Allianz Technology Trust 29 March 2019

The technology sector encompasses an ever-wider range of businesses, but many of them are united by their growth ambitions. For investors wanting exposure to this growth, Allianz Technology Trust (ATT) represents a very actively managed specialist investment trust, managed by one of the most experienced technology investment teams in the world, which has delivered excellent returns over the years.

The team seek to identify areas of 'innovative disruption' and invest in the businesses best placed to exploit it. At any one time, the portfolio comprises between 50 and 70 stocks, currently at the high end of that range at 70. We caught up with Walter Price, manager of the trust, recently to discuss current positioning.

Walter’s biggest theme in the portfolio is to cloud and SaaS businesses, which together amount to around 40-50% of the portfolio (including Microsoft, Google and Amazon), but mainly represented by holdings in 15 or 20 mid-cap cloud software companies. In Walter’s view, 2019 is the best environment we have so far seen for selling cloud software, with many companies set to achieve exceptionally strong sales and earnings growth.

The mandate for ATT is very flexible, and the team seek to ensure that the portfolio always reflects their views on the technology market at any one time, with very little regard to benchmark weightings. At times, this positioning has been reflected by a significant proportion of the portfolio being in mega-cap stocks, but at other times (such as now) it is invested more heavily in mid-caps. Currently, this means ATT is differentiated to Polar Capital Technology Trust as well as the benchmark, which both have a much higher weighting to mega-cap stocks.

The performance so far in 2019 represents a strong rebound from the volatility of Q4 2018. Walter’s exposure to mid-cap stocks - upped markedly since early 2018 - has meant that ATT has been in a strong position to perform so far in 2019. Over twelve months to 11^th March 2019, ATT is up 12.2%, against the benchmark return (in GBP) of 5.6% and Polar Capital Technology Trust (PCT)’s return of 9.4%.

As it is currently positioned, the portfolio now offers, according to Allianz Global Investors' (AllianzGI’s) estimates, a 3-5 year EPS growth estimate of 32% against 16% for the benchmark. Manager Walter Price is mindful of valuations, and whilst the portfolio is expensive on a forward P/E of 34.7 x, the realised PEG (or PE to Growth) ratio will be lower than the benchmark in the year ahead.

Walter and his team believe technology companies are better equipped than many other sectors to achieve growth irrespective of the market or economic backdrop. The focus on smaller, more innovative companies operating in a niche should, they hope, enable them to ride out what they accept is a possibly difficult year ahead.

There are relatively few specialist technology funds in the UK trust and OEIC universe, but ATT has outperformed the vast majority of them over many time periods. We believe this is thanks to the team’s flexible stock picking approach and focus on seeking to identify areas of 'innovative disruption', and invest in what they see as the next 'mega cap' businesses. However, one can’t discount the advantage it has of the management team being based in the midst of 'the action' in San Francisco.

Historically, ATT has traded on a wider discount than its closest listed peer, PCT. This picture has reversed since the start of 2018, with ATT trading at a premium to PCT over the period, and over one year the average discount for ATT has been -0.1%, whilst PCT has traded at an average discount of -3.5%. In our view, this reflects the stronger performance and active stock picking employed by the AllianzGI team and should ATT trade on a discount to PCT, this could be viewed as an opportunity.

The team’s active investment process, flexibility and high-conviction approach has delivered considerable value over the last ten+ years the team have had the mandate. The portfolio is tilted towards the 'high growth' beneficiaries of the continued move towards the cloud, which Walter sees as niche and which has uniquely attractive opportunities.