ALLIANZ TECHNOLOGY TRUST PLC
HALF-YEARLY FINANCIAL REPORT
For the six months ended 30 June 2024
HIGHLIGHTS
· Net Asset Value total return of 28.0% and a share price return of 30.6%, outperforming the Company’s benchmark index which returned 27.0% over the same period.
· Performance driven by stock selection, exposure to semiconductor value chain and market capitalisation differentiation from benchmark.
| 30 June2024 | 31 December 2023 | %Change | |
| Net Asset Value per Ordinary share | 432.8p | 338.2p | +28.0 |
| Ordinary share price | 396.5p | 303.5p | +30.6 |
| Dow Jones World Technology Index (sterling adjusted, total return) | 3,448.0 | 2,715.0 | +27.0 |
| Shareholders’ funds | £1,662.0m | £1,318.8m | +26.0 |
| Discount of Ordinary share price to Net Asset Value | 8.4% | 10.3% |
Interim Management Report
Chairman’s Statement
Disparate market drivers
The market environment and the drivers of sentiment remained mixed over the period, though definitely biased more to the positive, pushing markets upwards. Global markets gained consistently with the exception of a small step back in the first half of April. Notably, we have seen consumer price inflation trending towards central bank target ranges, giving rise to the prospect of easier monetary conditions later in the year.
It is also the year of elections around the globe and therefore (more than usual) politics is at the forefront of national agendas. Some elections are more high profile than others, but billions of people (almost half the world’s population) will go to the polls across the globe in 2024. In the UK where ATT is domiciled, early indications suggest the agenda of the new Labour Government, voted in shortly after the period end, is focused on economic growth. We will watch this develop with interest. In the US, where ATT’s investment managers are based, and where the largest proportion of the portfolio is domiciled, the situation is still unfolding. We have already seen the conviction of former President Trump as well as an assassination attempt on his life. Though Trump is generally regarded as being more pro-business, somewhat akin to the UK the expectation is that the perceived impact of any result would be priced in ahead of time making the actual event fairly neutral for markets.
Beyond ‘day-to-day’ politics, geopolitics has also continued to provide an unsettling backdrop for markets. Russia’s invasion of Ukraine and the ongoing conflict are nearly two and a half years old. Tensions, terrorism and large-scale military action in the Middle East are newer, but still protracted rather than swift, limited actions, and no less unsettling than Ukraine. While these ongoing conflicts may sometimes fade in the news, beyond the sadness of the physical toll on humanity and infrastructure, their impact on the world economy remains tangible.
Solid technology market performance
The technology sector was buoyed by continued excitement surrounding the potential impact of Artificial Intelligence (AI) with the so called ‘Magnificent Seven’ remaining the centre of market attention. The chipmaker Nvidia, a holding within the portfolio, proved to be the standout amongst these largest stocks. Seemingly unassailable from the perspective of its position as the bedrock semiconductor provider for AI, it briefly became the world’s most valuable company in June, being the latest of the technology giants to top a $3tn market valuation – for context, there are only a handful of nations whose entire Gross Domestic Product (GDP) is greater than that amount.
As detailed in the Portfolio Manager’s Report, performance of technology stocks was mixed across sectors and geographies with the aforementioned largest stocks dominant and a narrow segment of companies considered the key beneficiaries of the AI theme pushing strongly ahead. Semiconductors were the main beneficiary, up by almost 60% over the period. Interactive media and services were also up by 30%. Software returned a more muted 14% and technology hardware 11%. IT services was down 5% in the period due to ongoing macroeconomic uncertainty.
Portfolio performance
It is pleasing to report a Net Asset Value total return of 28.0% for the six months, a strong absolute performance and an outperformance of one percentage point compared to our benchmark, the Dow Jones World Technology Index. The share price return was 30.6%, slightly ahead of the NAV return, as during the period the discount narrowed marginally from 10.3% as at 31 December 2023 to 8.4% as at 30 June 2024. A commentary on the main determinants of performance is provided in the Portfolio Manager’s Report which follows my comments.
The AI debate
AI continues to dominate not only the technology industry narrative, but also headlines in general. There is no doubt that it truly is a new frontier – one that brings not only promise, but also the uncertainty of uncharted, ‘never seen before’ technologies. The ‘promise’ element has captivated many and led to something of a feeding frenzy – investors keen to get in on the ground floor of a theme that is seen as having world-changing potential and possibly almost unimaginable growth potential. That frenzy translates into the risk of elevated valuations for companies involved in the space – both directly as creators and implementers of the technology, but also the enablers – the companies providing the building blocks such as the necessary semiconductor chips. The question then becomes, have things gone too far? Proponents will be unable to accept an ill word against the burgeoning technology. Naysayers will call ‘bubble’ and hark back to the ‘dot-com’ era. The truth of course lies somewhere in between the two extremes and underscores the need for the type of careful assessment of a company’s fundamental characteristics which is at the heart of our Portfolio Manager’s investment process.
The UK and technology
We were asked about opportunities for investment in UK technology companies at our AGM in April. The UK market in general has been unloved for some time – many bemoan this as being due to a lack of technology firms listed on the exchange and a predominance of ‘older industries’, particularly when compared to the US. There is some truth in that, but it does not mean the UK is devoid of technology expertise and drive, in fact quite the opposite is true. A substantial proportion of the UK technology sector is at an early stage of development and hence not traded publicly. It is also the case that companies which have listed on the UK stock exchange are often snapped up by larger, overseas acquirers. For example, Darktrace – a British cyber security company headquartered in Cambridge, which we added to the portfolio in March of this year – was subsequently the subject of a bid from a US private equity firm. Whilst such a takeover can be considered a pleasing validation of UK expertise (Darktrace’s technology was referred to as ‘cutting edge’ by the bidder), of course it is also disappointing to ‘lose’ such stocks from the domestic market.
Discount/Buybacks
Over the period our discount to NAV remained elevated, particularly in the context of a longer-term picture where we have traded closer to par and often at a small premium when demand for technology stocks was high.
The Board monitored the discount very closely during the period under review, concluding that the discount largely reflected macroeconomic and interest rate uncertainty. It is pleasing to be able to note however that the discount started to narrow slightly towards the end of the period (reaching 8.4% on the last day). Since the period end the discount has been largely stable, although in early August it widened during a sudden period of global market volatility.
Our policy in respect of buying back shares remains unchanged. Currently we would consider buying back shares during periods where the discount is consistently over 7% and it is felt appropriate to do so given the prevailing market backdrop. Over the period 5,934,691 shares were bought back at an average discount of 11.5%. Since the period end on 30 June 2024, no further shares have been bought back. All shares repurchased are held in treasury rather than cancelled so that they may be reissued if sufficient demand arises.
Consumer Duty
The Board has worked with Allianz Global Investors, UK Limited (‘AllianzGI UK’), our AIFM, to ensure all obligations under the FCA’s new Consumer Duty regulations have been appropriately considered and applied to the Company. All communications including the website, factsheets and other published documentation, have been reviewed to ensure they are appropriate for consumers. A ‘value assessment’ has also been undertaken and it was concluded that the Company provides fair value. The value assessment is made available to distributors such as investment platforms and wealth managers to inform their own due diligence.
Annual General Meeting (AGM)
It was a pleasure to meet many shareholders at the Company’s AGM on 24 April 2024. The Board once again put in place arrangements for shareholders to attend the AGM electronically, as well as being able to ask questions. All resolutions were passed. A recording of the AGM, including a presentation from the lead portfolio manager, Mike Seidenberg, can be found on the Company’s website.
We would like to also remind shareholders that the key elements of this year’s Annual Financial Report were made available in an updated online format (the ‘Annual Financial Report – full’) at tinyurl.com/attafr23.
Outlook
The shorter-term outlook for the technology sector is, as always, difficult to predict with any great precision and we can safely assume that monetary policy, geopolitics and election outcomes will be significant determinants of market direction over the next six to twelve months. While it is the case that inflation is finally within or approaching central bank targets, and hence that there are reasonable grounds for anticipating that monetary conditions will ease over the next twelve months, there is the potential for disappointment over the timing and magnitude of interest rate reductions. The valuation of ‘growth’ sectors such as technology is particularly sensitive to changes in interest rate expectations which in turn gives rise to a risk of heightened near term volatility. Nevertheless, we remain excited by the technology sector’s long-term potential and confident that secular themes such as the development of AI, cyber security and the continued move from legacy IT infrastructure to the cloud will ultimately reward patient investors with a focus on the mid- and large-cap segments of the technology sector.