Allianz Technology Trust 02 October 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Allianz Technology Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Technology has been one of the most prominent investment themes globally in recent years, and the sector is growing to encompass an ever more diverse array of companies. One option for investors looking to exploit this theme with a highly experienced specialist investment team and strong long-term track record is Allianz Technology Trust (ATT).
The ATT team, led by Walter Price and Huachen Chen, are focused on areas of ‘innovative disruption’, looking to construct a portfolio of around typically 50-70 technology stocks (currently 72) that in their view are best placed to exploit opportunities for disruption.
With a focus on companies with strong growth prospects, the company typically has a relative bias towards mid-cap stocks as compared to passive tech exposure. The preference for profitable companies means, however, that these are generally established companies, and ATT is not seeking to operate as a quasi-venture capital fund for speculative start-ups. Nor is the team generally interested in cyclical companies masquerading as technology companies.
The team is cognisant of the wider macroeconomic and market picture, and incorporates thematic considerations into their portfolio construction. The most prominent of these themes at this time remains ‘software as a service’, with a particular focus on the possibilities for growth available to companies providing solutions in cloud computing and software security. Manager Walter Price believes that we are currently experiencing a rare epoch change as businesses shift to cloud operating systems. Although 2019 has posed some headwinds from a top-down economic perspective, operationally Walter continues to note resilience and positivity in these companies, which he expects to improve further with a stabilising global economy in 2020.
Although the portfolio typically exhibits a tendency to take greater risk exposure to the mid-cap sector of the market, the investment mandate remains flexible. As such, the managers tend to actively manage and adjust the portfolio regularly. Historically this has seen a reasonable degree of variation in geographic and market cap exposure, and the portfolio’s largest holdings can be relatively fluid.
At present the ATT management team notes that their portfolio has seen significantly greater earnings per share growth over the past three years compared to the benchmark (21.3% p.a. vs 14.7% p.a. respectively). They foresee this pattern continuing over the coming 3-5 years, with anticipated EPS growth of 24% against expected growth from the benchmark of 15%. An acknowledged risk is that ATT’s portfolio trades on a valuation premium to the wider benchmark, but the managers are satisfied that the superior growth profile adequately compensates for this.
Long-term performance has been strong, with stock selection and thematic considerations aiding returns in what is an actively managed portfolio. A natural bias towards mid-caps aligns with the stated aim of identifying companies with superior potential earnings growth. Recent returns have lagged slightly, but over the past ten years similar small setbacks have tended to represent a relative opportunity. The board is committed to growing the trust where beneficial to shareholders, which should help to further reduce ongoing charges relative to ATT’s peers.
With a US presidential election looming in 2020, there has been significant discussion around interpretations of antitrust legislation in relation to the US technology giants, while overseas jurisdictions have already stepped in to impose fines. Several serious presidential candidates have mooted possible enforced break-ups of certain large technology firms, but with its mid-cap focused portfolio ATT would likely be relatively less affected than peers should this occur.
The portfolio retains superior earnings growth characteristics to the wider technology index, but also a sizeable valuation premium on the underlying portfolio. Trends within the market in recent years, including increasing the market share of passive investment strategies, could leave the technology sector vulnerable to a change in intra-market dynamics should we see a higher interest rate environment as a result of stronger economic growth. If it transpires, this could pose some heightened valuation risk to the sector as a whole relative to the broader equity market.
For investors looking to access long-term growth potential from the technology sector, ATT’s portfolio could continue to offer superior earnings growth, with 3-5 years’ earnings growth anticipated to significantly outstrip the benchmark index.
|Portfolio is characterised by superior earnings growth compared to the benchmark
|The portfolio trades at a reasonably high valuation premium to the benchmark index
|An active 'pure' portfolio for investors looking to access the technology sector
|External risks to the technology sector could adversely affect sentiment
|Whilst AUM has grown through share issuance, ATT remains at a size which allows for nimbleness
|A change in market sentiment could lead to discount widening, exacerbating losses?