-driven disruption is also being increasingly felt in media content as time continues to migrate away from linear TV. In the US, eMarketer calculates time spent viewing digital video exceeded 82 minutes per day last year, an 18-fold increase while time spent watching linear TV has been declining since 2012 and is expected to contract by a further 4% in 2019. Demographics play a large part in this trend, a parliamentary committee revealing that conventional TV viewing by under-25s has halved in the UK since 2010. Streaming video and music services remain a key media battleground with YouTube (almost two billion monthly logged-in users) and Netflix (139 million paid users) dominating the former, and Spotify (207 million MAU) and Apple (56 million paid subscribers) leading the latter. However, the remarkable experience of Fortnite - an online game with 200 million registered users - demonstrates that TV and music are having to increasingly compete with gaming for consumer screen time. No doubt with this in mind, Alphabet (aka Google) announced Stadia, an online streaming gaming service expected to launch later this year.

 

Our belief that the smartphone market was mature was borne out in 2018 as worldwide sales of smartphones fell by 5% y/y with units shipped falling to 1.4 billion from 1.5 billion in the previous year. Slowing innovation, economic headwinds and price increases led to elongated replacement cycles. This, together with weak Chinese demand led to the smartphone industry experiencing its first ever annual decline while both Apple and Samsung ceded market share to the four Chinese vendors. With smartphone penetration at 70-80% in most advanced markets, unit growth is likely to be modest at best going forwards with IDC forecasting a return to low, single-digit growth through 2022. This upbeat assessment reflects hopes that less uncertainty in 2019 together with new-form factors and/or 5G can return the market to growth. However, replacement cycles have continued to extend, reaching 2.8 years in the US in 2018. For now, we cannot know where replacement cycles will end up but the PC experience is sobering; despite a plethora of would-be drivers such as laptops, two-in-ones, chromebooks and OS upgrades, units have declined every year since peaking in 2011 while sales are now c30% lower than where they stood then.

 

Our long-held view has been that Apple is best understood as a mass affluent/luxury consumer goods company with an exceptional brand/customer base and ecosystem. If anything, this view was strengthened a year ago by the shift towards price rather than unit-driven growth. Likewise, we were genuinely excited about services that were growing in the mix. However, a year later and the investment case for Apple has changed again. Having decided to stop disclosing units and ASPs, Apple went on to negatively preannounce results for the first time since 2002 with iPhone units down 15% y/y in Q1 and the company laying the blame squarely on China's macro-related weakness. With an installed base of 1.4 billion people including more than 900 million all-important active iPhone users, the core of the Apple story seems unchanged. The company appears to still have pricing power as iPhone ASPs have increased from $686 in 2017 to $755 in 2018. Services remain healthy too, accounting for 13% of total sales and growing a respectable 19% y/y. While overall market share slipped during 2018, Apple continues to dominate premium smartphone markets such as the US where c40% of devices run iOS (versus c14% globally) and even as replacement cycles extend, Apple remains remarkably good at selling iPhone-related products into its mass-affluent base.

 

Unfortunately, the premium smartphone market is now fully penetrated and replacement cycles are extending. We remain sceptical that  an ageing installed base is ripe for an upgrade because a large portion of the 900 million+ iPhones are second-hand/hand-me-downs. We are also less sure that pricing is as healthy as it seems with recent actions (price cuts in China, adjusting for the strong dollar in certain markets, promoting trade-ins) tactical rather than strategic answers to the issue of price elasticity. This is particularly true in emerging markets where Apple's premium offering and App Store have less resonance, like in India where the Apple X is priced at 10x the cost of the average handset. As the largest smartphone market and 16% of sales, Apple will need to solve China. Better unit growth progress in Q1 was likely helped by cheaper/old models which will weigh on ASPs and service attach rates and - in time - could threaten Apple's luxury good status which depends on high residual values.

 

Apple has also enjoyed limited success in the connected home where its premium priced offerings have faced intense competition from both Amazon and Google. What is striking is that the further one moves away from the iPhone, the less relevance Apple seems to have, which talks to the importance of inertia (people are loath to switch platforms) and value of the App Store. The latter represents the crown jewel of Apple's services business and the source of Apple's 'walled garden' However, app stores have become more contentious recently, due to the apparent data advantage enjoyed by Apple (and others) which means they should 'either run the platform or…play in the store'. Spotify has made the same point in its recent complaint to the EU about the (30%) 'Apple tax' which Apple's own Music service does not have to suffer. Potential risk to the App Store comes at a time when the Apple proposition is more reliant on services growth than ever before.

 

For now, Apple remains one of the best businesses in the world and one of the most important investments we have ever made. Its ability to create multiple new product categories - iPods, iPhones, iPads, Apple Watch and an ecosystem that both enables and sustains them - is unprecedented. This has left the company with $113bn of net cash on the balance sheet together with a baseline of c$50bn of annual cashflow which can be used to sustain EPS growth until replacement cycles have fully extended or augment services growth via large-scale M&A. There is also optionality associated with products that either enrich (or revive) the smartphone franchise.  For these reasons we are likely to retain a large but underweight Apple position. However, the product-driven growth story that we fell in love with has morphed into a cashflow/financial engineering alternative with most of the bottom-line growth currently modelled coming from future buybacks. This is fine as long as it is funded from the P&L (not the balance sheet) but a marked shift in cashflow generation, product pricing or M&A strategy would telegraph that this unique company was beginning to suffer from the weight of its incumbency.

 

Weak smartphone demand, together with trade war concerns during the second half of 2018 took the shine off another strong year for the semiconductor industry, although rampant DRAM pricing (+20% on a full-year basis) accounted for two-thirds of overall revenue growth. Having been particularly weak into the market lows, the sector has recently led the upward charge on prospects for a trade deal and a second-half recovery. Recent datapoints in both smartphones and datacentres, where cloud capex growth is slowing after a remarkable 2018, suggest that expectations of a second-half recovery are likely at risk. As such we are cautious near-term on inventory digestion as a result of weaker demand in both servers and smartphones and the unwind of the buffer built during the early days of the trade dispute. However, we remain excited about the opportunities brought by AI-infused data processing power growth and consider semiconductors one of the cheapest and most levered ways of gaining exposure to the so-called data economy. In addition, new emerging applications such as streaming gaming will help replace smartphone-related revenue while 5G should enable a number of new applications based on machine-to-machine and machine-to-human communication. In contrast, we remain cautious on smartphone-related plays (with the odd exception) and on Intel following an eventful year for the world's largest semiconductor company which saw it cede leadership at the leading manufacturing nodes to TSMC.

 

The robotics market was also negatively impacted by smartphone trends as well as weaker Chinese demand and trade/macroeconomic uncertainty. This resulted in growth slowing to c10%, from c30% in 2017, with much of the deceleration due to a pause in capacity expansion of organic light-emitting diodes (OLED). In addition, sharply lower subsidies for Chinese factory owners to modernise production lines impacted demand, while plunging EV battery manufacturing utilisation rates weighed heavily on lithium battery-related demand. That said, demand should remain robust in automotive (adoption of light/mixed materials), logistics (automated warehousing, guided vehicles) and medical (robotic-assisted surgery) sectors. Although we remain positive on the secular opportunities, we are mindful of weakening macroeconomic trends as well as the ongoing US/China trade dispute. In addition, both autos and smartphones - the two biggest end markets for industrial robots - are still experiencing weak demand and inventory digestion. We will look to take advantage of any share price volatility in order to rebuild our exposure having materially reduced it early last year.

 

While other would-be secular themes that were buffeted by cyclical headwinds, the software sector enjoyed a remarkable year as valuations expanded further alongside fundamental strength. Disruption - the zeitgeist of this cycle - continued to create an appropriate sense of urgency on the part of incumbents across myriad industries to reinvent themselves via digital transformations to avoid disintermediation, obsolescence and/or irrelevance. This allowed next-generation software companies to deliver strong growth, aided by limited exposure to China (responsible for just c1% of software revenues) and, by extension, trade worries. Sector valuations also likely benefited from improved profitability and elevated M&A activity. In addition to the landmark IBM/Red Hat deal, software M&A highlights included SAP's acquisitions of Qualtrics and Callidus, Microsoft's purchase of GitHub while private equity swallowed up a number of secondliners. Although we do not anticipate much further valuation upside from here, growth is likely to remain robust. While the economy and uncertainty might pose a threat to deal timelines, the business transformations under way are existential and software increasingly drives critical systems and revenues. We have taken some profits after a strong run, though the sector remains well supported by much improved profitability, the emergence of next-generation winners and the likelihood of further M&A.

 

In contrast, computer gaming stocks experienced a challenging year following disappointing results from bellwethers Electronic Arts and Activision, which were impacted by a combination of poor execution, a fierce competitive environment and regulatory headwinds. Not only was the holiday season overcrowded, but competition for time and wallet share was taken to another level by Fortnite, a free-to-play (FTP) Battle Royale game which went viral, growing from zero to 200 million registered players and 80 million monthly players in 16 months. This saw it generate $2.4bn in revenue during 2018 - 'the most annual revenue of any game in history' - solely through back-end monetisation. In addition, growth in China (the largest video games market globally) decelerated to just 6.1% amid a regulatory body reshuffle and hiatus in the approval of new game monetisation. Despite this perfect storm, we still like the gaming market, which is expected to be worth $148bn this year (+11% y/y).

 

However, the success of Fortnite (and EA's competitive response Apex Legends which reached 50 million players in just one month) may have opened Pandora's Box in terms of monetisation, although the success of Take Two's Red Dead Redemption 2 was a shot in the arm for premium content. New consoles expected in 2020 and streaming services could significantly increase the addressable market but new distribution models in video and music have not been unequivocal positives for incumbent content. As such, we are likely to remain more modestly positioned until the FTP / streaming dust settles.

 

In addition, there are a number of other themes that we remain excited about including payments where change is happening at an accelerated pace. While healthy consumer confidence and tax cuts played a part in stronger volume growth at Visa and Mastercard last year, the secular trend towards digital payments remains compelling. Drivers include eCommerce growth and contactless payments which has been accelerating the cash-to-card transition by one percentage point a year. In addition, we are excited about the business to business (B2B) opportunity which Mastercard estimates is almost three times larger in volume terms than consumer spend and, being largely cheque-based, appears ripe for disruption. The peer-to-peer (P2P) market represents another attractive growth vector, with US mobile P2P volume estimated at $167bn in 2018 forecast to more than double by 2022. We have exposure to two of the three leading P2P assets via our positions in PayPal (Venmo) and Square (Square Cash). As with software, we believe payments remains one of the best ways to gain exposure to disruption, demographics and changing user behaviour/expectations. However, the competitive landscape remains intense (reflecting the size of the prize) while the recent fall from grace of next-generation highflyer Metro Bank is a good reminder that technology is no substitute for balance sheet when it comes to banking.

 

The last word is reserved for artificial intelligence (AI) following a year when companies across myriad industries embraced AI-infused automation. Investors followed suit, pouring more than $18bn into AI companies, a 24% y/y increase. Adoption is being primarily driven by a step function improvement and cost of ML due to both silicon and system level innovation. While artificial general intelligence (AGI) remains a long-term goal, significant progress has been made in specific task solving, so-called narrow AI. As such, healthcare/digital health look more attractive potential areas with Amazon's acquisition of PillPack reigniting the debate about potential disruption to healthcare, an industry expected to produce data at 48% CAGR through 2020. Early-stage drug discovery is another key AI application designed to reduce the risk of failure and minimise costs - the average cost of bringing a drug to market is said to be $2.2bn. In the field of radiology, AI may offer a solution to the problem faced by the average radiologist that needs to interpret an image every three or four seconds for eight hours a day resulting in an error rate said to be as high as 30% even if only images that show pathological changes are considered in the error analysis. Only time will tell whether a 169-layer convolutional neural network (CNN) can diagnose pneumonia from chest X-rays better than radiologists.

 

Regulators have been very supportive so far, with the FDA fast-tracking approvals of AI-driven clinical imaging and diagnostics. while making the regulatory framework more flexible to accommodate rapid AI improvement. AI enablers are likely to continue to benefit from the deployment of AI infrastructure so expect Alphabet, Microsoft and Alibaba to derive meaningful revenue from 'AI as a service'. However, we also remain focused on trying to find companies where AI can have a significant impact on the business model in time. During the past year we initiated a position in Shimadzu, a Japanese analytical instrument supplier which is working with Fujitsu to incorporate AI into its latest mass spectrometer. By applying deep learning to more than 30,000 images, the equipment can automate the peak picking process with the same accuracy as an operator with over 10 years' experience but shrink detection time from two hours to several seconds. Thankfully neither Shimadzu nor Fujitsu appear to have any immediate plans to enter the fund management industry.

 

Ben Rogoff & Team

12 July 2019

 

The sources for any statistics referred to within this Investment Manager's Report are available on request from the Company Secretary at [email protected].

 

PORTFOLIO REVIEW

 

Breakdown of Investments by Region

As at

30 April 2019

As at

30 April 2018

US & Canada

68.7%

70.6%

Asia Pacific (ex-Japan)

12.5%

13.7%

Other Net Assets

6.8%

3.9%

Europe (inc-UK)

6.3%

6.1%

Japan

5.5%

4.8%

Middle East & Africa

0.2%

0.9%

 

Market Capitalisation of Underlying Investments

As at

30 April 2019

As at

30 April 2018

<£1bn

1.2%

1.3%

$1bn-$10bn

21.2%

22.0%

>$10bn

77.6%

76.7%

 

All data sourced from Polar Capital LLP.

 

CLASSIFICATION OF INVESTMENTS*

as at 30 April 2019

 


North

America %

Europe

%

Asia  Pacific (inc. Middle East)

%

Total 30 April

2019

%

Total 30 April

2018

%

Benchmark Weightings as at 30 April

2019

Software

 

 

 

 

26.5

 

1.0

 

0.2

27.7

26.7

27.1

Interactive Media & Services

13.9

-

3.0

16.9

28.2

19.4

Semiconductors & Semiconductor Equipment Equipment

7.9

3.1

4.9

15.9

15.6

18.6

Technology Hardware, Storage & Peripherals

5.1

0.1

2.7

7.9

10.0

16.7

Internet & Direct Marketing Retail

3.3

0.3

3.3

6.9

3.4

3.6

IT Services

4.7

0.1

0.8

5.6

1.9

7.4

Electronic Equipment, Instruments & Components

1.5

-

2.3

3.8

3.4

0.7

Entertainment

0.8

1.5

-

2.3

-

0.5

Communications Equipment

1.5

-

-

1.5

2.3

4.8

Machinery

-

-

1.0

1.0

1.0

-

Healthcare Equipment & Supplies

0.9

-

-

0.9

0.2

-

Healthcare Technology

0.8

-

-

0.8

0.9

0.6

Aerospace & Defense

0.7

-

-

0.7

0.8

-

Diversified Consumer Services

0.5

-

-

0.5

0.3

0.4

Life Sciences Tools & Services

0.4

-

-

0.4

-

-

Auto Components

-

0.2

-

0.2

0.3

-

Road & Rail

0.2

-

-

0.2

-

-

Chemicals

-

-

-

-

0.3

-

Professional Services

-

-

-

-

0.3

-

Electrical Equipment

-

-

-

-

0.2

-

Household Durables

-

-

-

-

0.2

0.1

Automobiles

-

-

-

-

0.1

-

Total investments (£1,803,242,000)

68.7

6.3

 

18.2

93.2

96.1


Other net assets (excluding loans)

6.9

0.1

2.6

9.6

6.2


Loans

(0.9)

-

(1.9)

(2.8)

(2.3)


Grand total (net assets of £1,935,646,000)

74.7

6.4

18.9

100.0

-


At 30 April 2018 (net assets of £1,551,611,000)

72.4

7.7

19.9

-

100.0


 

*The classifications are derived from the Benchmark as far as possible. The categorisation of each investment is shown in the portfolio available on the Company's website. Where a dash is shown for the Benchmark it means that the sector is not represented in the Benchmark. Not all sectors of the Benchmark are shown, only those in which the Company has an investment at the financial year end.

 

BENCHMARK

The Company uses the Dow Jones World Technology Index (total return, in Sterling with the removal of relevant withholding taxes) ('the Benchmark'), as the benchmark against which net asset value performance is measured for the purpose of assessing performance fees.

 

As at 30 April 2019 the Dow Jones World Technology Index was calculated as a market capitalisation based index of 625 technology companies worldwide. 72.7% of the index weighting is in North America, 7.0% in Europe and 17.1% in Asia Pacific (ex-Japan). By market capitalisation 89.7% is represented by large companies, 9.5% by mid-caps and 0.8% by smaller companies.

 

Shareholders should be aware that the Company's portfolio is actively managed and is not designed closely to track any particular benchmark, index or market. Given the dynamic nature of technology markets and the rapid changes in share prices of technology shares favoured by the Investment Manager, the performance of the portfolio can vary from the Benchmark performance, at times considerably.

 

Although the Company has a benchmark, this is neither a target nor an ideal investment strategy. The purpose of the Benchmark is to set a reasonable return for Shareholders above which the Investment Manager is entitled to a share of the extra performance the Investment Manager has delivered.

 

 

FULL PORTFOLIO as at 30 April 2019

 






Value of holding

% of net assets

Ranking




30

April

2019

30

April

2018

30 April 2019

30 April 2018

2019

2018

Stock

Sector

Region

 £'000

 £'000

 %

 %

1

(1)

Microsoft

Software

North America

170,736

121,855

8.8

7.9

2

(2)

Alphabet

Interactive Media & Services

North America

149,210

120,642

7.7

7.8

3

(4)

Facebook

Interactive Media & Services

North America

91,458

84,826

4.7

5.5

4

(3)

Apple

Technology Hardware, Storage & Peripherals

North America

85,862

98,663

4.4

6.4

5

(7)

Alibaba

Internet & Direct Marketing Retail

Asia Pacific*

64,772

41,928

3.3

2.7

6

(5)

Tencent

Interactive Media & Services

Asia Pacific*

55,788

55,974

2.9

3.6

7

(8)

Amazon.com

Internet & Direct Marketing Retail

North America

54,350

38,800

2.8

2.5

8

(6)

Samsung Electronics

Technology Hardware, Storage & Peripherals

Asia Pacific*

52,421

47,147

2.7

3.0

9

(11)

Taiwan Semiconductor

Semiconductors & Semiconductor Equipment

Asia Pacific*

42,654

28,670

2.2

1.8

10

(16)

ServiceNow

Software

North America

37,452

17,875

2.0

1.2

Top 10 investments



804,703


41.5


11

(10)

Adobe

Software

North America

37,303

31,961

1.9

2.1

12

(12)

Salesforce.com

Software

North America

29,987

24,378

1.6

1.6

13

(49)

Advanced Micro Devices

Semiconductors & Semiconductor Equipment

North America

28,936

9,035

1.5

0.6

14

(41)

PayPal

IT Services

North America

28,133

10,200

1.5

0.7

15

(20)

Zendesk

Software

North America

26,100

16,611

1.3

1.1

16

(14)

Texas Instruments

Semiconductors & Semiconductor Equipment

North America

23,814

19,443

1.2

1.3

17

(15)

ASML

Semiconductors & Semiconductor Equipment

Europe

22,787

19,027

1.2

1.2

18

(-)

Analog Devices

Semiconductors & Semiconductor Equipment

North America

20,943

-

1.1

-

19

(22)

Toyko Electron

Semiconductors & Semiconductor Equipment

Asia Pacific*

20,269

16,303

1.0

1.1

20

(35)

Arista Networks

Communications Equipment

North America

19,368

11,517

1.0

0.7

Top 20 investments



1,062,343


54.8


21

(-)

Mastercard

IT Services

North America

18,298

-

0.9

-

22

(24)

Xilinx

Semiconductors & Semiconductor Equipment

North America

17,572

15,052

0.9

1.0

23

(37)

IAC Interactive

Interactive Media & Services

North America

17,427

11,190

0.9

0.7

24

(43)

Infineon Technologies

Semiconductors & Semiconductor Equipment

Europe

17,192

9,888

0.9

0.6

25

(32)

Visa

IT Services

North America

16,460

12,032

0.9

0.8

26

(-)

Autodesk

Software

North America

16,329

-

0.8

 -

27

(-)

Synopsys

Software

North America

16,009

-

0.8

 -

28

(-)

Qualcomm

Semiconductors & Semiconductor Equipment

North America

15,645

-

0.8

-

29

(31)

Medidata Solutions

Healthcare Technology

North America

15,604

12,532

0.8

0.8

30

(13)

Nvidia

Semiconductors & Semiconductor Equipment

North America

15,165

21,346

0.8

1.4

Top 30 investments



1,228,044


63.3


31

(29)

Axon Enterprise

Aerospace & Defense

North America

14,774

12,795

0.7

0.8

32

(55)

Five9

Software

North America

14,024

7,827

0.7

0.5

33

(44)

Mimecast

Software

Europe

13,510

9,773

0.7

0.6

34

(-)

GMO Payment Gateway

IT Services

Asia Pacific*

13,056

-

0.7

 -

35

(39)

Ansys

Software

North America

12,928

10,855

0.7

0.7

36

(45)

Advantest

Semiconductors & Semiconductor Equipment

Asia Pacific*

12,845

9,728

0.7

0.6

37

(60)

Twilio

IT Services

North America

12,814

7,074

0.7

0.5

38

(67)

Pure Storage

Technology Hardware, Storage & Peripherals

North America

12,791

6,042

0.7

0.4

39

(59)

Aspen Technology

Software

North America

12,684

7,078

0.7

0.5

40

(-)

Spotify Technology

Entertainment

Europe

12,633

-

0.7

 -

Top 40 investments



1,360,103


70.3


41

(-)

Pinterest

Interactive Media & Services

North America

12,390

-

0.6

 -

42

(42)

Proofpoint

Software

North America

11,313

10,184

0.6

0.7

43

(58)

Aixtron

Semiconductors & Semiconductor Equipment

Europe

11,200

7,097

0.6

0.5

44

(-)

SK Hynix

Semiconductors & Semiconductor Equipment

Asia Pacific*

10,826

-

0.6

 -

45

(26)

8X8

Software

North America

10,806

13,359

0.6

0.9

46

(47)

HubSpot

Software

North America

10,358

9,618

0.5

0.6

47

(27)

UBI Soft Entertainment

Entertainment

Europe

10,115

13,283

0.5

0.9

48

(30)

Pegasystems

Software

North America

9,975

12,681

0.5

0.8

49

(74)

Tableau Software

Software

North America

9,958

5,126

0.5

0.3

50

(9)

Intel

Semiconductors & Semiconductor Equipment

North America

9,920

32,921

0.5

2.1

Top 50 investments



1,466,964


75.8


51

(82)

Chegg

Diversified Consumer Services

North America

9,775

4,108

0.5

0.3

52

(62)

RingCentral

Software

North America

9,636

6,990

0.5

0.5

53

(71)

Cree

Semiconductors & Semiconductor Equipment

North America

9,623

5,377

0.5

0.3

54

(56)

Everbridge

Software

North America

9,369

7,728

0.5

0.5

55

(34)

Electronic Arts

Entertainment

North America

9,343

11,649

0.5

0.8

56

(-)

Hamamatsu Photonics

Electronic Equipment, Instruments & Components

Asia Pacific*

8,858

-

0.5

 -

57

(69)

Fuji Machine Manufacturing

Machinery

Asia Pacific*

8,835

5,549

0.5

0.4

58

(70)

Lumentum

Communications Equipment

North America

8,755

5,437

0.4

0.4

59

(-)

Yaskawa Electric

Electronic Equipment, Instruments & Components

Asia Pacific*

8,725

-

0.4

 -

60

(19)

Dolby Laboratories

Electronic Equipment, Instruments & Components

North America

8,538

16,708

0.4

                1.1

Top 60 investments



1,558,421


80.5


61

(79)

Harmonic Drive Systems

Machinery

Asia Pacific*

8,297

4,281

0.4

0.3

62

(-)

St Microelectronics

Semiconductors & Semiconductor Equipment

Europe

7,922

-

0.4

 -

63

(-)

DocuSign

Software

North America

7,767

-

0.4

 -

64

(46)

Alteryx

Software

North America

7,562

9,666

0.4

0.6

65

(21)

Splunk

Software

North America

7,434

16,362

0.4

1.1

66

(28)

Keyence

Electronic Equipment, Instruments & Components

Asia Pacific*

7,425

12,925

0.4

0.8

67

(-)

Monolithic Power Systems

Semiconductors & Semiconductor Equipment

North America

7,393

-

0.4

 -

68

(95)

Universal Display

Electronic Equipment, Instruments & Components

North America

7,304

2,591

0.4

0.2

69

(108)

Square

IT Services

North America

7,280

911

0.4

0.1

70

(-)

Liveperson

Software

North America

7,140

-

0.3

 -

Top 70 investments



1,633,945


84.4


71

(-)

Shimadzu

Electronic Equipment, Instruments & Components

Asia Pacific*

7,103

-

0.4

 -

72

(92)

Dropbox

Software

North America

7,083

3,016

0.4

0.2

73

(63)

Cognex

Electronic Equipment, Instruments & Components

North America

6,828

6,784

0.4

0.4

74

(-)

Illumina

Life Sciences Tools & Services

North America

6,824

-

0.4

 -

75

(-)

CD Projeckt

Entertainment

Europe

6,768

-

0.3

 -

76

(84)

Intuitive Surgical

Healthcare Equipment & Supplies

North America

6,366

3,856

0.3

0.2

77

(-)

Okta

IT Services

North America

6,268

-

0.3

 -

78

(-)

TDK

Electronic Equipment, Instruments & Components

Asia Pacific*

6,014

-

0.3

 -

79

(38)

New Relic

Software

North America

5,957

11,128

0.3

0.7

80

(-)

Dassault Systemes

Software

Europe

5,894

-

0.3

 -

Top 80 investments



1,699,050


87.8


81

(96)

Expedia

Internet & Direct Marketing Retail

North America

5,843

2,507

0.3

0.2

82

(50)

Take-Two Interactive Software

Entertainment

North America

5,813

8,776

0.3

0.6

83

(-)

IRhythm Technologies

Healthcare Equipment & Supplies

North America

5,527

-

0.3

 -

84

(-)

Ocado

Internet & Direct Marketing Retail

Europe

5,495

-

0.3

 -

85

(-)

Corning

Electronic Equipment, Instruments & Components

North America

5,383

-

0.3

 -

86

(54)

2U

Software

North America

5,219

7,998

0.3

                0.5

87

(93)

Coupa Software

Software

North America

5,027

2,993

0.3

                0.2

88

(-)

Align Technology

Healthcare Equipment & Supplies

North America

4,868

-

0.3

 -

89

(-)

NetFlix.Com

Internet & Direct Marketing Retail

North America

4,830

-

0.2

 -

90

(66)

Rapid7

Software

North America

4,746

6,191

0.2

                0.4

Top 90 investments



1,751,801


90.6


91

(-)

Anaplan

Software

North America

4,703

-

0.2

 -

92

(100)

E Ink

Electronic Equipment, Instruments & Components

Asia Pacific*

4,350

2,310

0.2

                0.1

93

(90)

Pixart Imaging

Semiconductors & Semiconductor Equipment

Asia Pacific*

4,237

3,186

0.2

                0.2

94

(-)

Ememory Technology

Semiconductors & Semiconductor Equipment

Asia Pacific*

3,842

-

0.2

 -

95

(75)

Aptiv

Auto Components

Europe

3,839

4,847

0.2

                0.3

96

(-)

Semtech

Semiconductors & Semiconductor Equipment

North America

3,683

-

0.2

 -

97

(-)

Lyft

Road & Rail

North America

3,425

-

0.2

 -

98

(81)

Mix Telematics ADR

Software

Asia Pacific*

2,990

4,190

0.2

0.3

99

(-)

eGain

Software

North America

2,483

-

0.1

 -

100

(-)

Yahoo Japan

Interactive Media & Services

Asia Pacific*

2,449

-

0.1

 -

Top 100 investments



1,787,802


92.4


101

(87)

First Derivatives

IT Services

Europe

2,384

3,401

0.1

0.2

102

(-)

Zoom Video Communications

Software

North America

2,014

-

0.1

 -

103

(105)

KVH Industries

Communications Equipment

North America

1,897

1,427

0.1

                0.1

104

(106)

Tobii

Technology Hardware, Storage & Peripherals

Europe

1,858

1,303

0.1

0.1

105

(102)

Zuken

IT Services

Asia Pacific*

1,649

2,162

0.1

0.1

106

(-)

ForeScout Technologies

Software

North America

1,603

-

0.1

 -

107

(88)

Seeing Machines

Electronic Equipment, Instruments & Components

Asia Pacific*

1,540

3,288

0.1

0.2

108

(-)

CKD Corporation

Machinery

Asia Pacific*

1,331

-

0.1

 -

109

(-)

Network International

IT Services

Europe

785

-

 -

 -

110

(94)

Accesso Technology

Electronic Equipment, Instruments & Components

Europe

324

2,623

 -

                0.2

Top 110 investments



1,803,187


93.2


111

(110)

Herald Ventures Limited Partnership

Other

Europe

55

91

 -

 -












Total equities



1,803,242


93.2




Other net assets



132,404


6.8




Total net assets



1,935,646


100.0


 

*Including Middle East

 

 

STRATEGIC REPORT

 

The Strategic Report section of this Annual Report comprises the Chair's Statement, the Investment Manager's Report, including information on the portfolio and this Strategic Report. It has been prepared to provide information to Shareholders on the Company's strategy and the potential for such to succeed, including a fair review of the Company's performance during the year ended 30 April 2019, the position of the Company at the year end and a description of the principal risks and uncertainties. The Strategic Report section contains certain forward looking statements, made by the Directors in good faith based on the information available to them at the time of their approval of this Report. Such statements should be treated with caution due to inherent uncertainties, including both economic and business risk factors underlying any such forward-looking information.

 

INTRODUCTION AND BUSINESS MODEL

The Company's business model follows that of an externally managed investment trust providing Shareholders with access to an actively managed portfolio of technology shares selected on a worldwide basis.

 

The Company is designated an Alternative Investment Fund ('AIF') under the Alternative Investment Fund Management Directive ('AIFMD') and as required by the Directive has contracted with Polar Capital LLP to act as the Alternative Investment Fund Manager ('AIFM') and Investment Manager (or 'Manager') and HSBC Bank Plc to act as the Depositary.

 

Further information on the operation of the business is set out in the Directors' Report within the Annual Report.

 

Polar Capital LLP also provides or assists in providing company secretarial services and general administration including liaison with directly appointed third party suppliers.

 

INVESTMENT OBJECTIVE AND POLICY

Shareholders should be aware that the portfolio is actively managed and is not designed to track any particular benchmark, index or market. The performance of the portfolio can vary from the Benchmark performance, at times considerably.

 

Over the last four decades the technology industry has been one of the most vibrant, dynamic and rapidly growing segments of the global economy. Technology companies offer the potential for substantially faster earnings growth than the broader market.

 

Investments are selected for their potential shareholder returns, not on the basis of technology for its own sake. The Investment Manager believes in rigorous fundamental analysis and focuses on:

 

·      management quality;

 

·      the identification of new growth markets;

 

·      the globalisation of major technology trends; and

 

·      exploiting international valuation anomalies and sector volatility.

 

Objective

The Company's investment objective has been since formation, and will continue to be, to maximise long-term capital growth by investing in a diversified portfolio of technology companies around the world.

 

Policy

At the Annual General Meeting in 2012 the current Investment Policy, as detailed below and available on the Company's website, was approved. The Portfolio has been managed in accordance with the Policy and restrictions in the year to 30 April 2019.

 

Asset Allocation

Technology may be defined as the application of scientific knowledge for practical purposes and technology companies are defined accordingly. While this offers a very broad and dynamic investing universe and covers many different companies, the portfolio of the Company (the 'Portfolio') is focused on companies which use technology or which develop and supply technological solutions as a core part of their business models. This includes areas as diverse as information, media, communications, environmental, healthcare, finance, e-commerce and renewable energy, as well as the more obvious applications such as computing and associated industries.

 

The Board has agreed a set of parameters which seek to ensure that investment risk is spread and diversified. The Board believes that this provides the necessary flexibility for the Investment Manager to pursue the Investment Objective, given the dynamic and rapid changes in the field of technology, while maintaining a spread of investments.

 

Risk Diversification

The Company will at all times invest and manage its assets in a manner that is consistent with spreading investment risk and invests in a Portfolio comprised primarily of international quoted equities which is diversified across both regions and sectors.

 

The Company will satisfy the following investment restrictions:

 

·      The Company's interest in any one company will not exceed 10% of the gross assets of the Company, save where the Benchmark weighting of any investee company in the Company's portfolio exceeds this level, in which case the Company will be permitted to increase its exposure to such investee company up to the Benchmark 'neutral' weighting of that company or, if lower, 20% of the Company's gross assets.

 

·      The Company will have a maximum exposure to companies listed on emerging markets (as defined

by the MSCI Emerging Markets Index) of 25% of its gross assets.

 

·      The Company may invest in unquoted companies from time to time, subject to prior Board approval. Investments in unquoted companies in aggregate will not exceed 10% of the gross assets of the Company (measured at the time of acquisition of the relevant investment and whenever the Company increases the relevant holding).

 

In addition to the restrictions set out above, the Company is subject to Chapter 15 of the FCA's Listing Rules which apply to closed ended investment companies with a premium listing on the Official List of the London Stock Exchange. In order to comply with the current Listing Rules, the Company will not invest more than 10% of its total assets at the time of acquisition in other listed closed ended investment funds, whether managed by the Investment Manager or not. This restriction does not apply to investments in closed ended investment funds which themselves have published investment policies to invest no more than 15% of their total assets in other listed closed ended investment funds. However, the Company will not in any case invest more than 15% of its total assets in other closed ended investment funds.

 

Borrowing, Cash and Derivatives

The Company may borrow money to invest in the Portfolio over both the long and short-term. Any commitment to borrow funds is agreed by the Board and the AIFM.

 

The Company's Articles of Association permit borrowings up to the amount of its paid up share capital plus capital and revenue reserves but any net borrowings in excess of 20% of the Company's net assets at the time of drawdown will only be made with the approval of the Board.

 

The Investment Manager may also use from time to time derivative instruments, as approved by the Board, such as financial futures, options, contracts-for-difference and currency hedges. These are used for the purpose of efficient portfolio management. Any such use of derivatives will be made in accordance with the Company's policies on spreading investment risk as set out in this investment policy and any leverage resulting from the use of such derivatives will be subject to the restrictions on borrowings.

 

Changes to Investment Policy

Any material change to the Investment Policy will require the approval of the Shareholders by way of an ordinary resolution at a general meeting. The Company will promptly issue an announcement to inform Shareholders and the public of any change of its Investment Policy.

 

INVESTMENT STRATEGY GUIDELINES AND BOARD LIMITS

The Board has within the Investment Policy established guidelines for the Investment Manager in pursuing the Investment Policy. The Board uses these guidelines to monitor the portfolio's exposure to different geographical markets, sub-sectors within technology and the spread of investments across different market capitalisations.

 

These guidelines are kept under review as cyclical changes in markets and new technologies will bring certain sub-sectors or companies of a particular size or market capitalisation into or out of favour.

 

Market parameters

With current and foreseeable investment conditions, the Portfolio will be invested in accordance with the Investment Objective across worldwide markets, generally within the following ranges:

 

·      North America up to 85% of the Portfolio

 

·      Europe up to 40% of the Portfolio

 

·      Japan and Asia up to 55% of the Portfolio

 

·      Rest of the world up to 10% of the Portfolio

 

The Board has set specific upper exposure limits for certain countries where they believe there may be an elevated risk.

 

Cash

The Company may hold cash or near cash equivalents if the Investment Manager feels that these will at a particular time or over a period enhance the performance of the Portfolio. The Board has agreed that management of cash may be achieved through the purchase of appropriate government bonds, money market funds or bank deposits depending on the Investment Manager's view of the investment opportunities.

 

Gearing

The Board monitors the level of gearing available to the Portfolio Manager and agrees, in conjunction with the AIFM, all bank facilities in accordance with the Investment Policy.

 

During the year the Company had two, two-year loan facilities with ING Bank NV: One for 23.3m US Dollars at a fixed rate of 4.235% pa and one for 5.2bn Japanese Yen at a fixed rate of 0.8% pa, both of which were drawn down on 2 October 2018. These loans fall due for repayment on 2 October 2020. It is anticipated that the loan facilities will be replaced on expiry. These loans replace the previously held three year loans of USD 23.0m and Japanese Yen 2.8bn which expired on 2 October 2018.

 

The Company also entered into a revolving credit facility of 46.6m US Dollars with ING Bank NV on 2 October 2018, expiring on 2 October 2019 and with a margin of 0.80% above the prevailing LIBOR/EURIBOR Screen Rate. The revolving credit facility is unsecured and was undrawn at the year end.

 

Details of the loans are set out in Note 17 to the Financial Statements.

 

FUTURE DEVELOPMENTS

The Board remains positive on the longer-term outlook for technology and the Company will continue to pursue its Investment Objective. The outlook for future performance is dependent to a significant degree on the world's financial markets and their reactions to economic events and other geo-political forces. The Chair's Statement and the Investment Manager's Report comment on the outlook.

 

DIVIDENDS

The Company's revenue varies from year to year and the Board considers the dividend position each year in order to maintain the Company's status as an investment trust, which is discussed further in the Directors' Report within the Annual Report. The revenue reserve remains in deficit and historically the Company has not paid dividends given its focus on capital growth.

 

The Directors do not recommend, for the year under review, the payment of a dividend.

 

SERVICE PROVIDERS

Polar Capital LLP has been appointed to act as the Investment Manager and AIFM as well as to provide or procure company secretarial services and administrative services, including accounting, portfolio valuation and trade settlement which it has arranged to deliver through HSBC Securities Services ('HSS'). HSS have also been appointed as the Company's Custodian and Depository.

 

The Company also contracts directly with a number of third parties for the provision of regularly required services:

 

·      Stifel Nicolaus Europe Limited as Corporate Broker;

 

·      Equiniti Limited as Registrar;

 

·      KPMG LLP as independent Auditors;

 

·      Camarco as PR advisors; and

 

·      Emperor as website designers, internet hosting services and designers and printers for Shareholder communications.

 

REGULATORY ARRANGEMENTS

Both the AIFM and the Depositary have responsibilities under AIFMD for ensuring that the assets of the Company are managed in accordance with the Investment Policy and are held in safe custody. The Board remains responsible for setting the investment strategy and operational guidelines as well as meeting the requirements of the FCA's Listing Rules and the Companies Act 2006.

 

The AIFMD requires certain information to be made available to investors in AIFs before they invest and requires that material changes to this information be disclosed in the Annual Report of each AIF. Investor Disclosure Documents, which set out information on the Company's investment strategy and policies, leverage, risk, liquidity, administration, management, fees, conflicts of interest and other Shareholder information are available on the Company's website.

 

There have been no material changes to this information requiring disclosure. Any information requiring immediate disclosure pursuant to the AIFMD will be disclosed to the London Stock Exchange through a primary information provider. Statements from the Depositary and the AIFM can be found on the Company's website.

 

The Company seeks to manage its portfolio in such a way as to meet the tests in Section 1158 and 1159 of the Corporation Tax Act 2010 (as amended by Section 49(2) of the Finance Act 2011) and continue to qualify as an investment trust. This qualification permits the accumulation of capital within the portfolio without any liability to UK Capital Gains Tax. Further information is provided in the Directors' Report within the Annual Report.

 

KEY PERFORMANCE INDICATORS

The Board appraises the performance of the Company and the Investment Manager as the key supplier of services to the Company against Key Performance Indicators ('KPIs'). The objectives of the KPIs comprise both specific financial and Shareholder related measures, these KPIs have not differed from the prior year.

 

 

KPI

 

Control process

Outcome

The provision of

investment returns

to Shareholders

measured by

long-term NAV

growth and relative

performance

against the

Benchmark.

The Board reviews the performance of the portfolio in detail and hears the views of the Investment Manager at each meeting.

At 30 April 2019 the total net assets of the Company amounted to £1,935,646,000 (2018: £1,551,611,000). The Company's NAV has, over the year to 30 April 2019, outperformed the Benchmark. The NAV per share rose by 24.7% from 1159.69p to 1446.40p while the Benchmark rose 21.4% in Sterling terms over the same period. As at 30 April 2019 the portfolio comprised 111 (2018: 110) investments.

 

Investment performance is explained in the Chair's

Statement and the Investment Manager's Report.

 

Over the longer-term, as shown by the historic performance data shown above, growth in the NAV has exceeded the Benchmark.

 

Monitoring and reacting to issues created by the discount or premium of the ordinary share price to the NAV per ordinary share with the aim of reduced discount volatility for Shareholders.

The Board receives regular information on the composition of the share register including trading patterns and discount/premium levels of the Company's ordinary shares.

 

The Board is aware of the vulnerability of a sector specialist investment trust to a change in investor sentiment to that sector. While there is no formal discount policy the Board discusses the market factors giving rise to any discount or premium, the long or short- term nature of those factors and the overall benefit to Shareholders of any actions. The market liquidity is also considered when authorising the issue or buy back of shares when appropriate market conditions prevail.

 

A daily NAV per share, diluted when appropriate, calculated in accordance with the AIC guidelines, is issued to the London Stock Exchange.

The discount/premium of the ordinary share price to NAV per ordinary share (diluted when appropriate) has been as follows:

 

Financial year to 30 April 2019

• Maximum premium over year: 0.8%

• Maximum discount over year: 8.0%

• Average discount over year:3.9%

 

The Company has not bought back any shares in the year to 30 April 2019 and has issued 30,000 shares when the issue was NAV enhancing to existing

Shareholders.

 

Over the previous five financial years ended 30 April 2019

• Maximum premium over period: 5.0%

• Maximum discount over period: 13.8%

• Average discount over period: 2.7%

 

Over the previous five financial years ended 30 April 2019 the Company has not bought back any shares and has issued 1,488,841 as a result of market demand.

 

To qualify and continue to meet the requirements for Sections 1158 and 1159 of the Corporation Tax Act 2010 ('investment trust status').

The Board receives regular financial information which discloses the current and projected financial position of the Company against each of the tests set out in Sections 1158 and 1159.

This has been achieved for every year since launch in

1996.

 

HMRC has approved investment trust status subject to the Company continuing to meet the relevant eligibility conditions and ongoing requirements.

 

The Directors believe that the tests have been met in the financial year ended 30 April 2019 and will continue to be met.

 

Efficient operation of the Company with appropriate investment management resources and services from third party suppliers within a stable and risk controlled environment.

The Board considers annually the services provided by the Investment Manager, both investment and administrative, and reviews on a cycle the provision of services from

third parties including the costs of their services.

 

The annual operating expenses are reviewed and any non-recurring project related expenditure approved by the Board.

The Board has received and considered satisfactory the

internal controls report of the Investment Manager and other key suppliers including contingency arrangements to facilitate the ongoing operations of the Company in the event of withdrawal or failure of services.

 

The ongoing charges of the Company for the year ended 30 April 2019 excluding the performance fee were 0.95% of net assets (2018: 0.99%). The ongoing charges including the performance fee payable in respect of the year ended 30 April 2019 were 1.33% (2018: 1.76%) of net assets.

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

The Board is responsible for the management of risks faced by the Company and, through delegation to the Audit Committee, has established procedures to manage risk, oversee the internal control framework and determine the nature and extent of the principal risks the Company is willing to take in order to achieve its long-term strategic objectives. The Audit Committee carries out at least annually, a robust assessment of the principal risks and uncertainties with the assistance of the Investment Manager, continually monitors identified risks and meets to discuss both long-term and emerging risks outside of the normal cycle of Audit Committee meetings.

 

A Risk Map and process is constructed to identify and assess various risks, their likelihood and the possible severity of impact then, considering both internal and external controls and factors that could provide mitigation, a post mitigation risk impact score is determined. The Audit Committee has identified the top risks faced by the Company which are those classified as having the highest risk impact score post mitigation. The top risks are detailed below with a high-level summary of the management through mitigation and status arrows to indicate any change in assessment over the past financial year.

 

 

Principal Risks and Uncertainties

Management of risks through Mitigation & Controls

Change in assessment of the risk over the past financial year

BUSINESS


Failure to achieve investment objective and/or Failure in services provided by Investment Manager

Investment mandate falls out of favour or failure of the Investment Manager to deliver the investment objective whether due to loss of key investment personnel or other factors:

 

- Failures potentially leading to poor performance against the Benchmark and/or the Company's peer group or leading to a depressed share price, unacceptably large and persistent discount.

 

- The risk of investors seeking alternative investments or lower risk strategies.

A full annual review of the investment strategy and investment markets, together with detailed reports containing financial information including gearing and cash balances provided to each Board meeting, are used to assess portfolio construction and the degree of risk which the Investment Manager incurs in order to generate investment returns.

 

The Board regularly considers the level of premium and discount of the share price to the NAV and the Board considers ways to enhance Shareholder value including share issuance and buy backs.

 

Mitigation is sought through regular reporting and monitoring of investment performance against the peer group, other closed and open-ended funds and Exchange Traded Funds ('ETFs').

 

A resolution is put forward every five years to provide Shareholders with an opportunity to vote on the continuation of the Company. The next continuation resolution will be proposed at the AGM to be held in September 2020.

 

The Board is committed to a clear communication program to ensure Shareholders understand the investment strategy. The Chair and Directors meet with Shareholders through various events and bespoke meetings through the year.


EXTERNAL


Global geopolitical risk

There is significant exposure to the

economic cycles and political movements

of the markets in which the underlying

investments are listed.

 

- The fluctuations of exchange rates

may have a material impact on

Shareholder returns.

 

- Political change affecting economic

stability may have an adverse effect

on underlying valuations.

 

The Board regularly discusses the global geo- political issues and general economic conditions and developments.

 

Note 27 describes the impact of changes in foreign exchange rates. The Company's largest exposure is to the level of US $ holdings.

 

Political changes in the US, Europe and UK continue the uncertainty and volatility in financial markets.

 


 'Brexit'

Uncertainty surrounding the impact of any

eventual exit of the UK from the European

Union.

 

- Changes in trade and tariff

arrangements may affect valuations.

 

- Potential for the exit arrangements to

adversely impact investee companies.

The consequences of the Brexit referendum result were considered at the time and continue to be monitored through existing control systems. Due to the high level of US investments (68.7%) and the low level of UK investments (1.4%) the Board does not believe that there is likely to be any significant direct impact on the operation of the Company or the structure of the portfolio. The Company has a varying level of cash which is primarily held in US Dollars and also has loan facilities in Japanese Yen and US Dollars. Fluctuations in exchange rates are monitored which may impact investor returns. An analysis of currency is given in Note 27 to the Financial Statements.

 


Cyber Risk and/or 'Black Swan' Risk

Cyber-attack causing disruption to or failure of operational and accounting systems and processes provided by the Investment Manager creating financial loss due to an unexpected event and / or adverse impact on personnel or the portfolio.

There is an annual review of internal control reports from suppliers which includes the Investment Manager's cyber protocols and disaster recovery procedures.

 

The Company has a disaster recovery plan in place along with a Black Swan Committee.

 

The number, severity and success rate of cyber-attacks have increased considerably over recent years, controls are however in place and the Board proactively seeks to keep abreast of developments through a series of meetings with relevant service providers.

 


Breach of Statutes and Regulations including failure to keep up with legislative changes

Failure to comply with the FCA's Listing Rules and Disclosure Guidance and Transparency Rules; not meeting the provisions of s1158/1159 of the Corporation Tax Act 2010, the Companies Act 2006 and other UK, European and overseas legislation affecting UK companies including MiFID II and the GDPR and not complying with accounting standards.

 

Further risks arise from not keeping abreast of changes in legislation and regulations which have in recent years been substantial.

The Board monitors regulatory change with the assistance of the Investment Manager, Company Secretary and external professional suppliers and implements necessary changes should they be required. The Board receives

regulatory reports for discussion and, if required, considers the need for any

remedial action.

 

In addition, as an investment company, the Company is required to comply with a framework of tax laws, regulation (both UK and EU) and Company law.

 

The implementation of MiFID II and the GDPR have had no adverse impact so far.

 


INFRASTRUCTURE


Accounting/Financial and/or Custody Errors

Material accounting errors or

misstatements, including inaccurate

fee calculations.

 

Mis-valuation of investments or the loss

of assets.

 

Incomplete or inaccurate financial

information potentially causing failure

to meet investment trust status.

 

Company is unable to recover losses

or make-good shareholder value.

A full review of the internal control framework is carried out at least annually.

Regular reporting is received by the Investment Manager on behalf of the Board

from the Depositary on the safe custody of the Company's assets.

 

The Board undertakes independent reviews of the Depositary and external Administrator services and additional resources have been put in place by the Investment Manager.

 

Management accounts are produced and reviewed monthly, statutory reporting and daily NAV calculations are produced by the external Administrator and verified by the Investment Manager. Accounting records are tested, and valuations verified independently as part of the year-end financial reporting process.


 

↔No change

↑Increased

↓Decreased

 

MANAGEMENT COMPANY AND MANAGEMENT OF THE PORTFOLIO

As the Company is an investment vehicle for Shareholders the Directors have sought to ensure that the business of the Company is managed by a leading specialist investment management team and that the investment strategy remains attractive to Shareholders.

 

The Directors believe that a strong working relationship with the investment management team will help to achieve the optimum return for Shareholders.

 

Investment team

The Investment Manager is Polar Capital LLP ('Polar Capital'), which is authorised and regulated by the Financial Conduct Authority.

 

Under the terms of the investment management agreement Polar Capital provides investment management, and provides and procures accounting, company secretarial and administrative services.

 

Polar Capital provides a team of technology specialists led by Ben Rogoff. Each member focuses on specific areas while Ben has overall responsibility for the portfolio. Polar Capital also has other specialist and geographically focused investment teams which may contribute to idea generation. The team's biographies can be found in the Annual Report and on the Company's website.

 

Termination arrangements

The investment management agreement may be terminated by either party giving 12 months' notice, but under certain circumstances the Company may be required to pay up to one year's management charges if immediate notice is given and compensation will be on a sliding scale if less than 12 months' notice is given.

 

Fee arrangements

As reported within the Chair's Statement and later in the Notes to the Financial Statements, following negotiations with the Manager through late 2018 and early 2019, on 15 April 2019 the Company announced revised fee arrangements which came into force on 1 May 2019. The Company was advised that the revised fee arrangements amounted to a smaller related party transaction, as defined by Listing Rule 11.1.10. In accordance with Listing Rule 11.1.10, the Company obtained written confirmation from its Corporate Broker, Stifel Nicolaus, as its sponsor, that the revised fee arrangements were fair and reasonable as far as the Shareholders of the Company were concerned.

 

Performance periods will coincide with the Company's accounting periods. In the event of a termination of the investment management agreement, the date the agreement is terminated will be deemed to be the end of the relevant performance period and any performance fee payable shall be calculated as at that date.

 

Management fees of £15,341,000 (2018: £13,202,000) have been paid for the year to 30 April 2019, of which £3,876,000 (2018: £nil) was outstanding at the year end. A performance fee of £6,644,000 has been earned for the year to 30 April 2019 (2018: £11,169,000), and the whole of this amount (2018: whole amount) was outstanding at the year end.

 

Management fee

The base management fee which is paid by the Company quarterly in arrears to the Manager, is calculated on the Net Asset Value ('NAV') on a per share basis as follows:

 

Tier 1 - 1 per cent. for such of the NAV as exceeds £0 but is less than or equal to £800 million;

 

Tier 2 - 0.85 per cent. for such of the NAV as exceeds £800 million but is less than or equal to £1.6 billion;

 

Tier 3 - 0.80 per cent. for such of the NAV as exceeds £1.6 billion but is less than or equal to £2 billion; and

 

Tier 4 - 0.70 per cent. for such of the NAV as exceeds £2 billion.

 

Prior to 1 May 2019, and the fee basis for the financial year ended 30 April 2019, the management fee was payable quarterly in arrears based on the NAV per share, multiplied by the arithmetic mean of the number of shares in issue at the end of each quarter as follows:

 

Tier 1 - 1 per cent. for such of the NAV as exceeds £0 but is less than or equal to £800 million;

 

Tier 2 - 0.85 per cent. for such of the NAV as exceeds £800 million but is less than or equal to £1.7 billion; and

 

Tier 3 - 0.80 per cent. for such of the NAV as exceeds £1.7 billion.

 

Any investments in funds managed by Polar Capital are wholly excluded from the base management fee calculation. In addition to the base management fee, the Manager may be entitled to receive a performance fee as detailed below.

 

Performance fee

The performance fee participation rate is 10 per cent. of outperformance above the Benchmark, subject to a cap on the amount which may be paid out in any one year of 1 per cent. of NAV. Any amount over the 1 per cent. payment is written off.

 

Calculation

A notional performance fee entitlement ('NPFE') is calculated and accrued daily (if positive) having made up all past underperformance; however, it is only at the financial year end that the payment of the performance fee is tested.

 

The calculation period starts at the end of the financial year in which the last performance fee was paid and is open until the end of the financial year that the next performance fee is paid.

 

The 1 per cent cap is applied as part of the NAV calculation so the performance fee accrual will never exceed 1 per cent of the NAV.

 

All underperformance must be made good.

 

Payment conditions

On the final day of each financial year the NPFE will be tested.

 

If the NPFE is positive, then a performance fee may be paid to the Manager if the following conditions have been achieved:

 

·      There has been outperformance of the Benchmark in the financial year;

 

·      The NAV per share at the financial year end is equal to or higher than the NAV per share when the last performance fee was paid; and

 

·      The NAV per share at the financial year end is equal to or higher than the NAV per share at the beginning of the financial year.

 

If the NPFE is negative, then no performance fee is paid, and the calculation period remains open.

 

Prior to 1 May 2019, and the performance fee basis for the financial year ended 30 April 2019, the criteria was as follows:

 

·      Annual performance fee equal to 15% of the amount by which the increase in the adjusted NAV per share exceeds the total return on the Dow Jones World Technology Index (total return, Sterling adjusted with relevant withholding taxes removed) multiplied by the time weighted average of the number of shares in issue during that period, subject to a high water mark.

 

·      The NAV per share ('Adjusted NAV per share') was adjusted for the purposes of the performance fee calculation by adding back any accruals for unpaid performance fees, any dividends paid or payable by reference to the performance period and the removal of any benefit of share issuance or buy backs.

 

·      High water mark - the performance fee was only payable if, and to the extent that, the Adjusted NAV per share exceeded the highest of:

 

-       the Adjusted NAV per share on the last day of the previous performance period;

 

-       the Adjusted NAV per share on the last day of a performance period in respect of which a performance fee was last paid;

 

·      Any performance fee accrual was included in the NAV calculated in accordance with the AIC guidelines.

 

·      The performance fee which could be paid by the Company in any one performance period was capped at 2% of net assets.

 

Other

In addition to the above, with effect from 1 May 2019 the Manager will also be responsible for the first £100,000 of marketing costs and all research costs.

 

CONTINUED APPOINTMENT OF INVESTMENT MANAGER

The Board, through the Management Engagement Committee, has reviewed the performance of the Investment Manager in managing the portfolio over the longer-term. The review also considered the quality of the other services provided by the Investment Manager, including the strength of the investment team, the depth of the other services provided by the Investment Manager and the resources available to provide such services.

 

We have discussed with the Investment Manager the provision of increased resources and are pleased to see the recruitment of additional people to support the Company, which includes the organisation on the Company's behalf of third-party suppliers, and the quality of the Shareholder communications.

 

The Board, on the recommendation of the Management Engagement Committee, has concluded that on the basis of longer-term performance it is in the best interests of Shareholders as a whole that the appointment of Polar Capital LLP as Investment Manager is continued on the terms agreed on 12 April 2019, effective 1 May 2019.

 

LONGER-TERM VIABILITY

In accordance with the AIC Code of Corporate Governance, the Company is required to make a forward-looking longer-term viability statement. The Board has considered and addressed the ability of the Company to continue to operate over a period significantly beyond the twelve-month period required for the going concern statement. The Board has considered the industry and market in which the Company operates and the continued appetite for technology investment. The Board continues to use five years as a reasonable term over which the viability of the Company should be viewed; shareholders have the opportunity to vote on the continuation of the Company every five years, therefore the outlook for the next five-year period incorporates the continuation vote which will be put to shareholders at the AGM in 2020. The process and matters considered in establishing the longer-term viability are detailed within the Audit Committee Report below.

 

In establishing the positive outlook for the Company over the next five years to 30 April 2024, the Board has taken into account:

 

The ability of the Company to meet its

liabilities as they fall due

The financial position of the Company and its cash flows and liquidity position are described in the Strategic Report and the Financial Statements. Note 27 to the Financial Statements below includes the Company's policies and process for managing its capital; its financial risk management objectives; details of financial instruments and hedging activities. Exposure to credit risk and liquidity risk are also disclosed.

 

The portfolio comprises investments traded on major international stock exchanges, there is a spread of investments by size of company.

 

The assessment took account of the Company's current financial position, its cash flows and its liquidity position, the principal risks as set out above and the Committee's assessment of any material uncertainties and events that might cast significant doubt upon the Company's ability to continue as a going concern. The assessment was then subject to a sensitivity analysis over a five-year period, which stress tested a number of the key assumptions underlying the forecasts both individually and in aggregate for normal, favourable and stressed conditions and considered whether financing facilities will be renewed.

 

92.5% of the current portfolio could be liquidated within seven trading days and there is no expectation that the nature of the investments held within the portfolio will be materially different in future.

 

The expenses of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position.

 

Repayment of the bank facilities, drawn down at the year end, and due in October 2020, would equate to approximately 28% of the cash or cash equivalents available to the Company at 30 April 2019, without having to liquidate the portfolio of investments.

 

The Company has no employees and consequently does not have redundancy or other employment related liabilities or responsibilities.

 

The Company will propose a resolution on the continuation of the Company at the AGM in September 2020

 

Under the AIC SORP, where Shareholders have the opportunity to vote in favour or against a company continuing in existence, it will normally be the case that Shareholders will have to vote in favour of a liquidation before it can occur. It is reasonable to believe that if good performance is achieved over the period until the next continuation vote in 2020 Shareholders will vote in favour of continuation.

 

Factors impacting the forthcoming

years

The Strategic Report section, comprising the Chair's Statement, the Investment Manager's Report and the Strategic Report provide a comprehensive review of factors which may impact the Company in forthcoming years. In making its assessment, the Board considered these factors alongside the Principal Risks and Uncertainties, and their corresponding mitigation and controls, as set out on above.

 

Regulatory

changes

Despite the increased level of regulation and the unpredictability of future requirements it is considered that regulation will not increase to a level that makes the running of the Company uneconomical in comparison to other competitive products.

 

That the business model of being a closed ended investment fund will continue to be wanted by investors and the investment objective will continue to be desired and achievable.

 

Further, the Board recognise that there has been considerable growth in the technology sector and immense change in what is deemed to be a technology company which broadens the universe for potential investment. Technology remains a specialist sector for which there continues to be a need for independent specialist sector investment expertise.

 

The Board therefore believe it appropriate to confirm their assessment for the longer-term viability of the Company for the next five years to 30 April 2024.

 

GOING CONCERN

The Board has also considered the ability of the Company to adopt the Going Concern basis for the preparation of the Financial Statements.

 

Consideration included the Company's current financial position, its cash flows, its liquidity position and its assessment of any material uncertainties and events that might cast significant doubt upon the Company's ability to continue as a going concern. In conjunction with the financial considerations taken into account when reviewing the longer-term viability, the Board considered the Company's year's performance (net assets +24.7%), outperforming the benchmark (+21.4%) by 3.3%; the liquidity of the portfolio (92.5% liquid over 7 days) and the opportunity for investment and reinvestment of funds. The Board believe that the Company is able to continue in operation and meet its liabilities as they fall due over the next twelve-month period from the date of this Report and it is appropriate to present the Company and the Financial Statements as a Going Concern.

 

CORPORATE RESPONSIBILITY

Socially responsible investing and exercise of voting powers

 

The Board has instructed the Investment Manager to take into account the published corporate governance policies of the companies in which it invests.

 

The Board has also considered the Investment Manager's Stewardship Code and Proxy Voting Policy. The Voting Policy is for the Investment Manager to vote at all general meetings of companies in favour of resolutions proposed by the management where it believes that the proposals are in the interests of Shareholders. However, in exceptional cases, where it believes that a resolution could be detrimental to the interests of Shareholders or the financial performance of the Company, appropriate notification will be given and abstentions or a vote against will be lodged. The Investment Manager has voted at 104 meetings during the year under review. In total 1,006 resolutions were voted on of which 45 were against the recommendation of the management.

 

The Investment Manager reports to the Board, when requested, on the application of the Stewardship Code and Voting Policy. The Investment Manager's Stewardship Code and Voting Policy can be found on the Investment Manager's website in the Corporate Governance section (www.polarcapital.co.uk).

 

Environment and Greenhouse Gas Emissions

The Company's core activities are undertaken by its Investment Manager which seeks to limit the use of non renewable resources and reduce waste where possible. The Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013 require companies listed on the Main Market of the London Stock Exchange to report on the greenhouse gas ('GHG') emissions for which they are responsible. The Company is an investment trust, with neither employees nor premises, nor has it any financial or operational control of the assets which it owns. Consequently, it has no GHG emissions to report from its operations nor does it have responsibility for any other emissions.

 

Diversity and Human Rights

The Company has no employees and the Board is comprised of two female and four male Non-executive Directors.

 

When new appointments are made to the Board, the Board will continue to have regard to the benefits of diversity, including gender, when seeking to make any such appointments. The Board's Diversity Policy is discussed further in the Report on Corporate Governance in the Annual Report.

 

The Company has not adopted a policy on human rights as it has no employees or operational control of its assets.

 

Modern Slavery Act

As an investment company, the Company does not provide goods or services in the normal course of business and does not have any customers.

 

Accordingly, it is considered that the Company is not required to make any slavery or human trafficking statements under the Modern Slavery Act 2015.

 

Anti-bribery, Corruption and Tax Evasion

The Board has adopted a zero-tolerance policy (which is available on the Company's website) to bribery, corruption and the facilitation of tax evasion in its business activities. The Board uses the principles of the policies formulated and implemented by the Investment Manager and expects the same standard of zero-tolerance to be adopted by third-party service providers.

 

The Company has implemented a Conflicts of Interest policy to which the Directors must adhere; in the event of divergence between the Investment Manager's policy and the Company's policy the Company's policy shall prevail. The Company is committed to acting with integrity and in the interests of Shareholders and will seek to ensure that the law is enforced should such a need arise.

 

Directors' Duties

The statutory duties of the Directors are listed in s171-177 of the Companies Act 2006. Under s172, Directors have a duty to promote the success of the Company for the benefit of its members (our Shareholders) as a whole and in doing so have regard to the consequences of any decision in the long term, as well as having regard to the Company's stakeholders amongst other considerations.

 

The fulfilment of this duty not only helps the Company achieve its Investment Objective but ensures decisions are made in a responsible and sustainable way for Shareholders. The Directors have considered this duty when making the strategic decisions during the year that affect Shareholders, including the renewal of the gearing facilities, the recommendation that Shareholders vote in favour of the resolutions to renew the allotment and buy back authorities at the AGM, the continued appointment of the Investment Manager and in particular, the revised fee arrangements explained in the Chair's Statement and in this Strategic Report.

 

The Directors have also engaged with and taken account of Shareholders' interests during the year. A number of meetings have been held over the last year, and in particular, one event in December 2018 attracted representatives of over 40% of the shareholder base, this event will be repeated later in 2019. In addition, the Chair wrote to the Company's largest shareholders following the publication of last year's Annual Report and Financial Statements offering the opportunity to have a meeting; one shareholder replied. She also offered to meet with the Company's largest shareholders when the revised fee arrangements were being considered and a number of shareholders participated in those useful discussions. Shareholders are encouraged to attend the Company's AGM or contact the Directors via the Company Secretary.

 

Approved by the Board on 12 July 2019

By order of the Board

 

Tracey Lago, FCIS

Polar Capital Secretarial Services Limited

Company Secretary

 

 

AUDIT COMMITTEE REPORT

 

INTRODUCTION FROM THE CHAIR

I am pleased to present, as Chair of the Audit Committee, what is my fourth annual report to shareholders.

 

Committee Composition

The Committee comprises all of the independent Non-executive Directors; with the exception of the Chair of the Board who attends Committee meetings by invitation.

 

The Audit Committee, as a whole, has competence relevant to the sector in which the Company operates. Committee members have a range of financial, investment and other relevant sector experience including fund management in both equity and venture capital funds. The requirement for at least one member of the Committee to have recent and relevant financial experience is satisfied by both Stephen White and myself being Chartered Accountants and we both currently chair Audit Committees for other public companies.

 

More information about the Committee members can be found in the Annual Report.

 

The Committee met three times during the financial year with all members attending each meeting.

 

Committee Role and Responsibilities

The Committee has written terms of reference, which are available to view on the Company's website, www.polarcapitaltechnologytrust.co.uk. The terms of reference clearly define the Committee's responsibilities and duties. In addition to the terms of reference, the Committee has developed an annual agenda to ensure all key responsibilities are completed and managed.

 

SIGNIFICANT ISSUES CONSIDERED BY THE AUDIT COMMITTEE DURING THE YEAR

 

Significant Reporting Matters

 

Annual Report and Financial Statements (the 'Annual Report')

The Board has asked the Committee to confirm that in its opinion the Annual Report as a whole can be taken as fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's financial position, performance, business model and strategy. In doing so the Committee has given consideration to:

 

·      the comprehensive control framework around the production of the Annual Report, including the verification processes in place to deal with the factual content;

 

·      extensive levels of review are undertaken in the production process, by the Investment Manager and the Committee; and

 

·      the internal control environment as operated by the Investment Manager and other suppliers including any checks and balances within those systems.

 

As a result of the work performed, the Committee has concluded that the Annual Report for the year ended 30 April 2019, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy, and it has reported on these findings to the Board.

 

Valuation of Investments

During the year the Committee reviewed the robustness of the Investment Manager's processes in place for recording investment transactions as well as ensuring the valuation of assets is carried out in accordance with the adopted accounting policies and as laid out in note 2(f).

 

Existence and Ownership of Investments

During the year the Committee received reassuring quarterly reports from the Depositary on its work and safe keeping of the Company's investments, in accordance with the AIFM Regulations.

 

Other Reporting Matters

 

Accounting Policies

During the year the Committee ensured that the accounting policies as set out below were applied consistently throughout the year. In light of there being no unusual transactions during the year or other possible reasons, there were no changes to currently adopted policies.

 

Going Concern

The Audit Committee, at the request of the Board, considered the ability of the Company to adopt the Going Concern basis for the preparation of the Financial Statements. Having reviewed the Company's financial position, the Committee is satisfied that it is appropriate for the Board to prepare the financial statements for the year ended 30 April 2019 on a going concern basis. See the Strategic Report above for further details.

 

Viability Statement

The Committee considered the Company's longer-term viability, with reference to the FRC's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, and concluded that the Board may state its reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.

 

The assessment took account of the Company's current financial position, its cash flows and its liquidity position, the principal risks as set out above and the Committee's assessment of any material uncertainties and events that might cast significant doubt upon the Company's ability to continue as a going concern. The assessment was then subject to a sensitivity analysis projected over a five-year period, which tested a number of the key assumptions including income and expenditure underlying the forecasts both individually and in aggregate for normal, favourable and stressed conditions and considered whether financing facilities will be renewed. In addition to the assessment and in conjunction with the review of the principle risks that the Company faces, the Company carried out stress testing, applying where possible,  values to a variety of our key risks materialising, and evaluated the effect of this on the Company's viability over a five year period. The results of the testing demonstrated the impact on the NAV and the Company's ability to be able to meet its liabilities over the same five year period. The Committee recommended to the Board that the Company's longer-term prospects to continue its operations and meet its expenses and liabilities as they fall due over the next five years to 30 April 2024 are reasonable. See above for further details.

 

Taxation and Expenses

The Board ensured that the Company was compliant with section 1158 of the Corporation Tax Act 2010 throughout the year, by seeking and receiving confirmation that the Company continues to meet the eligibility conditions.

 

In the year under review, Grant Thornton LLP provided services to the Company as tax agents in Taiwan and Arrk Solutions for the iXBRL tagging of the Company's accounts for submission to HM Revenue and Customs.

 

The Committee also considered the allocation of expenses between capital and income and agreed to continue with the Company's stated accounting policy of allocating the indirect costs to revenue and performance fees to capital, in-line with market practice and permitted by the AIC SORP (Statement of Recommended Practice).

 

Internal Audit

The Committee considered the need for an internal audit function however, as an investment trust, it is not deemed necessary as the accounting, administration and other operational services are all outsourced and provided to the Company by third-party providers.

 

Interim Report and Financial Statements

The Committee considered and reviewed the Interim Report and Financial Statements, which are not audited or reviewed by the external Auditors, to ensure that they reflected the accounting policies used in the annual Financial Statements.

 

Conduct Committee of the Financial Reporting Council ('FRC')

In January 2019, the Company received a letter from the Conduct Committee of the FRC advising that the 2018 Annual Report of the Company had been selected to be reviewed in accordance with their Part 2 - Committee Operating Procedures. It is stated that the review is limited to compliance with reporting requirements and is not a verification of the information provided. I am pleased to report that the FRC review confirmed that, with the exception of one recommended presentational amendment to the Statement of Changes in Equity, which has been reflected in the 2019 Financial Statements, no questions or queries were raised on the Annual Report.

 

Internal Controls and Risk Management

The Board has ultimate responsibility for the management of risk throughout the Company and has asked the Audit Committee to assist in maintaining an effective internal control environment.

 

The Audit Committee on behalf of the Board has a risk management process which is used throughout the year to monitor the Company's risks and controls.

 

As part of the year end process the Audit Committee undertook a review of the effectiveness of the system of internal controls taking into account any issues that had arisen during the course of the year.

 

The Committee acknowledges that the Company is reliant on the systems utilised by external suppliers. Hence representatives of the Investment Manager reported to the Committee on the internal controls operated by the Investment Manager and the Committee also received internal control reports from other key suppliers on the quality and effectiveness of the services provided to the Company. Further to these reports, the Committee has been conducting a 'deep dive' review of the Company's external suppliers. During the year, this review has involved members of the Committee conducting site visits to Polar Capital and HSBC where they received thorough presentations from their representatives covering the work of the Operations, Risk Administration and Accounting Teams, in addition to the Custodian and Depositary. Employees of the Manager also conducted a site visit of the Company's Registrar, Equiniti, and reported to the Committee on their findings. No matters of concern were raised at any of the meetings with any areas of service; it was agreed that the deep dive review meetings would continue to be undertaken periodically.

 

The Audit Committee uses a Risk Map which seeks to identify, monitor and mitigate principal risks as far as possible. Over the year the Audit Committee has undertaken a review of the entire Risk Map to identify the principal risks facing the business and reviewed each risk as to its likelihood and impact. The Committee also robustly considered the mitigating factors and controls to reduce the impact of such risks as described above. As well as the annual review the Audit Committee has maintained an active process throughout the year to monitor these risks and controls in order to provide assurance that they operate as intended and that the Risk Map reflects developing and new risks. In addition, the Audit Committee has met to discuss and assess emerging risks and where appropriate recommends changes to the Risk Map.

 

There were no issues of concern arising from the reviews of or within the internal controls environment the Company relied upon during the course of the year ended 30 April 2019 and up to the date of this report which were considered significant.

 

The Audit Committee will actively continue to monitor the system of internal controls through the regular review of the Risk Map and the internal control environment.

 

The Audit Committee has reviewed the Investment Manager's policies on whistleblowing, anti-bribery and the Modern Slavery Act and is satisfied that the Investment Manager has controls and monitoring processes to implement their policies across the main contractors which supply goods and services to the Investment Manager and the Company. The Company has adopted an Anti-Corruption policy which incorporates Anti-Bribery, Anti-Slavery and the Corporate Criminal Offence of Tax Evasion. In addition to this the Company has issued a data privacy notice in relation to the General Data Protection Regulation.

 

All such policies can be found on the Company's website www.polarcapitaltechnologytrust.co.uk.

 

The Audit Committee has also considered the Investment Manager's policy and controls surrounding the use of brokerage commissions generated from transactions in the Company's portfolio.

                                                                                                                         

External Auditor

 

Appointment and Tenure

Following the formal competitive tender process in 2016, the Committee agreed to appoint KPMG LLP ('KPMG') which was subsequently confirmed by Resolution of the Shareholders at the AGM held in both 2017 and 2018. At the time of appointment, a two-year fixed audit fee was agreed. Mr John Waterson is the Audit Partner allocated to the Company by KPMG. Mr Waterson has met with the Board several times prior to and during the audit process.

 

It is anticipated that Mr Waterson will serve as Audit Partner until completion of the audit process in 2022 and EU legislation requires the Company to tender the external audit no later than for the for the year ending 30 April 2028. The Company has complied throughout the year ended 30 April 2019 with the provisions of the Statutory Audit Services Order 2014, issued by the Competition and Markets Authority ('CMA Order'). The re-appointment of KPMG as Auditors to the Company will be submitted for Shareholder approval at the AGM to be held on 4 September 2019, together with a separate Resolution to authorise the Directors to set the remuneration of the Auditors.

 

There are no contractual obligations restricting the choice of external auditor.

 

The Audit

The scope of the annual audit was agreed in advance with the Committee with a focus on areas of audit risk and the appropriate level of audit materiality. The Auditors reported to the Audit Committee on the results of the audit work and highlighted any issue which the audit work had discovered, or the Committee had previously identified as significant or material in the context of the Financial Statements.

 

There were no adverse matters brought to the Audit Committee's attention in respect of the 2019 audit, which were material or significant or which should be brought to Shareholders' attention.

 

Effectiveness

The Audit Committee monitored and evaluated the effectiveness of the Auditors under the terms of their appointment based on an assessment of their performance, qualification, knowledge, expertise and resources.

 

The Auditors' effectiveness was also considered along with other factors such as audit planning and interpretations of accounting standards. This evaluation has been carried out throughout the year by meetings held with the Auditors, by review of the audit process and by comments from the Investment Manager and others involved in the audit process.

 

The Auditors were provided with an opportunity to address the Committee without the Investment Manager present to raise any concerns or discuss any matters relating to the audit work and the cooperation of the Investment Manager and others in providing any information and the quality of that information including the timeliness in responding to audit requests. No concerns were raised by the Auditors or the Audit Committee in relation to the service provided by the Investment Manager or any other third-party service provider.

 

Independence

In order to fulfil the Committee's responsibility regarding the independence of the Auditor, the Committee reviewed the senior staffing for the audit, the Auditor's arrangements concerning any conflicts of interest, the extent of any non-audit services, the Auditor's independence statement and any other issues that may affect the Auditor's independence. Subsequent to the review the Audit Committee concluded that the Auditor remained independent and continued to act in an independent manner.

 

Fees

As part of the year end audit, the Committee considered and re-confirmed the level of fees pre-agreed and payable to the Auditors bearing in mind the nature of the audit and the quality of services received. The annual audit fee for the year was £24,500 (2018: £24,500).

 

Non-Audit Services

The Audit Committee's policy on the provision of non-audit services by the Auditors is available on the Company's website. The policy is produced in line with the FRC Ethical Standards and any non-audit services are required to be pre-approved by the Audit Committee.

 

KPMG LLP were appointed to undertake their first annual audit for the year ended 30 April 2018 and have not provided any non-audit services to the Company in the year under review, or in the previous year.

 

EFFECTIVENESS OF THE COMMITTEE

As a member of the FTSE350, the AIC Code recommends that the Directors engage in an externally facilitated Board evaluation at least every three years. This external evaluation took place this year and was completed by Lintstock, an independent third-party specialising in board evaluation. The external evaluation included a review of the work undertaken by the Audit Committee. I am delighted to confirm that the findings of the external evaluation were positive in all aspects and the Audit Committee was highly rated with particular note being made of the annual cycle of work, meeting time and input value along with the Committee members ability to review the financial statements and the assistance and support given to the Board in relation to the Company's risk framework.

 

Charlotta Ginman, FCA

Chair of the Audit Committee

12 July 2019

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union ('EU').

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these Financial Statements, the Directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

 

·      make judgements and estimates that are reasonable and prudent;

 

·      state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements;

 

·      assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

 

·      use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.

 

Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

We confirm that to the best of our knowledge:

 

·      the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

 

·      the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of its principal risks and uncertainties.

 

We consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

 

Sarah Bates

Chair

12 July 2019

 

 

Status of announcement 

 

The figures and financial information contained in this announcement are extracted from the Audited Annual Report for the year ended 30 April 2019 and do not constitute statutory accounts for the year. The Annual Report and Financial Statements include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or Section 498(3) of the Companies Act 2006. 

 

The Annual Report and Financial Statements for the year ended 30 April 2019 have not yet been delivered to the Registrar of Companies. The figures and financial information for the year ended 30 April 2018 are extracted from the published Annual Report and Financial Statements for the year ended 30 April 2018 and do not constitute the statutory accounts for that year.  The Annual Report and Financial Statements for the year ended 30 April 2018 have 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.

 

 

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 April 2019

 


Notes

Year ended 30 April 2019

Year ended 30 April 2018

Revenue return

£'000

Capital return

£'000

Total return

£'000

Revenue return

£'000

Capital return

£'000

Total return

£'000

Investment income

3

11,965

-

11,965

10,021

842

10,863

Other operating income

4

1,105

-

1,105

211

-

211

Gains on investments held at fair value

5

-

393,226

393,226

-

308,076

308,076

Gains/(losses) on derivatives

6

-

1,470

1,470

-

(4,657)

(4,657)

Other currency gains/(losses)

7

-

1,913

1,913

-

(2,369)

(2,369)

Total income

13,070

396,609

409,679

10,232

301,892

312,124

Expenses



Investment management fee

8

(15,341)

-

(15,341)

(13,202)

-

(13,202)

Performance fee

8

-

(6,644)

(6,644)

-

(11,169)

(11,169)

Other administrative expenses

9

(1,140)

-

(1,140)

(1,119)

-

(1,119)

Total expenses

(16,481)

(6,644)

(23,125)

(14,321)

(11,169)

(25,490)

(Loss)/profit before finance costs and tax

(3,411)

389,965

386,554

(4,089)

290,723

286,634

Finance costs

10

(1,090)

-

(1,090)

(627)

-

(627)

(Loss)/profit before tax

(4,501)

389,965

385,464

(4,716)

290,723

286,007

Tax

11

(1,827)

-

(1,827)

(1,438)

-

(1,438)

Net (loss)/profit for the year and total comprehensive (expense)/income

(6,328)

389,965

383,637

 

(6,154)

 

290,723

 

284,569

(Losses)/earnings per share (basic  and diluted) (pence)

12

(4.73)

291.41

286.68

(4.62)

218.24

213.62

The total column of this statement represents the Company'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.

 

The Company does not have any other comprehensive income.

 

The notes below form part of these Financial Statements.

 

 

STATEMENT OF CHANGES IN EQUITY

for the year ended 30 April 2019

 



Share capital

Capital redemption reserve

Share premium

Special non- distributable reserve

Capital reserves

Revenue reserve

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Total equity at 1 May 2017


33,122

12,802

143,287

7,536

1,137,507

(81,729)

1,252,525

Total comprehensive income/(expense):









Profit/(loss) for the year to 30 April 2018


-

-

-

-

290,723

(6,154)

284,569

Transactions with owners, recorded directly to equity:









Issue of ordinary shares

18,20

327

-

14,190

-

-

-

14,517










Total equity at 30 April 2018


33,449

12,802

157,477

7,536

1,428,230

(87,883)

1,551,611

Total comprehensive income/(expense):









Profit/(loss) for the year to 30 April 2019


-

-

-

-

389,965

(6,328)

383,637

Transactions with owners, recorded directly to equity









Issue of ordinary shares

18,20

7

-

391

-

-

-

398

Total equity at 30 April 2019


33,456

12,802

157,868

7,536

1,818,195

(94,211)

1,935,646

The notes below form part of these Financial Statements.

 

 

BALANCE SHEET

as at 30 April 2019

 

 

 

Notes

30 April 2019

£'000

30 April 2018

£'000

Non-current assets



Investments held at fair value through profit or loss

13

1,803,242

1,491,331

Current  assets



Receivables

14

36,494

9,641

Overseas tax recoverable

69

19

Cash and cash equivalents

15

194,544

101,156

Derivative financial instruments

13

150

2,369


231,257

113,185

Total assets

2,034,499

1,604,516

Current liabilities



Payables

16

(44,775)

(17,628)

Bank loans

17

-

(35,277)

Bank overdraft

15

(391)

-



(45,166)

(52,905)

Non-current liabilities




Bank loans

17

(53,687)

-

Net assets

1,935,646

1,551,611

Equity attributable to equity shareholders



Share capital

18

33,456

33,449

Capital redemption reserve

19

12,802

12,802

Share premium

20

157,868

157,477

Special non-distributable reserve

21

7,536

7,536

Capital reserves

22

1,818,195

1,428,230

Revenue reserve

23

(94,211)

(87,883)

Total equity

1,935,646

1,551,611

Net asset value per ordinary share (pence)

25

1446.40

1159.69

 

The Financial Statements were approved and authorised for issue by the Board of Directors on 12 July 2019 and signed on its behalf by:

 

 

Sarah Bates

Chair

 

The notes below form part of these Financial Statements.

 

Registered number 3224867

 

 

CASH FLOW STATEMENT

for the year ended 30 April 2019

 

 

 

 

Notes

2019

£'000

2018

£'000

Cash flows from operating activities




Profit before tax


385,464

286,007

Adjustments:




Gains on investments held at fair value through profit or loss

5

(393,226)

(308,076)

(Gains)/losses on derivative financial instruments

6

(1,470)

4,657

Proceeds of disposal on investments


1,228,104

893,130

Purchases of investments


(1,145,393)

(851,177)

Proceeds on disposal of derivative financial instruments

13

23,134

4,762

Purchases of derivative financial instruments

13

(19,445)

(11,072)

Increase in receivables


(329)

(477)

(Decrease)/increase in payables


(773)

8,586

Overseas tax


(1,877)

(1,387)

Foreign exchange (gains)/losses

7

(1,913)

2,369

Net cash generated from operating activities


72,276

27,322





Cash flows from financing activities




Loans repaid

17

(36,471)

-

Loans drawn

17

52,847

-

Issue of ordinary shares


398

14,517





Net cash generated from financing activities


16,774

14,517





Net increase in cash and cash equivalents


89,050

41,839





Cash and cash equivalents at the beginning of the year


101,156

63,602

Effect of movement in foreign exchange rates on cash held

7

3,947

(4,285)





Cash and cash equivalents at the end of the year

15

194,153

101,156

 

The notes below form part of these Financial Statements.

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 April 2019

 

1.            GENERAL INFORMATION

Polar Capital Technology Trust plc is a public limited company registered in England and Wales whose shares are traded on the London Stock Exchange.

 

The principal activity of the Company is that of an investment trust company within the meaning of Section 1158/1159 of the Corporation Tax Act 2010 and its investment approach is detailed in the Strategic Report.

 

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 IFRIC guidance.

 

The Company's presentational currency is Pounds Sterling. All figures are rounded to the nearest thousand pounds (£'000) except as otherwise stated.

 

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 November 2014 and updated in February 2018 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. There has been no impact on the basis of accounting as a result of this update.

 

The financial position of the Company as at 30 April 2019 is shown in the balance sheet above. As at 30 April 2019 the Company's total assets exceeded its total liabilities by a multiple of over 20. The assets of the Company consist mainly of securities that are held in accordance with the Company's investment policy, as set out above and these securities are readily realisable. The Directors consider that the Company has adequate financial resources to enable it to continue in operational existence. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Company's accounts.

 

(b) Presentation of Statement of Comprehensive Income

In order to reflect better the activities of an investment trust company and in accordance with the guidance set out by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. The results presented in the revenue return column is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 1158 of the Corporation Tax Act 2010.

 

(c) Income

Dividends receivable from equity shares are taken to the revenue return column of the Statement of Comprehensive Income on an ex-dividend basis.

 

Special dividends are recognised on an ex-dividend basis and may be considered to be either revenue or capital items.

 

The facts and circumstances are considered on a case by case basis before a conclusion on appropriate allocation is reached.

 

Where the Company has received dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised in the revenue return column of the Statement of Comprehensive Income. Any excess in value of shares received over the amount of the cash dividend foregone is recognised in the capital return column of the Statement of Comprehensive Income.

 

Unfranked income includes the taxes deducted at source.

 

Bank interest and other income receivable are accounted for on an accruals basis and are recognised in the period in which it was earned.

 

Interest outstanding at the year end is calculated on a time apportioned basis using the market rates of interest.

 

(d) Expenses and Finance Costs

All expenses, including finance costs, are accounted for on an accruals basis.

 

All indirect expenses have been presented as revenue items per the non-allocation method except as follows:

 

- any performance fees payable are allocated wholly to capital, reflecting the fact that, although they are calculated on a total return basis, they are expected to be attributable largely, if not wholly, to capital performance.

 

- transaction costs incurred on the acquisition or disposal of investments are expensed either as part of the unrealised gain/loss on investments (for acquisition costs) or as a deduction from the proceeds of sale (for disposal costs).

 

Finance costs are calculated using the effective interest rate method and are accounted for on an accruals basis.

 

(e) Taxation

The tax expense represents the sum of the overseas withholding tax deducted from investment income, tax currently payable and deferred tax.

 

The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

 

In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Statement of Comprehensive Income is the 'marginal basis'. Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Statement of Comprehensive Income, then no tax relief is transferred to the capital return column.

 

Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

 

Investment trusts which have approval as such under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.

 

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the balance sheet date.

 

Deferred tax is charged or credited in the Statement of Comprehensive Income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

(f) Investments Held at Fair Value Through Profit or loss

When a purchase or sale is made under contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date and are initially measured at fair value.

 

On initial recognition the Company has designated all of its investments as held at fair value through profit or loss as defined by IFRS.

 

All investments are measured at subsequent reporting dates at fair value, which is either the bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted. Investments in unit trusts or OEICs are valued at the closing price, the bid price or the single price as appropriate, as released by the relevant investment manager.

 

Fair values for unquoted investments, or for investments for which there is only an inactive market, are established by using various valuation techniques. These may include recent arms length market transactions, the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that technique is utilised. Where no reliable fair value can be estimated for such instruments, they are carried at cost, subject to any provision for impairment.

 

Changes in fair value of all investments held at fair value and realised gains and losses on disposal are recognised in the capital return column of the Statement of Comprehensive Income.

 

(g) Receivables

Receivables are initially recognised at fair value and subsequently measured at amortised cost. Receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value (amortised cost) as reduced by appropriate allowances for estimated irrecoverable amounts.

 

(h) Cash and Cash Equivalents

Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash.

 

In the Balance Sheet bank overdrafts are shown within current liabilities.

 

(i) Payables

Payables are initially recognised at fair value and subsequently measured at amortised cost. Payables are not interest bearing and are stated at their nominal value (amortised cost).

 

(j) Bank Loans

Interest bearing bank loans are initially recognised at cost, being the proceeds received net of direct issue costs, and subsequently at amortised cost. The amounts falling due for repayment within one year are included under current liabilities in the Balance Sheet.

 

(k) Derivative Financial Instruments

The Company's activities expose it primarily to the financial risks of changes in market prices, foreign currency exchange rates and interest rates. Derivative transactions which the Company may enter into comprise forward exchange contracts, the purpose of which is to manage the currency risks arising from the Company's investing activities, quoted options on shares held within the portfolio, or on indices appropriate to sections of the portfolio, the purpose of which is to provide additional capital return.

 

The use of financial derivatives is governed by the Company's policies as approved by the Board, which has set written principles for the use of financial derivatives.

 

A derivative instrument is considered to be used for hedging purposes when it alters the market risk profile of an existing underlying exposure of the Company. The use of financial derivatives by the Company does not qualify for hedge accounting under IFRS. As a result changes in the fair value of derivative instruments are recognised in the Statement of Comprehensive Income as they arise. If capital in nature, associated change in value is presented in the capital return column of the Statement of Comprehensive Income.

 

(l) Rates of Exchange

Transactions in foreign currencies are translated into Sterling at the rate of exchange ruling on the date of each transaction. Monetary assets, monetary liabilities and equity investments in foreign currencies at the balance sheet date are translated into Sterling at the rates of exchange ruling on that date. Realised profits or losses on exchange, together with differences arising on the translation of foreign currency assets or liabilities, are taken to the capital return column of the Statement of Comprehensive Income.

 

Foreign exchange gains and losses arising on investments held at fair value are included within changes in fair value.

 

(m) Share Capital

Represents the nominal value of authorised and allocated, called-up and fully paid shares issued.

 

(n) Capital Reserves

Capital reserves - gains/losses on disposal includes:

 

- gains/losses on disposal of investments

 

- exchange differences on currency balances and on settlement of loan balances

 

- cost of own shares bought back

 

- other capital charges and credits charged to this account in accordance with the accounting policies above

 

Capital reserve - revaluation on investments held includes:

 

- increases and decreases in the valuation of investments and loans held at the year end.

 

All of the above are accounted for in the Statement of Comprehensive Income except the cost of own shares bought back or issued which are accounted for in the Statement of Changes in Equity.

 

(o) Share Issue Costs

Costs incurred directly in relation to the issue of new shares together with additional share listing costs have been deducted from the share premium reserve.

 

(p) Segmental Reporting

Under IFRS 8, 'Operating Segments', operating segments are considered to be the components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker has been identified as the Manager (with oversight from the Board).

 

The Board is of the opinion that the Company is engaged in a single segment of business, namely by investing in a diversified portfolio of technology companies from around the world in accordance with the Company's Investment Objective, and consequently no segmental analysis is provided.

 

In line with IFRS 8, additional disclosure by geographical segment has been provided in Note 26.

 

Further analyses of expenses, investment gains or losses, profit and other assets and liabilities by country have not been given as either it is not possible to prepare such information in a meaningful way or the results are not considered to be significant.

 

(q) Key Estimates and Judgements

Estimates and assumptions used in preparing the financial statements are reviewed on an ongoing basis and are based on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of these estimates and assumptions form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.

 

The majority of the Company's investments are in US Dollars, the level of which varies from time to time. The Board considers the functional currency to be Sterling. In arriving at this conclusion the Board considered that Sterling 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 only estimates and assumptions that may cause material adjustment to the carrying value of assets and liabilities relate to the valuation of unquoted investments and investments for which there is an inactive market. These are valued in accordance with the techniques set out in note 2(f). At the year end, such investments represent less than 0.01% of net assets and consequently, the Board does not believe these to represent an area of significant judgement or estimation.

 

(r) New and Revised Accounting Standards

There were no new IFRSs or amendments to IFRSs applicable to the current year which had any significant impact on the Company's accounts.

 

The following standards became effective on 1 January 2018 and the adoption of the standards and interpretations have not had a material impact on the financial statements of the Company.

 

IFRS 9 Financial Instruments

The requirements of IFRS 9 and its application to the assets and liabilities held by the Company were considered ahead of its adoption on 1 January 2018. The classification of all assets and liabilities remains unchanged under IFRS 9 and all figures will be directly comparable to the existing basis of valuation.

 

IFRS 15 Revenue from Contracts with Customers

Given the nature of the Company's revenue streams from financial instruments, the provisions of this standard are not expected to have a material impact.

 

At the date of authorisation of these financial statements, the following new IFRSs that potentially impact the Company are in issue but are not yet effective and have not been applied in these accounts:

 

Effective for periods commencing on or after 1 January 2019:

 

IFRS 16 Leases

As the Company neither holds, trades or has any lease obligations of any type, the provisions of this standard are not expected to have a material impact on the accounts.

 

IFRS 9 (Amended) Prepayment Features with Negative Compensation

Negative compensation arises where the contractual terms permit a borrower to prepay the instrument before its contractual maturity, but the prepayment amount could be less than unpaid amounts of principal and interest. The Company has no such terms in any of its loan agreements in place and the amendment are not expected to have any impact on the accounts.

 

IFRIC 23 Uncertainty over Income Tax Treatments

The interpretation provides guidance on considering uncertain tax treatments in relation to taxable profit or loss and does not add any new disclosures. The Company complies with all relevant tax laws where applicable and the provisions of this interpretation are not expected to have a material impact on the accounts.

 

IAS 19 (amended) Employee Benefits

As the Company has no employees, the amendment to this standard are not expected to have any impact on the accounts.

 

IAS 28 (amended) Investments in Associates and Joint Ventures

As the Company has no investment in associates or joint ventures, the amendment to this standard are not expected to have any impact on the accounts.

 

Annual Improvement Cycles 2015-2017 (Amendments)

This makes narrow-scope amendments to four IFRS Standards: IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Incomes Taxes and IAS 23 Borrowing costs. These limited amendments are not expected to have any impact on the accounts.

 

Effective for periods commencing on or after 1 January 2020:

 

IFRS 3 Business combinations (amended)

 

IAS 1 and IAS 8 Definition of Material (amended)

 

References to the conceptual Framework in IFRS Standards (amended)

 

The Directors expect that the adoption of the standards listed above will have either no impact or that any impact will not be material on the Financial Statements of the Company in future periods.

 

 

3.            INVESTMENT INCOME

Year ended 30 April 2019

£'000

Year ended

30 April 2018

£'000

Revenue:



Franked: Listed investments



Dividend income

76

99

Unfranked: Listed investments



Dividend income

11,889

9,922


11,965

10,021

Capital:



Special dividends allocated to capital

-

842

 

All investment income is derived from listed investments.

 

 

4.            OTHER OPERATING INCOME

Year ended 30 April 2019

£'000

Year ended

30 April 2018

£'000

Bank interest

1,099

211

Other income

6

-


1,105

211

 

 

5.            GAINS ON INVESTMENTS HELD AT FAIR VALUE

Year ended 30 April 2019

£'000

Year ended

30 April 2018

£'000

Net gains on disposal of investments at historic cost

291,338

247,231

Transfer on disposal of investments

(197,726)

(147,916)

Gains based on carrying value at previous balance sheet date

93,612

99,315

Valuation gains on investments held during the year

299,614

208,761


393,226

308,076

 

 

6.            GAINS/(LOSSES) ON DERIVATIVES

Year ended 30 April 2019

£'000

Year ended

30 April 2018

£'000

Gains/(losses) on disposal of derivatives held

2,361

(3,524)

Losses on revaluation of derivatives held

(891)

(1,133)


1,470

(4,657) (4,657)

 

The derivative financial instruments represent the call and put options, which are used for the purpose of efficient portfolio management. As at 30 April 2019, the Company held NASDAQ 100 Stock Index put options and the market value of the open put options position was £150,000 (30 April 2018: Powershares QQQ with a market value of £1,506,000). As at 30 April 2019, the Company did not hold any open call options (30 April 2018: Advanced Micro Devices with a market value of £863,000).

 

 

7.            OTHER CURRENCY GAINS/(LOSSES)

Year ended

30 April 2019

£'000

Year ended

30 April 2018

£'000

Exchange gains/(losses) on currency balances

3,947

(4,285)

Exchange losses on settlement of loan balances

(5,850)

-

Exchange gains on translation of loan balances

3,816

1,916


1,913

(2,369)

 

 

8.            INVESTMENT MANAGEMENT AND PERFORMANCE FEE


Year ended 30 April 2019

£'000

Year ended 30 April 2018

£'000

Investment management fee payable to Polar Capital (charged wholly to

revenue)

15,341

13,202

Performance fee payable to Polar Capital (charged wholly to capital)

6,644

11,169

 

The basis for calculating the investment management and performance fees are set out in the Strategic Report above and details of all amounts payable to the Manager are given in note 24 below.

 

The quarterly investment management fee is calculated on the net asset value on the last day of the prior quarter. The increase in the management fee for the year ended 30 April 2019 is due to the 25% increase in net asset value which took place over the year to 30 April 2019.

 

A new investment management agreement was agreed with the Manager and announced on 15 April 2019. The agreement includes a reduction in the base management fee above certain sizes of net asset value and a reduced percentage of outperformance payable to the Manager. In addition, the cap on any such performance fee payable was also reduced with effect from 1 May 2019. Details of the investment management agreement are disclosed in the Strategic Report above.

 

9.            OTHER ADMINISTRATIVE EXPENSES


Year ended

30 April 2019

£'000

Year ended 30 April 2018

£'000

Directors' fees1

190

155

National Insurance Contributions

14

13

Depositary fee 2

137

136

Registrar fee

47

44

Custody2 and other bank charges

159

209

UKLA and LSE listing fees

83

60

Legal & professional fees and other financial services 3

35

9

AIC fees

21

21

Auditors' remuneration - for audit of the financial statements

25

25

Directors' and officers' liability insurance

9

9

AGM expenses

10

15

Corporate brokers' fee 4

56

32

PR, website and marketing expenses5

43

66

Shareholder communications

49

57

Research costs 6

238

209

Other expenses7

24

59


1,140

1,119

 

1.        Full disclosure is given in the Directors' Remuneration Report in the Annual Report.

2.        Fee determined on the pre-approved rate card with HSBC.

3.        Includes costs relating to the new fee arrangements and the arrangement of the new loan facilities.

4.        Includes costs relating to the review of the new fee arrangements.

5.        Includes a separate marketing expense of £2,000 (2018: £13,000).

6.        The total cost to the Company from 3 January 2018 to 31 December 2018 was £447,000. This represents 50% of the research costs incurred in relation to the Company by Polar Capital over the same period, with the balance being paid by Polar Capital. The new investment management agreement which came into effect on 1 May 2019 includes zero contribution by the Company to research costs from 1 January 2019. From 1 January 2019 all research costs are payable by Polar Capital. Details of the investment management agreements are disclosed in the Strategic Report above.

7.        2019 included costs in relation to a third party board evaluation (2018: included Non-executive Director search fee).

 

 

10.          FINANCE COSTS

 

Year ended 30 April 2019

£'000

Year ended 30 April 2018

£'000

Interest on loans and overdrafts

954

627

Loan arrangement and facility fees

136

-


1,090

627

 

 

11.          TAXATION

Year ended

30 April 2019                  £'000

Year ended

30 April 2018

£'000

a) Analysis of tax charge for the year:



Overseas tax

1,827

1,438

Total tax for the year (see note 11b)

1,827

1,438

b) Factors affecting tax charge for the year:



The charge for the year can be reconciled to the profit per the Statement of Comprehensive Income as follows:



Profit before tax

385,464

286,007

Tax at the UK corporation tax rate of 19%

73,238

54,341

Tax effect of non-taxable dividends

(2,273)

(2,064)

Tax effect of gains on investments that are not taxable

(75,356)

(57,200)

Unrelieved current year expenses and deficits

4,391

4,923

Overseas tax suffered

1,827

1,438

Total tax for the year (see note 11a)

1,827

1,438

c) Factors that may affect future tax charges:



There is an unrecognised deferred tax asset comprising:



Unrelieved management expenses

30,122

25,321

Non-trading deficits

877

877


30,999

26,198

 

The deferred tax asset is based on a prospective corporation tax rate of 17% (2018: 17%), which was substantively enacted in September 2016 and is effective from 1 April 2020.

 

It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses and deficits and therefore no deferred tax asset has been recognised.

 

Due to the Company's tax status as an investment trust and the intention to continue meeting the conditions required to obtain approval of such status in the foreseeable future, the Company has not provided tax on any capital gains arising on the revaluation or disposal of investments held by the Company.

 

 

12.          (LOSSES)/EARNINGS PER ORDINARY SHARE

 


Year ended 30 April 2019

Year ended 30 April 2018


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)

(6,328)

389,965

383,637

(6,154)

290,723

284,569    

Weighted average ordinary shares in issue during the year

133,821,384

133,821,384

133,821,384

133,214,816  

133,214,816  

133,214,816

From continuing operations







Basic and diluted

- ordinary shares (pence)

(4.73)

291.41

286.68

(4.62)

218.24

213.62

 

As at 30 April 2019, there are no potentially dilutive shares in issue and the earnings per share therefore equate to those shown above (2018: there was no dilution).

 

 

13.          INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

 

i) Changes in non-current equity investments


Year ended

30 April 2019

£'000

Year ended 30 April 2018

£'000

Cost at 1 May

997,079

786,661

Valuation gains

494,252

433,407

Valuation at 1 May

1,491,331

1,220,068

Additions at cost

1,173,313

844,674

Proceeds of disposal

(1,254,628)

(881,487)

Gains on disposal

93,612

99,315

Valuation gains

299,614

208,761

Valuation at 30 April

1,803,242

1,491,331

Cost at 30 April

1,207,102

997,079

Closing fair value adjustment

596,140

494,252

Valuation at 30 April

1,803,242

1,491,331

Of which:



Listed on a recognised Stock Exchange

1,803,187

1,491,240

Unquoted

55

91

 

Included in additions at cost are purchase costs of £571,000 (30 April 2018: £993,000). Included in proceeds of disposals are sales costs of £639,000 (30 April 2018: £1,156,000). These costs comprise primarily commission.

 

ii) Changes in derivative financial instruments


Year ended 30 April 2019

£'000

Year ended 30 April 2018

£'000

Valuation at 1 May

2,369

716

Additions at cost

19,445

11,072

Proceeds of disposal

(23,134)

(4,762)

Gains/(losses) on disposal

2,361

(3,524)

Valuation losses

(891)

(1,133)

Valuation at 30 April

150

2,369

 

iii) Classification under Fair Value Hierarchy:

 

The table below sets out the fair value measurements using the IFRS7 fair value hierarchy. Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset as follows:

 

Level 1 - valued using quoted prices in active markets for identical assets.

 

Level 2 - valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1.

 

Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data.

 

The valuation techniques used by the company are explained in the accounting policies note above.

 

There have been no transfers during the year between Levels 1 and 2. A reconciliation of fair value measurements in Level 3 is set out below.

 


Year ended

30 April 2019

£'000

Year ended 30 April 2018

£'000

Equity Investments and derivative financial instruments



Level 1

1,803,337

1,493,609

Level 2

-

-

Level 3

55

91


1,803,392

1,493,700

 

 

 

Level 3 investments at fair value through profit or loss

Year ended

30 April 2019

£'000

Year ended 30 April 2018

£'000

Opening balance

91

319

Distribution proceeds

(11)

(276)

Total (losses)/gains included in the Statement of Comprehensive Income

- on assets held at the year end



(25)

48

Closing balance

55

91

 

iv) Unquoted investments

 

As at 30 April 2019, the portfolio comprised one unquoted investment, which was valued at £55,000 (30 April 2018: £91,000):

 


30 April 2019

£'000

30 April 2018

£'000

Herald Ventures Limited Partnership

55

91


55

91

 

During the year Herald Ventures Limited Partnership distributed £11,000 (2018: £51,000).

 

Level 3 investments are recognised at fair value through profit & loss on a recurring basis.

 

A +/- 10% change in the price used to value the investments as at the year end would result in a +/- £6,000 (2018: +/- £9,000) impact to the capital return of the profit & loss.

 

The investment held in Herald Ventures Limited is valued semi-annually by the Polar Capital Valuation Committee on the recommendation of the Manager.

 

The most recent valuation was carried out on 30 April 2019, the valuation principle remained as used in previous years, being Herald Venture's valuation less a 25% public value discount applied to the underlying publicly traded investments of Herald Ventures. The Board believe this to be an appropriate way in which to value an unquoted investment.

 

 

14.          RECEIVABLES

30 April 2019

£'000

30 April 2018

£'000

Sales for future settlement

34,902

8,378

Prepayments and accrued income

1,574

1,248

VAT recoverable

18

15


36,494

9,641

 

The carrying values of other receivables approximate their fair value.

 

15.          CASH AND CASH EQUIVALENTS

30 April 2019

£'000

30 April 2018

£'000

Cash at bank

194,544

101,156

Bank overdraft

(391)

-

Cash at bank

194,153

101,156

 

 

16.          PAYABLES

30 April 2019

£'000

30 April 2018

£'000

Purchases for future settlement

33,962

6,042

Accruals

10,813

11,586


44,775

17,628

 

The carrying values of other payables approximate their fair value.

 

 

17.          BANK LOANS

i)             Bank loans


30 April

2019

£'000

30 April 2018

£'000

The Company has the following unsecured Japanese Yen and US Dollar loans:



JPN ¥2,800m at a rate of 0.995% repayable 2 October 2018

-

18,578

US$23m at a rate of 2.21% repayable 2 October 2018

-

16,699

JPN ¥5,200m at a rate of 0.8% repayable 2 October 2020

35,814

-

US$23.3m at a rate of 4.235% repayable 2 October 2020

17,873

-


53,687

35,277

 

The Company repaid the two, three-year loan facilities with ING Bank NV of 23.0m US Dollars and 2.8bn Japanese Yen which were drawn down in October 2015 and expired on 2 October 2018.

 

The bank loans held at the year end are a Japanese Yen 5.2 billion and a US Dollar 23.3 million two years fixed rate term loan with ING Bank N.V. The loans are unsecured but are subject to certain undertakings and restrictions, all of which have been complied with during the year. These loans are stated at amortised cost.

 

During the year, the Company entered a credit facility of US Dollar 46.6 million available with ING Bank N.V., expiring 2 October 2019. The facility is unsecured but is subject to covenants and restrictions which are customary for a facility of this nature, all of which have been complied with. The facility was undrawn at the year end.

 

The main covenants relating to the above loans and facility are:

 

(i) Total borrowings shall not exceed 30% of the Company's net asset value

(ii) The Company's minimum net asset value shall be £400 million

(iii) The Company shall not change the investment manager without prior written consent of the lenders.

 

ii)            Reconciliation of bank loans


30 April

2019

£'000

30 April 2018

£'000

Bank loans held as at 30 April 2018

35,277

37,193

Loan repaid

(36,471)

-

Loan drawn

52,847

-

Exchange losses on settlement of loan balances

5,850

-

Effect of changes in foreign exchange rates on bank loans held

(3,816)

(1,916)

Bank loans held as at 30 April 2019

53,687

35,277

 

The movement in the liability arising from the bank loans due to changes in foreign exchange rates is a non-cash movement and is included in the Statement of Comprehensive Income within 'Other currency losses'.

 

 

18.          SHARE CAPITAL


30 April

2019

£'000

30 April

2018

£'000

Allotted, Called up and Fully paid:



Ordinary shares of 25p each



Opening balance of 133,795,000 (30 April 2018: 132,487,000)

33,449

33,122

Issue of 30,000 (30 April 2018: 1,308,000) ordinary shares

7

327

Allotted, called up and fully paid: 133,825,000

(30 April 2018: 133,795,000) ordinary shares of 25p

33,456

 

33,449

At 30 April 2019

33,456

33,449

 

During the year a total of 30,000 ordinary shares (30 April 2018: 1,308,000 ordinary shares), nominal value £7,000 (30 April 2018: nominal value £327,000) were issued to the market to satisfy demand, at a price of 1330.0 pence per share, for a total net consideration received of £398,000 (30 April 2018: £14,517,000). 

 

This reserve is not distributable.

 

 

19.          CAPITAL REDEMPTION RESERVE


30 April 2019

£'000

30 April 2018

£'000

As at 1 May 2018

12,802

12,802

As at 30 April 2019

12,802

12,802

 

The capital redemption reserve represents the nominal value of shares repurchased and cancelled.

 

This reserve is not distributable.

 

 

20.          SHARE PREMIUM


30 April 2019

£'000

30 April 2018

£'000

As at 1 May 2018

157,477

143,287

Issue of 30,000 (30 April 2018: 1,308,000) ordinary shares

391

14,190

As at 30 April 2019

157,868

157,477

 

The share premium arises from excess of consideration received on issue of shares over nominal value.

 

This reserve is not distributable.

 

 

21.          SPECIAL NON-DISTRIBUTABLE RESERVE


30 April 2019

£'000

30 April 2018

£'000

As at 1 May 2018

7,536

7,536

As at 30 April 2019

7,536

7,536

 

The special non-distributable reserve arose from the exercise of warrants which were issued by the Company at launch in 1996. The final warrant conversion was exercised in 2005.

 

This reserve is not distributable.

 

 

22.          CAPITAL RESERVES


Capital*

reserve - gains/losses on disposal

30 April

2019

£'000

 

Capital** reserve - revaluation

30 April 2019

£'000

 

Total capital reserves

30 April

2019

£'000

Capital

reserve - gains/losses on disposal

30 April

2018

£'000

 

Capital

reserve - revaluation

 30 April 2018

£'000

 

Total capital reserves

30 April

2018

£'000

As at 1 May 2018

939,911

488,319

1,428,230

710,816

426,691

1,137,507

Net gains on disposal of investments

93,612

-

93,612

 

99,315

 

-

 

99,315

Transfer on disposal of investments

197,726

(197,726)

-

 

147,916

 

(147,916)

 

-

Valuation gains on investments held during the year

-

299,614

299,614

 

 

 

-

 

 

 

208,761

 

 

 

208,761

Net gains/(losses) on derivative contracts

2,361

(891)

1,470

 

(3,524)

 

(1,133)

 

(4,657)

Special dividends allocated to capital

-

-

-

 

842

 

-

 

842

Performance fee allocated to capital

(6,644)

-

(6,644)

 

(11,169)

 

-

 

(11,169)

Exchange gains/(losses) on currency balances

3,947

-

3,947

 

(4,285)

 

-

 

(4,285)

Exchange losses on settlement of loan balances

(5,850)

-

(5,850)

-

-

-

Exchange gains on translation of loan balances

-

3,816

3,816

 

-

 

1,916

 

1,916

As at 30 April 2019

1,225,063

593,132

1,818,195

939,911

488,319

1,428,230

 

*  These are realised distributable capital reserves which may be used to repurchase the Company's shares or be distributed as dividends.

** This reserve comprises holdings gains on investments (which may be deemed to be realised) and other amounts, which are unrealised. An analysis has not been made between the amounts that are realised (and maybe distributed or used to repurchase the Company's shares) and those that are unrealised.

 

 

23.          REVENUE RESERVE


30 April 2019

£'000

30 April 2018

£'000

As at 1 May 2018

(87,883)

(81,729)

Loss for the year to 30 April

(6,328)

(6,154)

As at 30 April 2019

(94,211)

(87,883)

 

The revenue reserve may be distributed or used to repurchase the Company's shares (subject to being a positive balance).

 

 

24.          TRANSACTIONS WITH THE MANAGER AND RELATED PARTY TRANSACTIONS

 

(a) Transactions with the Manager

Under the terms of an agreement dated 9 February 2001 the Company has appointed Polar Capital LLP ('Polar Capital') to provide investment management, accounting, secretarial and administrative services. Details of the fee arrangements for these services are given in the Strategic Report. The total management fees, paid under this agreement to Polar Capital in respect of the year ended 30 April 2019 were £15,341,000 (2018: £13,202,000) of which £3,876,000 (2018: £nil) was outstanding at the year-end.

 

A performance fee amounting to £6,644,000. (2018: £11,169,000) is payable in respect of the year, and the whole of this amount (2018: same) was outstanding at the year end.

 

In addition, the total research cost contribution from the Company in respect of the year ended 30 April 2019 was £238,000 (2018: £209,000) of which £nil (2018: £209,000) was outstanding at the year end.

 

A new investment management agreement was put in place with the Manager and announced on 15 April 2019 taking effect from 1 May 2019. This includes: the removal of any contribution to research costs; a reduction in the marketing costs payable by the Company with the Manager contributing the first £100,000 per annum to such; a reduction in the base management fee above certain sizes of net asset value; a reduced percentage of outperformance payable to the Manager; a reduction in the cap on any such performance fee payable. Details of the revised terms of the investment management agreement are provided in the Strategic Report above.

 

(b) Related party transactions

The compensation payable to key management personnel in respect of short term employee benefits is £190,000 (2018: £155,000) which comprises £190,000 (2018: £155,000) paid by the Company to the Directors.

 

Refer to the Directors' Remuneration Report in the Annual Report including Directors' shareholdings and movements within the year.

 

25.          NET ASSET VALUE PER ORDINARY SHARE

 


Net asset value per share

 


30 April

2019

30 April

2018

Undiluted:



Net assets attributable to ordinary shareholders (£'000)

1,935,646

1,551,611

Ordinary shares in issue at end of year

133,825,000

133,795,000

Net asset value per ordinary share (pence)

1446.40

1159.69

 

As at 30 April 2019, there were no potentially dilutive shares in issue (2018: there was no dilution).

 

 

26.          SEGMENTAL REPORTING

 

Geographical segments

Since the Company does not have external customers an analysis of the Company's investments held at 30 April 2019 by geographical segment and the related investment income earned during the year to 30 April 2019 is noted below:

 


 

30 April 2019

Value of investments

£'000

Year ended 30 April 2019

Gross income

£'000

 

30 April 2018

Value of investments

£'000

Year ended

30 April 2018

Gross income

£'000

North America

1,330,205

6,613

1,090,726

5,369

Europe

122,761

769

93,529

645

Asia Pacific (inc. Middle East)

350,276

4,583

307,076

4,007

Total

1,803,242

11,965

1,491,331

10,021

 

 

27.          DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

 

Risk management policies and procedures

The Company invests in equities and other financial instruments for the long term to further the investment objective set out above in the Strategic Report. This exposes the Company to a range of financial risks that could impact on the assets or performance of the Company.

 

The main risks arising from the Company's pursuit of its investment objective are market risk, liquidity risk, credit risk and gearing risk and the Directors' approach to the management of them is set out below. The risks have remained unchanged since the beginning of the year to which the financial statements relate.

 

The Company's exposure to financial instruments comprise:

 

-       Equity and non-equity shares which are held in the investment portfolio in accordance with the Company's investment objective.

 

-       Term loans and bank overdrafts, the main purpose of which is to raise finance for the Company's operations

 

-       Cash, liquid resources and short-term receivables and payables that arise directly from the Company's operations

 

-       Derivative transactions which the Company enters into may include equity or index options, index future contracts, forward foreign exchange contracts and interest rate swaps.

 

The purpose of these is to manage the market price risks, foreign exchange risks and interest rate risks arising from the Company's investment activities.

 

The overall management of the risks is determined by the Board and its approach to each risk identified is set out below. The Board and the Investment Manager co-ordinate the risk management and the Investment Manager assesses the exposure to market risk when making each investment decision.

 

(a)           Market Risk

Market risk comprises three types of risk: market price risk (see note 27(a)(i)), currency risk (see note 27(a)(ii)), and interest rate risk (see note 27(a)(iii)).

 

(i) Market Price Risk

The Company is an investment company and as such its performance is dependent on the valuation of its investments. Consequently, market price risk is the most significant risk that the Company faces.

 

Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Company's operations. It represents the potential loss the Company might suffer through holding market positions in the face of price movements.

 

A detailed breakdown of the investment portfolio is given above. Investments are valued in accordance with the Company's accounting policies as stated in Note 2(f).

 

At the year end, the Company's portfolio included derivative instruments of £150,000 (2018: £2,369,000).

 

Management of the risk

In order to manage this risk it is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a particular technology sector.  The allocation of assets to international markets, together with stock selection covering small, medium and large companies, and the use of index options, are other factors which act to reduce price risk. The Investment Manager actively monitors market prices throughout the year and reports to the Board which meets regularly in order to consider investment strategy.

 

Market price risk exposure

The Company's exposure to changes in market prices at 30 April on its quoted and unquoted investments was as follows:


30 April 2019

£'000

30 April 2018

£'000

Non-current asset investments at fair value through profit or loss

1,803,242

1,491,331

Derivative financial instruments at fair value through profit or loss

150

2,369


1,803,392

1,493,700

 

An analysis of the Company's portfolio is shown on above.

 

Market price risk sensitivity

The following table illustrates the sensitivity of the return after taxation for the year and the value of shareholders' funds to an increase or decrease of 15% (2018:15%) in the fair values of the Company's investments. This level of change is considered to be reasonably possible based on observation of current market conditions and historic trends. The sensitivity analysis is based on the Company's investments at each balance sheet date, with all other variables held constant.

 

 


30 April 2019

£'000

30 April 2018

£'000

Increase in fair value

Decrease in fair value

Increase in fair value

Decrease in fair value

Revenue return

(2,164)

2,164

(1,904)

1,904

Capital return

270,509

(270,509)

224,055

(224,055)

Change to the profit after tax for the year

268,345

(268,345)

222,151

(222,151)

Change to shareholders' funds

268,345

(268,345)

222,151

(222,151)

Change to NAV per share (pence)

200.52

(200.52)

166.04

(166.04)

 

(ii)           Currency Risk

The Company's total return and net assets can be significantly affected by currency translation movements as the majority of the Company's assets and revenue are denominated in currencies other than Sterling.

 

Management of the risk

The investment manager mitigates the individual currency risks through the international spread of investments and may make use of forward foreign exchange contracts. Borrowings in foreign currencies are entered into to manage the asset exposure to those currencies, which vary according to the asset allocation.

 

Foreign currency exposure

The table below shows, by currency, the split of the Company's non-sterling monetary assets, liabilities and investments that are priced in currencies other than Sterling.


30 April 2019

£'000

30 April 2018

£'000

Monetary Assets:



Cash and short term receivables



US Dollars

156,289

47,478

Japanese Yen

37,266

19,821

Euros

13,153

16,971

Hong Kong Dollars

8,255

-

Taiwan Dollars

7,400

6,742

Canadian Dollars

6,900

-

Korean Won

320

282

Indian Rupee

36

36

Swedish Kroner

-

657

Monetary  Liabilities:



Payables



US Dollars

(30,206)

(6,069)

Euros

(4,209)

-

Taiwan Dollars

(2,174)

-

Japanese Yen

(22)

(64)

Bank Loans:



US Dollars

(17,873)

(16,699)

Japanese Yen

(35,814)

(18,578)

Foreign currency exposure on net monetary items

139,321

50,577




Non-Monetary Items:



Investments at fair value through profit or loss that are equities



US Dollars

1,427,949

1,184,225

Japanese Yen

106,856

74,939

Euros

75,110

67,011

Korean Won

63,247

51,348

Hong Kong Dollars

55,788

55,974

Taiwan Dollars

55,083

39,475

Polish Zloty

6,768

-

Swedish Kroner

1,858

1,304

Canadian Dollars

-

4,395

Investments at fair value through profit or loss that are derivatives



US Dollars

150

2,369

Total net foreign currency exposure

1,932,130

1,531,617

 

Foreign currency exchange rate movement

During the financial year Sterling depreciated by 5.3% (2018: appreciated by 6.5%) against the US Dollar, depreciated by 3.7% (2018: appreciated by 4.5%) against the Japanese Yen, appreciated by 2.0% (2018: depreciated by 4.1%) against the Euro, depreciated by 5.4% (2018: appreciated by 7.4%) against the Hong Kong Dollar, appreciated by 3.5% (2018: depreciated by 0.1%) against the Korean Won and depreciated by 1.2% (2018: appreciated by 4.4%) against the Taiwan Dollar.

 

Foreign currency sensitivity

The following table illustrates the sensitivity of the loss after tax for the year and the value of shareholders' funds in regard to the financial assets and financial liabilities and the exchange rates for the £/US Dollar, £/Euro, £/Japanese Yen, £/Hong Kong Dollar, £/Korean Won and £/Taiwan Dollar.

 

Based on the year end position, if Sterling had depreciated, by a further 10% (2018: 10%), against the currencies shown, this would have the following effect:


30 April 2019

£'000

 

 

US Dollar

 

 

Euro

 

 

Yen

Hong Kong Dollar

 

Korean

Won

 

Taiwan Dollar

Statement of Comprehensive Income - profit/loss after tax



Revenue return

531

23

156

16

176

155

Capital return

170,701

9,339

12,032

7,116

7,063

6,701

Change to the profit/loss after tax for the year

171,232

9,362

12,188

7,132

7,239

6,856

Change to shareholders' funds

171,232

9,362

12,188

7,132

7,239

6,856

 

 


30 April 2018

£'000

 


 

 

US Dollar

 

 

Euro

 

 

Yen

Hong Kong Dollar

 

Korean

Won

 

Taiwan Dollar

Statement of Comprehensive Income - profit/loss after tax







Revenue return

550

38

81

14

95

94

Capital return

134,589

9,331

8,457

6,219

5,737

5,134

Change to the profit/loss after tax for the year

135,139

9,369

8,538

6,233

5,832

5,228

Change to shareholders' funds

135,139

9,369

8,538

6,233

5,832

5,228

 

Based on the year end position, if Sterling had appreciated, by a further 10% (2018: 10%), against the currencies shown, this would have the following effect:


30 April 2019

£'000

US Dollar

 

 

Euro

 

 

Yen

Hong Kong Dollar

 

Korean

Won

 

Taiwan Dollar

Statement of Comprehensive Income - profit/loss after tax



Revenue return

(435)

(19)

(127)

(13)

(144)

(127)

Capital return

(139,664)

(7,641)

(9,844)

(5,822)

(5,779)

(5,483)

Change to the profit/loss after tax for the year

(140,099)

(7,660)

(9,971)

(5,835)

(5,923)

(5,610)

Change to shareholders' funds

 

(140,099)

(7,660)

(9,971)

(5,835)

(5,923)

(5,610)

 

 


30 April 2018

£'000




 

 

US Dollar

 

 

Euro

 

 

Yen

Hong Kong Dollar

 

Korean

Won

 

Taiwan Dollar



Statement of Comprehensive Income - profit/loss after tax









Revenue return

(450)

(31)

(66)

(12)

(78)

(77)



Capital return

(110,118)

(7,635)

(6,920)

(5,088)

(4,694)

(4,202)



Change to the profit/loss after tax for the year

(110,568)

(7,666)

(6,986)

(5,100)

(4,772)

(4,279)



Change to shareholders' funds

(110,568)

(7,666)

(6,986)

(5,100)

(4,772)

(4,279)



 

In the opinion of the Directors, neither of the above sensitivity analyses are representative of the year as a whole since the level of exposure changes frequently as part of the currency risk management process used to meet the Company's objectives.

 

(iii)          Interest Rate Risk

Interest rate changes may affect the income received from cash at bank and interest payable on borrowings.

 

All cash balances earn interest at a variable rate.

 

The Company finances its operations through its term loans as well as bank overdrafts and any retained gains arising from operations.

 

The Company uses borrowings in the desired currencies at both fixed and floating rates of interest to both generate the desired interest rate profile and manage the exposure to interest rate fluctuations.

 

The Company's Japanese Yen and US Dollar two-year term loan carries a fixed rate of interest and therefore does not give rise to any interest rate risk.

 

Management of the risk

The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. The Company may also enter into interest rate swap agreements.

 

Interest rate exposure

The exposure, at 30 April, of financial assets and liabilities to interest rate risk is shown by reference to:

·      floating interest rates (i.e. giving cash flow interest rate risk) - when the rate is due to be re-set;

·      fixed interest rates (i.e. giving fair value interest rate risk) - when the financial instrument is due for repayment.

 


30 April 2019

£'000

30 April 2018

£'000

Within one year

More than

one year

 

Total

Within one year

More than one year

 

Total

Exposure to floating interest rates:







Cash and Cash equivalents

194,153

-

194,153

101,156

-

101,156

Exposure to fixed interest rates:







Bank loan

-

(53,687)

(53,687)