Allianz Technology Trust (ATT) is a highly differentiated trust offering exposure to technology stocks, with its managers seeking to capitalise on the winners of emerging trends within the sector. The trust’s allocation is spread across a range of market caps, with a current overweight to mid-caps compared to its mega-cap-dominated benchmark.
COVID-19 has created a turbulent yet positive period for the technology sector, accelerating the adaption of several trends with examples including working-from-home software and automation (as discussed in the Portfolio section). The team see COVID-19 as having reinforced the dominance of the sectoral winners, with companies which were not able to adapt to the pandemic falling further behind. That being said, having been well positioned going into the pandemic, the team are happy with the current allocation of their portfolio and this is something that is reflected in their performance. They are instead looking more towards a post-COVID-19 world, upping their exposure to cyclical names while feeling increasingly bearish towards the mega-cap names.
ATT has performed well so far during the pandemic, outperforming both its benchmark and its closest peer. As we detail in the Performance section, over the last five years ATT has generated an NAV return of 321% against the 235.7% return of the benchmark. Over 2020 so far, ATT has generated impressive absolute NAV returns of 70.7% (as at 04/12/2020).
ATT’s share price has largely traded at a premium over the year, apart from the short moment of volatility during the COVID-19 crash which is detailed further in the Discount section. ATT currently trades at a 0.6% premium and continues to be a net issuer of shares.
ATT has a refreshingly different approach to technology investing, with a far more diverse allocation in terms of market capitalisation when compared to both its benchmark and broader technology funds, and this has been a key attraction of the trust. We believe that the management have been vindicated in their identification and use of thematic investing. Many of the trends which they identified pre-COVID-19 have been the main winners of the pandemic, and ATT’s performance has reflected this.
While past performance shouldn’t guide decisions, the ATT team have continued to add to their track record of successfully identifying themes ahead of the curve. The team are already looking past COVID-19 to the future winners, which they believe to be more cyclical names. With the potential for a COVID-19 vaccine, plus more stimulus expected from the US’s new Democratic presidency, we see plenty of tailwinds for this new allocation. However, we also believe the more recent themes can continue over the longer term, given how prevalent themes such as working from home have become in all of our lives.
The trust continues to trade at a slight premium, which we believe is a fair outcome considering how resilient its performance has been over the year. ATT also has an increasingly loyal investor base, which should hopefully sustain its premium into the future.
|Offers diversification from the benchmark due to a mid-cap bias, and is underweight to mega caps
||Mid-cap stocks can trade with higher volatility than larger-cap names
|Superior expected earnings growth with a strong track record of identifying trends
||ATT could be caught up in a broader rotation to value post-COVID-19
|Strong, seasoned investment team who have achieved very strong performance during 2020
||Thematic investing can offer less diversification within portfolios
The objective of Allianz Technology Trust (ATT) is to deliver returns in excess of the Dow Jones World Technology Index through a portfolio of global listed technology stocks. The management team, led by Walter Price and Huachen Chen and supported by portfolio manager Mike Seidenberg, aim to invest in the major technology trends by identifying their ‘current winners’, i.e. those companies which are far ahead in adapting to market trends. The overall investment process is largely a flexible and bottom-up one, being benchmark-agnostic.
The team look to find the most innovative companies, those which have the ability to disrupt their incumbent competitors and thus emerge as winners. As a sector the team view technology being in a period of rapid change, and did so even before the emergence of COVID-19. The industry, they note, is constantly innovating and producing new growth opportunities, and companies which are not able to quickly adapt will be left behind. The winners in their view are further defined by their quality and performance, while the losers are companies which operationally perform poorly when compared to a ‘winner’. Walter and the team have demonstrated a track record of identifying new themes within technology, and since the mid-1980s they have been ahead of the market in identifying trends such as wireless communication, storage systems and cloud computing.
Because of the continuous availability of investment opportunities within the technology sector, the team believe that they can produce some of the best total return opportunities within any equity market. Walter and the team also believe that the sector can justify its above-average P/E when compared to the broader market, observing that current valuations are reasonable considering the superior return opportunities they present. This belief is amplified by the current ultra-low interest rate environment, where high-growth companies have been able to justify high valuations when compared to the near-zero yield of bonds. While the team happily acknowledge the potentially high-growth prospects of their companies, they still follow a valuation-sensitive process and will not purchase names whose valuation reflects a ‘priced for perfection’ stock.
The team are aware of the secular tailwinds and trends within the market, and are not agnostic to top-down analysis. They seek to take account of cyclical and structural opportunities, so that the portfolio is able to capitalise on future macro developments. To that end the team have identified a number of key industry trends, and their portfolio weightings reflect their beliefs on where the near-, medium- and long-term economic opportunities lie. The current themes include targeted advertising and payment systems, suppliers of cloud infrastructure, leaders in the electrification of vehicles and entertainment on demand, companies that promote collaborative working from anywhere, and companies that enable flexible and efficient working and manufacturing processes (e.g. through automation).
In our last research piece we noted that Walter and the team had taken advantage of the COVID-19 pandemic to shift the portfolio, and this is something that continues to evolve. The progression of the pandemic has created a catalyst for the acceleration of several themes in their view, with a decade of change condensed into one or two years and further widening the gap between ‘winners’ and ‘losers’. Supply chains will have been upended by the COVID-19 crisis, exposing vulnerabilities in where production is located. The team expect diversification in manufacturing and production operations post-COVID-19, which will further the demand for automation in both production and distribution. Companies which were slow to adapt to the digital transformation were ultimately playing catch-up during this year’s pandemic, and were less able to compete with early adapters which become more efficient as a result. This explains ATT’s largest thematic weighting being in the collaborative working theme (at 40%). ‘Winners’ of COVID-19 have been able to reduce their costs during the pandemic by leveraging their digital integration, including by having higher volumes of digital sales meetings, with lower overheads when compared to physical sales meetings, or through the ability to transition into a working-from-home state without material losses in productivity. Walter and the team believe that somewhere between 40% and 70% of the efficiencies brought about by COVID-19 and the responses it necessitated in businesses will remain in the long run, cementing the advantage their current winners will continue to have.
ATT’s current portfolio reflects the areas where the team see the greatest propensity for winners, which means an overweight to mid-cap stocks and the US. Since our last update from the team the ATT portfolio has further rotated into the mid-cap space, often at the expense of larger-cap names, although ATT still carries a dominant weighting to the US (now 90%). Walter believes that the mid-cap space has on average higher return generation potential than large caps, which he increasingly sees as having their growth fully priced in. The team also believe that the US continues to house the most attractive companies; their weighting to the US doesn’t reflect the benchmark but rather their understanding of where the current trends are strongest.
There has recently been less turnover in ATT’s portfolio than when we last met with Walter, with most of the COVID-19 readjustments having been done earlier in the year. He is now largely happy with how the portfolio of 70 stocks is currently positioned. Walter is also finding it increasingly harder to foresee a scenario where mega caps outgrow their mid-cap peers. Walter believes that many of his mid-cap names will be able to generate 40% to 50% growth per annum, or be able to maintain that level if they are already there – which he anticipates representing a superior outlook to that of most mega-cap names. He is also afraid of the impact potential antitrust issues will have on the future growth of names such as Amazon, Apple and Facebook, which are all in the sights of the US’s new Democratic presidency. That said, Walter retains a significant exposure (albeit underweight to the benchmark) in many of them, as the table of top ten holdings below illustrates.
Top ten holdings
|Zoom Video Communications
Source: Allianz Global Investors, as at 31/10/2020
This is not to say that the ATT portfolio has remained wholly unchanged since we last met with the trust’s managers. Walter and Mike have been adding to their holdings of cyclical and industrial companies, often in the semiconductor and automation sectors. They are of the view that post-COVID-19 these sectors are primed for a period of strong growth as the economic cycle picks up, and are using the current market weakness as an entry point. The team do not expect these new investments to immediately match the current growth trajectory of their existing holdings but instead expect their growth to pick up at some point in 2021 come the post-COVID-19 recovery. Semiconductors are currently one of the largest subsectors within the portfolio, at 13.4% (as at 31/10/2020).
The team have recently entered into a large position in Alphabet, now their largest holding. While they do acknowledge the headwinds facing many mega-cap names, they found an opportunistic entry point into Alphabet. COVID-19 has disproportionately impacted Alphabet’s advertising revenue, given the company’s 20% exposure to travel advertising, plus the team also believe that the spectre of antitrust regulation is already being priced into Alphabet. The team believe the resulting valuation discount to the wider technology sector is not entirely justified, as advertising demand is bouncing back and Alphabet has offered clients a high return on spending. They also see a possible overreaction to the antitrust issues, given that the resulting financial penalty of the antitrust suit over payments to Apple may be overstated by the market and authorities are potentially softening their approach to web browser regulation. They also see Alphabet benefitting from some of the key sectoral trends, with its increasing success in cloud computing and YouTube continuing to gain traction in the digital entertainment space. They foresee the stock’s recent underperformance as temporary, with the potential for a near-term rebound.
ATT’s increasingly mid-cap bias has been a progressive trend, reflecting the ever increasing opportunities the team is identifying in that area. Much like the case with Apple, the team see mega-caps as having their growth prospects increasingly priced in and Walter is adjusting his portfolio accordingly. The team classify mega-cap companies as those with assets in excess of $200bn, large-cap companies as those with assets between $30bn and $200bn, mid-cap companies as those between $5bn and $30bn, and small-cap companies as those below $5bn. The charts below show how ATT’s portfolio has evolved to meet the opportunities the managers have identified in different market-caps. We observe that through the end of 2018 and the start of 2019 there was a c. 20% increase in the mid-cap exposure of ATT, primarily at the expense of large-cap exposures. The mid-cap allocation has shrunk in 2020, though this is mainly due to a number of mid-cap names moving into the large-cap space (as well as large-cap names moving into the mega-cap space) as their market caps rapidly increased as a result of strong performance during the pandemic.
ATT: Market-cap allocation over time
Whilst mega-cap exposure has been increasing over the year, ATT still remains significantly more exposed to mid-cap companies relative to its closest peer, Polar Capital Technology Trust (PCT). PCT has a more benchmark-aligned exposure, with a greater weighting to mega caps even than the benchmark has.
Current market-cap allocation
Note: PCT data reflects the trust’s portfolio as at 31/07/2020.
As has been the norm with ATT, the trust does not currently utilise gearing. However, the managers still retain the option to do so in the future. We understand that in normal market conditions gearing will not exceed 10% of net assets, but that it may on occasions go as high as 20%. Conversely, the proportion of the trust’s net assets held in cash or liquid investments will not ordinarily exceed 15% of net assets, but may be increased at times to a maximum of 30%.
ATT has been able to achieve a considerable performance record over the last five years, as seen in the graph below. This is both in absolute terms, generating a 321% NAV return over the period, and relative to the benchmark, as the trust exceeded the benchmark’s return of 235.7%. This performance is a result of both the broader technology sector outperforming almost all others, and through the team’s stock selection, where the active management of the strategy has added considerable alpha. The AIC Technology & Media sector is a small one, with only four constituents. We regard the only truly comparable trust in the sector to ATT as being Polar Capital Technology Trust (PCT), which we have used in place of a conventional peer group. ATT has outperformed PCT over the five-year period, with PCT’s NAV growing 270.8%.
As can be seen from the annual performance chart below, ATT’s relative performance to PCT has not been a one-way street in recent years, with periods of clear underperformance and also substantial outperformance. While we do not believe a strategy should be judged on a single year’s performance but rather over the longer term, the varying annual performance does help to highlight the differences in approach between the ATT and PCT, specifically ATT’s mid-cap bias versus PCT’s mega-cap. By carrying a strong mid-cap bias compared to its benchmark, demonstrated by ATT’s 71% active share (as at 31/10/2020), there will be periods where ATT’s style is out of favour even if the broader tech sector is ahead of global markets or when the team are selecting relatively well-performing mid-cap names. The periods of 2014, 2016, and 2019 are examples of this.
Discrete annual performance
2020 has been a very good year for the trust, with a year-to-date NAV return of 70.7% and a one-year NAV return of 75%, returns that are in excess of those of both its benchmark and PCT. Excess returns have mostly been driven by companies which Walter and the team associate with digital transformation opportunities, such as communication services, mobile payments and collaboration software. The individual top contributors were: Tesla, Zscaler, Zoom Video Communications, CrowdStrike Holdings, Amazon and Square. There have of course been detractors over the period, primarily the trust’s overweight to semiconductors. Yet, as we outline in the Portfolio section, this allocation is part of Walter and the team’s bullish outlook for a future cyclical recovery, and they did not expect it to be a top contributor this year.
As a result of ATT’s investment objective of targeting capital growth in excess of its benchmark – as well as of the low-yielding nature of technology companies (which typically do not pay a dividend, and, if anything, have tended to prefer share buybacks as a method of returning capital to shareholders) – the trust does not currently pay a dividend and is unlikely to do so in the future.
Walter Price and Huachen Chen lead the specialist team of four portfolio managers. They have been investing in technology companies for over 35 years and Walter has worked with co-manager Huachen for over 30 years. Walter has been managing ATT since 2007, with Huachen joining in 2014. They are supported by portfolio manager and analyst Mike Seidenberg and by assistant portfolio manager and analyst Danny Su. They have consistently applied the same approach to their investment research, looking for disruptive innovators which can generate strong returns for investors from ‘creative destruction’. The team live and work in the San Francisco area where a great number of the world’s technology companies are located, a factor which they view as important for quickly identifying changes in relentlessly competitive markets.
ATT’s management team follow the same investment rationale they have done for many years. They aim to identify major trends ahead of others, investing in companies that have the potential to become industry leaders. As noted under the Portfolio section, they generally hold an overweight position in mid caps (and an underweight to large caps) relative to the benchmark, and have a strong preference for US-listed companies. The team also lean on Allianz Global Investors’ proprietary Grassroots Research network, enabling them to commission reports and market research from journalists, analysts and other professionals. This has in the past proved useful with regard to consumer-related products, among others.
As at 04/12/2020, ATT trades on a 0.6% premium, which is in excess of its closest comparable peer PCT’s 5% discount. This difference has not always been the case: as can be seen in the below graph, ATT had at times traded at a wider discount than PCT. It was in 2017 that the discount began to narrow, with, in our opinion, the market acknowledging the strength of ATT’s strategy.
Since the start of 2018 ATT has on average traded very close to its NAV, with an average discount of 0.2%, narrower than PCT’s 3.4% average discount over the same period. This is due in no small part to the team’s exceptional investment process, but also to the broader tailwinds affecting technology. The technology sector is currently being perceived by the market as having superior growth prospects to most other sectors. It has also been a prime beneficiary of the pervading low interest rates across all major economies, which has made it easier for market participants to justify the high premiums investors pay for tech stocks.
Discount to NAV
ATT has been able to issue shares at a slight premium to NAV in recent years, with 3,710,000 shares issued in the first half of 2020 at an average premium to NAV of 1.05%. Such actions support liquidity and bring down the fixed costs of the trust by spreading them over a larger number of shares, thus reducing the fixed cost per share. Throughout 2019 ATT issued a total of 1,795,000 new shares at an average premium to NAV of 1%, worth a total of £29.8m. During 2020 the trust has issued an additional 6.1m new shares, at an average premium of 1%, for a total issuance of £132.2m.
The board also operates a discount-control policy with the aim of preventing a substantial widening of the discount. The board will consider buying back shares when the discount is over 7% and they regard all other factors as being aligned. Both share buybacks and issuance are only pursued when it is deemed by the board to be in the interest of the majority of shareholders. The most recent authority to conduct share buybacks (to control the discount) was passed at the 2016 AGM, where the last periodic continuation vote was also cast. The next opportunity shareholders will have to vote on the continuation of ATT will be at the 2021 AGM.
ATT operates with a tiered management fee structure: a 0.8% fee based on a market cap up to £400m, a 0.6% fee levied on values between £400m and £1bn, and a 0.5% fee on values over £1bn.
It should be noted that charging a fee on the market cap instead of the NAV incentivises, in our view, the managers to keep the trust trading at a premium or at least to avoid a discount, in addition to the general incentive of growing the NAV. As at 04/12/2020 the OCF of ATT is 0.88%, reflecting the market cap of £1.2bn. We note that the OCF will contain the management cost and the fixed running cost of the trust. One can thus expect the OCF to fall as the market cap increases, reducing the average management fee, and as further shares are issued this will reduce fixed costs. This can be easily demonstrated by comparing the current OCF to that of 2018, which was 0.93% (annualised over the year). ATT also compares well at present to PCT, which operates with a current OCF of 0.93% and utilises a less generous management fee structure. ATT’s current KID RIY is 1.71%, compared to PCT’s 1.74%. Please note that the calculation methods for KID RIYs differ between trusts.
ATT operates with a performance fee, subject to a high-water mark. The fee is calculated as 12.5% of the outperformance of the NAV against the trust’s benchmark, the Dow Jones World Technology Index. The total performance fee paid in a given year is capped at 2.25% of NAV at the respective year end. Any periods of underperformance are carried forwards indefinitely, and must be fully offset by subsequent outperformance before a performance fee can be paid. There was no performance fee paid for 2019.
While a performance fee can increase costs during periods of outperformance, we believe that the cost can outweigh the negatives as it better aligns the managers’ interests with those of the shareholders. The nature of the clawback clause also incentivises the manager towards long-term performance over the short term, as they cannot game the system by claiming a performance fee in one year at the expense of the subsequent year’s returns.
ATT is managed by Allianz Global Investors (AllianzGI), which as a firm includes ESG considerations as an active component of its approach to investment. The trust is classed as ESG-aware and benefits from the two pillars of ESG integration – research and stewardship. AllianzGI employs several dedicated ESG analysts, who conduct research and analyse the third-party ESG research which is available for the majority of ATT’s stocks.
The ESG team focus their research on issues which they deem to have a material impact on an investment’s performance. On matters of governance these include issues around shareholder rights and corporate governance. For environmental risks they assess issues like waste management and climate risk, assessing how firms are adapting to a low-carbon world and adopting science-based targets. For the social aspect of ESG they observe how companies deal with issues like human capital management, data privacy and security, and advertising standards.
The ATT management team utilise the work done by AllianzGI’s ESG team, incorporating their output into their decision-making. It must be noted that the ATT team do not actively operate with an ESG screen or formalised ESG process, but rather do so holistically when they see there being a major material risk (although ESG is becoming a more common component in their analysis). Currently they view typical large-cap tech companies as having much improved corporate governance, with the likes of Microsoft having shaken off its once predatory corporate nature. Morningstar’s sustainability rating of ATT’s portfolio ranks it as average when compared to the broader technology sector peer group. Sustainability refers to the impact each individual holding has on various ESG factors, and are aggregated into a single score based on a company’s weighting in the portfolio.
Something that is important to note is that while ATT does not rank amongst the best amongst peers for ESG, nor does it operate with a strict ESG screening process, the technology sector as a whole is very ESG-compliant. Typically, technology companies operate with little environmental impact, having to consume relatively few natural resources to operate. The relative youth of these companies is also reflected in their staffing, with technology companies being more diverse and inclusive than their non-tech peers. Issues around antitrust and privacy do remain though, but these ESG issues are of such importance to the long-term profitability of technology firms that Walter and the team are very unlikely to ignore them in their analysis.