Polar Cap Tech Tst Plc -AUDITED RESULTS FOR FINANCIAL YEAR TO 30 APRIL '18
POLAR CAPITAL TECHNOLOGY TRUST PLC
AUDITED RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2018
17 July 2018
30 April 2018
30 April 2017
Total net assets~
Net assets per ordinary share~
Benchmark (see below)
Price per ordinary share
(Discount)/Premium of ordinary share price to the NAV per ordinary share~
Ordinary shares in issue*
*The issued share capital on 17 July 2018 is 133,825,000 shares.
For the year to 30 April 2018
Local Currency %
Sterling Adjusted %
Dow Jones World Technology Index (total return Sterling adjusted, with the removal of relevant withholding taxes)
Other Indices over the year (total return)
S&P 500 Composite
30 April 2018
30 April 2017
US$ to £
Japanese Yen to £
Euro to £
For the year to 30 April
Ongoing charges ratio# ~
Ongoing charges ratio including performance fee # ~
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, the research cost borne by the Company is included in the ongoing charges calculation.
~ Alternative performance measure
For further information please contact:
Polar Capital Technology Trust PLC
Tel: 020 7227 2700
Tel: 020 3757 4984
Page number references are made to the Annual Report and Financial Statements for the year to 30 April 2018 available on the Company's website.
MANAGEMENT REPORT - STRATEGIC REPORT
I am pleased to be reporting to you for the first time as your Chair. I would like to thank my predecessor, Michael Moule, for his contribution to your Company. His immense enthusiasm, investment knowledge and curiosity make him a very hard act to follow. I shall do my best.
As Michael said last year, he was appointed in 2011 and presided over considerable growth in Polar Capital Technology since that point, fuelled by post crisis Central Bank support and extraordinary change in and opportunities provided by the technology sector. Part of the role of a Chair's statement is to put the twelve-month period of this report into context. It is perhaps worth remembering that in the year to 30 April 2017, the net assets per share of your Company rose by just over 56.0%, despite considerable political surprise and upheaval during that period.
The twelve months on which I now report seems almost muted by comparison: the net asset value per share rose a further 22.7%, taking net assets per share to 1,159.69p and the net assets of your Company to £1,551.6m. The share price rose by almost as much, providing a return of 21.2%.
Shareholders may remember that a considerable part of 2016/17's return was due to the weakness of Sterling, following the result of the Brexit referendum. This year, that weakness reversed to some extent providing a headwind, and not a tailwind to returns.
Our Benchmark is the Dow Jones World Technology index (total return, Sterling adjusted with relevant withholding taxes removed) and this has driven returns over time. The Polar Capital technology team, led by Ben Rogoff in respect of the Company, has delivered further returns by outperforming that Benchmark, both last year by 2.7% and this year by 5.6%. The team is not hidebound by the Benchmark (to mix metaphors) but does pay some attention to it. We have said to our shareholders that we will provide a broad technology exposure and, in what is a volatile sector, we seek to pay attention to risk both in absolute and relative terms. Companies in this sector perform spectacularly well, from time to time, and also perform spectacularly badly. Obviously the team tries to pick the former group and avoid the latter, but from time to time, the unexpected happens. Hence Ben Rogoff's approach is to run a reasonably diversified portfolio with the aim of delivering good long-term outperformance but avoiding peaks and troughs in the shorter term. Therefore, we are pleased to see relative outperformance over 5 and 10 years.
Ben describes the reasons for the team's outperformance in detail in his report to follow here. In broad terms, his long-term thesis, that cloud computing would have a radical effect on the sector, has continued to prove correct. One or two older companies (and perhaps Microsoft is one) have shown signs of reinventing themselves but many spiral downwards and are not included in the portfolio.
Looking in a bit more detail, the portfolio has outperformed in all of its market capitalisation categories and almost all of its geographic regions.
We are pleased, therefore, to be paying a performance fee this year, for the first time since 2011. This reflects both good absolute returns (without which a performance fee is not payable) and an effective long-term approach which has delivered outperformance for shareholders.
We do consider the performance fee and the Benchmark carefully. The business model of Polar Capital, which involves 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. We regularly review the overall fee structure including the performance element with the next review due later this year.
I had wondered perhaps too optimistically if this section could be removed over time. However, the last year has thrown a few further curve balls into our paths.
MiFID II: although if we were starting from here, I don't think anyone would set up the way client commission has been used for broker research for fund managers, and the agency problem is real, the transition is less straightforward for a trust which is competing for research and resources with investment vehicles in other regulatory regimes. We expect, however, change to continue on this front. Our research and commission costs have been falling quite quickly and we have had detailed discussions with Polar over the years on this front.
In 2016 our commissions payable were £2.7m of which £1.8m was for research, in the year to April 2017 they were £2.3m of which £1.5m was for research and, in the year to 30 April 2018, commissions were lower again at £2.1m of which £1.4m was for research. Of the latter, £1.2m was prior to the implementation of MiFID II (1 May 2017-2 January 2018) and £0.2m was the direct cost for the four months from 3 January to 30 April 2018, this period reflects the new MiFID II regime. From 30 April 2017, assets have risen by 23.9% from £1,252.5m to £1,551.6m.
In response to the arrival of what is called unbundling, we negotiated with Polar that we would pay 50% of the newly unbundled research costs for the calendar year 2018, with a cap of USD$878,000 (approximately £637,000), in addition to our execution costs, which Polar have also negotiated downwards. The total cost of research for 2018 is estimated at $1.76m and has been calculated based on prior years research consumption and revised, reduced cost rates with various research providers.
In connection with the contribution to research costs we have also put in a third tier on the basic management fee with effect from 1 January 2018. We will review these arrangements with Polar Capital later in the year in the light of experience and the services being provided for the fees paid.
Along with other investment trusts, we were required by our regulatory authorities to produce a new form of Key Investor Document, which is available on the Company's website. We did at the time indicate that we thought that this was perhaps not the only document investors might consider when investing in the shares of the Company and made an announcement to that effect. Our view persists.
We have appointed two new Directors to your Board: Stephen White and Charles Park. For the appointment of both we used an external online-based Board level service and we are very pleased Stephen and Charles agreed to join us. Their biographical details are on page 53 of the Annual Report. Stephen brings many years of direct investment experience and considerable investment trust expertise as well. Charlie brings many years of experience of looking at US company cashflows (as he puts it) as well as considerable experience of starting and growing his own investment firm. Brian Ashford- Russell has decided to retire at the AGM, which will be an important milestone for the Company, after his great contribution to its foundation and development.
We are pleased to confirm the AGM will this year return to the Royal Automobile Club, Pall Mall, London and will be held at 2.30pm on 6 September followed by tea. I would encourage shareholders not to miss this event. Ben Rogoff, the investment manager, will give shareholders a presentation which provides insight into the development and impact of new technologies on the Company's portfolio. There will be ample 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. The formal business of the AGM is contained in a separate circular and also on the website.
In the Manager's Report, Ben Rogoff describes in detail his view of the long-term direction of the sector, or sectors, in which Polar Capital Technology Trust invests. He has been right about the radical impact of cloud computing on enterprise computing as well as the development of big data and these trends have underpinned the portfolio in recent years. We expect these themes to continue and the disruption caused already by such trends not to diminish.
The companies at the forefront of these changes are doing well, demand seems robust and debt levels are generally low. The speed with which dominant market shares are developed is to an extent alarming, and margins are substantial. In many ways, it's better to be invested in the disrupting than the disrupted and it's the disruptors that are the focus of your Company.
The sector is itself volatile. Technologies get superseded and in some instances the winners take all. In addition, valuations for our preferred non-legacy companies within the sector are not cheap, and we have had extraordinary returns over the last two years.
However, market timing is a very unreliable source of returns. Our view is therefore that it is entirely possible that there will be some downturn in the prices of the companies in which we invest although we don't know when that might happen. We have tried to make sure that we avoid the riskiest companies within the sector, cash levels are a little higher than usual and we have a small investment in put options to give a little protection. The purpose of this is to be able to take advantage of any set back to invest further into those companies which our manager believes will take advantage of the extraordinary opportunities provided by the technology sectors in the long term.
17 July 2018
Equity markets enjoyed another positive year driven by earnings growth and positive revisions while valuation expansion was kept in check by rising risk-free rates, political uncertainty and the return of market volatility. Returns were also hampered by further Sterling strength, the Pound rising 6.5% and 4.5% against the Dollar and Yen respectively, although falling 4.1% against a strong Euro. This left the FTSE World TR index in Sterling terms advancing 7.7% during the year, with currency dampening returns. Developed markets benefited from strengthening macroeconomic conditions which provided upward momentum to earnings estimates that also benefited from the weaker USD Dollar, the trade-weighted basket falling 7.3%. However, a more synchronised global recovery also saw oil (+35%) rise sharply, contributing to the upward move in 10 year US Treasury yields which began the year at 2.28% and ended the period at 2.94% having briefly exceeded 3%. This, together with elevated levels of political / trade uncertainty and more hawkish central bank language resulted in a dramatic return of market volatility during the final third of our fiscal year.
Although the US market (+6.6% in Sterling terms) continued to perform well in absolute terms, it trailed other major markets on a relative basis as economic momentum and tax reform were offset by higher sovereign yields and the weaker US Dollar. While the first half of the year saw investors question President Trump's ability to reaccelerate growth, the passage of the tax reform bill in December resulted in a volte-face which, together with nascent evidence of wage inflation presaged a significant bond market reversal as 10 year US Treasury yields exploded higher. This legislation - which reduced the corporate tax rate to 21% from 35%, its lowest point since 1939 - added additional impetus to earnings growth that had already been benefiting from improved macroeconomic conditions and rebounding energy prices.
US economic improvement - most apparent in the unemployment rate which fell to 3.9% and in the new order component of the December ISM manufacturing index which posted its highest reading in nearly fourteen years - resulted in further policy tightening, the Federal Reserve raising interest rates three times, leaving Fed Funds at 1.75% by period end. While bond and equity markets continued to diverge, higher risk-free rates made it difficult for stocks to rerate despite the improved earnings outlook. Together with President Trump's increasingly aggressive rhetoric and protectionist trade policies, higher bond yields presaged the return of equity market volatility with the S&P 500 experiencing its first 10% correction in two years during early 2018. This came as a particularly rude awakening following an extended period of low volatility and a record fifteen consecutive months of positive S&P 500 returns.
Other developed markets performed well during our fiscal year, driven by improved economic backdrops, continuing low interest rates and more modest bond-market corrections reflecting larger initial output gaps. Europe (+7.5%) enjoyed a strong first-half following the triumph of Emmanuel Macron in the French Presidential election and upward revisions to ECB 2017 GDP forecasts. Economic data also remained supportive with the Eurozone manufacturing PMI registering 60.6 in December, the highest level since the survey began in 1997. However, less dovish commentary from the ECB as it began to articulate its exit policy for quantitative easing (QE) and greater political uncertainty following Italian general elections weighed on returns during the second half, further frustrated by US Dollar weakness and poor weather. Japan (+14.5%) outperformed during the year, aided by PM Shinzo Abe's landslide election victory in October, and strong earnings momentum. However, the strongest performance was reserved for Asian equities (+17.0%), aided by US Dollar weakness and semiconductor-related strength.
Although North Korean missile tests and political brinksmanship weighed on sentiment during the first half, this lifted following a historic meeting between the leaders of North Korea and South Korea (confirming the common goal of a nuclear-free Korean Peninsula) and a remarkable warming of relations between President Trump and President Kim Jong-un.
The technology sector delivered another strong period of absolute and relative returns, our benchmark, the Dow Jones World Technology index, advancing 17.1% in Sterling terms during the past fiscal year. Not only did this follow a remarkable prior year, but unlike in previous periods outperformance was not aided by the sector's disproportionate US exposure. Although the weaker US Dollar detracted from the Trust's absolute return during the period, technology stocks outperformed materially in most major markets due to a combination of superior earnings growth and valuation rerating as the sector continued to attract incremental investors. In addition to strong secular drivers, technology earnings benefited from macroeconomic tailwinds and fiscal reform directly via lower tax rates and indirectly as a result of increased technology spending as many companies chose to reinvest their tax windfalls. This was likely influenced by fear of technology disruption which reached fever pitch following Amazon's acquisition of Whole Foods in June.
The improved backdrop saw Gartner revise up its 2018 IT spending forecast to +6.2% (the highest annual growth rate forecast since 2007) while the sector delivered strong earnings growth throughout the year. 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 a relative safehaven amid concerns about trade wars due to its minimal exposure to China, while the acquisition of Mulesoft by Salesforce.com set a new valuation benchmark for software acquisitions in what was otherwise a quiet year for M&A.
The so-called FANG stocks (Facebook, Amazon, Netflix and Google), together with their Chinese counterparts(Alibaba, Baidu and Tencent), continued to dominate the headlines, although strong fundamentals were at times overshadowed by regulatory and privacy-related concerns that began early in the year following the EU decision to fine Google €2.42 billion for allegedly breaking competition law.
However, this paled into relative insignificance following news of an earlier Facebook data breach involving political consultant Cambridge Analytica that allegedly used personal information harvested from more than 50m Facebook profiles without permission to target and influence US voters. This escalation of privacy concerns added to worries about so-called fake news and led to Facebook CEO Mark Zuckerberg appearing before a Senate sub-committee where he apologised for his "mistake". This overhang, together with greater investment spending saw both Alphabet (+4%) and Facebook (+8%) take time-outs during what was otherwise a very strong year for the Internet subsector. E-commerce trends remained robust, with Cyber Monday registering the largest online sales day ever with $6.6bn spent, +17% y/y, while in China, the Singles' Day promotion saw gross merchandise value (GMV) growth accelerate to +39% y/y from +32% in 2016.
These trends helped each of the Chinese Internet giants Alibaba (+45%), Baidu (+31%) and Tencent (+50%) deliver exceptional returns during the year. Amazon (+59%) also benefited from these trends, as well as remarkable growth at its cloud platform, AWS. See the Technology Outlook below.
In contrast and consistent with our long-held thesis, former enterprise computing winners such as IBM (-11%), Oracle (-3%) and SAP (+5%) - none of which were held in the portfolio over the period - all struggled to meet market expectations as Cloud adoption continued unabated. Against a backdrop of increasing IT budget / capital-spending trends, this underperformance became increasingly difficult to explain away as "business model transition" or short-term "mis-execution", epitomised by weaker than expected 2H18 guidance from IT services leader Accenture who cited pricing pressure as a headwind, a timely reminder of the deflation associated with Cloud migration. That said, incumbents Cisco (+26%) and Intel (+38%) both delivered strong returns due to better than expected growth and resulting multiple expansion. Apple (+10%) and the smartphone supply chain round-tripped during an eventful year with remarkable first-half strength (in anticipation of an iPhone supercycle) unwound during a painful second half following disappointing iPhone X sales and the likelihood of another flat year for total iPhone unit sales. That Apple was able to deliver inline performance reflected strength in its services business, an undemanding valuation and the effect of lower repatriation taxes (following the passage of tax reform legislation) given Apple's massive offshore cash balance. Smartphone-related weakness and the blocking of Broadcom's proposed acquisition of Qualcomm (-7%) on national security grounds, took the shine off an exceptional year for semiconductor companies that benefited from strong demand for sensors, memory, storage and advanced compute driven by Cloud, Artificial Intelligence (AI) and the Internet of Things (IoT).
Our total return performance came in ahead of our benchmark, our own net asset value per share rising 22.7% during the year versus a 17.1% gain in the Sterling adjusted benchmark. In the US, the most significant positive contribution to performance was made by Amazon which was also our largest overweight position. In addition, the portfolio benefited from its significant overweight exposure to software- as-a-service (SaaS) companies such as New Relic (+64%), RingCentral (+97%), ServiceNow (+65%) and Zendesk (+60%) which delivered strong growth and multiple expansion. Computer gaming companies also contributed positively, with Ubisoft (+90%) and Nintendo (+60%) particularly strong performers while our small position in payments upstart Square (+144%) proved our third largest absolute contributor during the year. Stock selection was positive across all major regions and across all market-capitalisation tiers.
Relative performance was also positively impacted by underweight / zero positions in a number of large index constituents including IBM, Oracle and Qualcomm that delivered disappointing returns during the year. The portfolio benefited from one acquisition with MuleSoft acquired by Salesforce.com for a 36% premium. Our AMD (-23%) position proved our largest detractor during the year, the stock digested its earlier gains as progress with its new CPU / GPU families failed to drive earnings estimates higher. Chip-rival Intel (+38%), where we were underweight, also hurt our relative performance as growth in its server business reaccelerated driving a valuation re-rating. Performance was also hindered by other underweight positions in a number of positive index contributors such as Cisco (+26%) and Microsoft (+31%), together with a number of next-generation holdings that disappointed including Criteo, CyberArk and Tesla. 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.
Looking back, 2017 proved the strongest year for global growth since 2011, with GDP +3.8% y/y as c.120 countries (accounting for three quarters of world GDP) experienced accelerating growth. This broadening and more synchronised upswing looks set to continue with 2018 on track to be the "first year since the financial crisis that the global economy will be operating at or near full capacity" with growth pegged at 3.9% this year and next. Advanced economies are expected to expand by 2.5% in 2018, driven by 2.9% growth in the US (2017: 2.3%) with consumption supported by wage growth, small business optimism at the highest level in decades and the expansionary impact of tax reform, offset by further policy normalisation. After delivering its fastest annual growth rate since 2007, Europe should experience another solid year with GDP expected to expand by 2.4% (2017: 2.3%) aided by labour market improvement, business capital spending and supported by loose monetary policy / quantitative easing (QE). The UK is likely to trail with growth pegged at just 1.6% (2016: 1.8%) due to soft consumption (relating to earlier Sterling weakness) and ongoing Brexit uncertainty. Japan remains a key beneficiary of global economic acceleration although growth is expected to moderate to 1.2% this year (2017: 1.9%) due to lower fiscal stimulus and Yen strength. After a strong 2017, developing economies are expected to further accelerate this year to 4.9% (2017: 4.8%) aided by reacceleration in India with growth forecast at c.7.4% (2017: 6.7%E) following a weaker year due to rebounding oil prices, demonetisation and the implementation of the Goods and Services Tax. Although growth rebounded in 2017 for the first time in seven years, China is expected to resume a gradual slowdown to 6.6% this year (2017: 6.9%) due to economic rebalancing / structural reforms and efforts to curb the expansion of credit.
Strengthening company numbers
The improved economic backdrop has presaged a sharp recovery in US corporate earnings which bounced back sharply in 2017, aided by the weaker US Dollar and the recovery of oil / commodity-related earnings. Current forecasts have the pace of earnings growth accelerating this year with estimates currently experiencing their largest upward revision since Factset began tracking the data.
The first-quarter earnings season has been exemplary with the S&P 500 on track to deliver 24.9% earnings growth y/y - the highest earnings growth since Q3'10 - boosted by recently enacted US tax reform and the new 21% corporate tax rate. Revenue growth has also impressed with the S&P 500 tracking at 8.2% y/y which would represent the highest revenue growth reported by the index since Q4'11. As in prior years, earnings should also be buttressed by buybacks with S&P 500 companies sitting on nearly $1.8tr in cash and equivalents, much of which has been stranded offshore until recently. This year is therefore likely to prove a record year with more than $178bn in buybacks already announced by the end of February (more than twice the prior 10 year average) while Apple alone repurchased $23.5bn worth of stock in its most recent quarter, the largest single-stock buyback ever and more than the market value of 275 of the S&P 500 constituents. Although elevated margins may appear a risk to earnings progress, this largely reflects the growing influence of margin-rich technology companies that currently account for 19.1% of S&P 500 earnings. Adjusting for this improved mix, US non- financial (ex-tech) EBITDA margins remain far from 1990s highs. While higher interest costs may prove a headwind (each additional percentage point on the corporate bond yield said to reduce EPS by c.4%) the altogether thornier issue of wage inflation represents the most latent risk to margins.
Interest rate normalisation
However, the elimination of output gaps is already beginning to have an impact on monetary policy which - in the US, in particular - has already become less market friendly. The Fed has already begun to unwind its balance sheet and raise interest rates (six times since the lows) with expectations for a further two hikes in 2018. The Bank of England has also raised interest rates for the first time since 2008, (although this was largely due to earlier Sterling depreciation), while the ECB - having bought more than €2tr worth of bonds may also begin to wind down its own QE programme.
However, we expect policy and liquidity conditions to remain supportive with G4 central bank balance sheets likely to expand until late this year and Mario Draghi all but ruling out ECB rate hikes this year. As such we remain hopeful that inevitable policy normalisation - now that the "era of QE and financial repression" is ending - will be carefully managed, not least because central banks have very little firepower in the event of an unforeseen economic shock. This view depends on core inflation remaining below target (core PCE averaging c.1.6% during 2018 vs. the 2% Fed target) despite unemployment falling to 3.9% - 17-year lows and decisively below levels once considered the "natural rate". While the market has begun to discount somewhat higher inflation (10-year Treasury Inflation Protected Securities (TIPS) spread rising to 2.15%) rising long-term Treasury yields also reflect other factors including higher growth, the Fed unwinding its balance sheet and $1.5tr of unfunded tax cuts. While we expect the alignment of interest between policymakers and investors - the bedrock of this long-bull market - to be increasingly tested, we remain hopeful that their respective paths will not diverge critically over the coming year.
The valuation conundrum
The combination of strong earnings progress and choppier market conditions has resulted in some recent valuation compression, the forward 12-month PE on the S&P 500 falling back to 16.5x (from 18.2x in January), leaving this metric broadly inline with the five-year (16.1x), but above the 10-year (14.3x) averages. International markets appear better value, but less so on a sector adjusted basis. However, lower equity multiples have been more than offset by higher US Treasury yields and measures of inflation such that the relative valuation gap between equities and bonds has narrowed over the past 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 according to this measure at the January 2018 highs. Although valuations remain appropriate for the current (low) inflation environment, higher bond yields and/or rising inflationary pressures will likely act as valuation headwinds going forwards. As such we do not expect equity valuations to expand easily from here (and it is quite possible that cycle-high valuations have already been seen). That is not to say we are bearish - downside risk to valuations should prove modest absent deflation or inflation, the two primary causes of sharply lower PEs. But the key question remains - at what level does the current inverse relationship between stocks and bonds break down? Of course, we will not know the answer to this until after the event, but history suggests the relationship turns negative once 10 year US Treasury yields breach 4%. However, we imagine the path to 3.5%-4% is likely to involve more serious buffeting than investors have become accustomed to simply because we do not know where the break point is.
As we regularly opine in our monthly updates, we are hopeful that in the absence of further PE expansion, investors may gravitate towards and ultimately crowd in stocks able to deliver genuine growth. This may help to explain why "growth" often outperforms in late-stage bull markets when "value" ought to be doing better as yields rise, epitomised by the so-called Nifty Fifty period, Japan between 1988-90 and of course the TMT bubble. At these times, technology and regulatory change has often played a key role in carving out subsets of stocks that perfectly capture the excitement of the time. Radio stocks played a prominent role in the years prior to 1929 epitomised by RCA which was growing revenues at 50% per year, while another frontier industry - electric utilities were "the favourites of speculators". Technology companies were also well represented within the so-called Nifty Fifty - 50 stocks identified by Morgan Guaranty Trust that were among the fastest-growing companies on the planet in the latter half of the 1960s. These included hardware high-fliers Burroughs, Digital Equipment and IBM as well as reprographics darlings Polaroid and Xerox. Likewise, technology leadership in consumer electronics, video gaming and use of assembly-line robots in manufacturing helped create the preconditions for the late 1980s Japanese equity market bubble. And the late 1990s bubble - characterised by the classic "new" and "old" economy division - was driven by the confluence of game- changing technologies and telecom deregulation.
The zeitgeist of today is of course disruption made possible and being delivered by technology winners, epitomised by Amazon and the other FANG stocks 20 years after "Internet 1.0". Once again, the world is divided into winners and losers, while a number of nascent technologies such as artificial intelligence and blockchain have the long-term potential to change everything. Despite this potentially heady mix, markets have yet to really experience anything that resembles a late 1990s 'blow-off'. After all, bull markets tend to go out with a bang (not a whimper) with peaks often marked by excess. This can take the form of investment fads, sentiment, use of leverage and valuation.
Each of these variables has become a little more elevated over the past year: Bitcoin and marijuana- related stocks have delivered incredible returns to speculative investors, equity flows have continued to improve and leverage is at post-financial crisis highs as US corporates replace equity with cheap debt. However, valuations still look appropriate and sentiment remains remarkably restrained. The so-called "melt-up" scenario therefore still exists as a bull case and could be presaged by a great rotation moment where higher yields force a reallocation away from bonds, but remain below levels that might derail equities. M&A activity - subdued in 2017 - could also explode back to life as a result of repatriation and technology disruption, with private equity a potent incremental buyer.
In short, the final phase of this bull market could yet surprise us to the upside given that we have the necessary ingredients for another Nifty Fifty and many of the late-cycle conditions that could trigger a "melt-up".
Looking for signals
That said, we are ever mindful of the duration of this long bull market - now the second longest on record. While "bull markets don't die of old age", we will continue to watch for signs of deterioration that might help us better navigate choppier waters. Fortunately, there are few signs today of the usual preconditions that might indicate the market is at a peak such as widening credit spreads, loss of breadth and recession probability above 20%. With corporate leverage back at highs (and mindful of the 2016 market correction caused by the high yield market seizing up as energy prices plunged) we remain focused on credit spreads as a potential trigger.
According to CSFB, a widening of high yield spreads has preceded eight of the last nine market peaks on average by seven months (and at least two months) before an equity market correction. Another key indicator we will be watching is the yield curve because it typically inverts in anticipation of the next recession and ahead of an equity market correction. As Ned Davis states, "Bull markets often end in a predictable manner. The economy begins to grow above potential with inflation starting to rise, and the Fed raising interest rates to keep inflation in check. This generally leads to an inverted yield curve, which makes it either unprofitable or risky for banks to lend…".
Although the yield curve has been flattening, this should be expected late cycle while the lead time between full inversion and a recession can be as much as 18 months. Finally, we will watch for deteriorating breadth as per our Nifty Fifty scenario where an ever-diminishing number of stocks shore up a market that really wants to go down. "Persistent divergence between the S&P 500 making a series of new highs, while market breadth makes a series of lower highs" has been present "in virtually every" market top, a process that can last anywhere from four months to two years. Deteriorating breadth characterised tops in 1929, 1972, 1987 and of course during the 1990s technology bubble. However - and despite much FANG-related chatter to the contrary - recent market breadth has been positive while none of the indicators we follow look particularly concerning.
As ever, there are myriad risks that could challenge our view. The most significant of these relates to policy error and/or the loss of policymaker support with the elimination of output gaps and late-cycle fiscal stimulus potentially forcing the Fed to normalise interest rates ahead of schedule. Mario Draghi's anticipated departure from the ECB in 2019 could further increase the "risk of missteps or disorderly financial market adjustments" with the changing of the guard feeling a little like politicians moving from a peace to a war footing.
The market sell-off in January following the spike in average hourly earnings made it abundantly clear that wage pressure remains the most significant risk to orderly policy normalisation. Sharply higher rates would likely spill into equity markets, potentially presaging a 1987-type moment, and/or a recession, already statistically overdue given the length of the current expansion (105 months) as compared to the median of 37 months. A recession or a growth scare could also be induced by a trade dislocation should President Trump succeed in further emulating President Reagan, considered by some to have been "the most protectionist president since Herbert Hoover". A key tenet of his pre-election campaign, investors should not be surprised by "Trumpist" efforts to "save U.S. jobs" through higher tariffs, bilateral trade deals, and lower trade deficits.
The decision in January to impose US tariffs on imported solar panels and refrigerators and aimed squarely at the Chinese, has commenced a tit-for-tat series of tariffs today covering more than $100bn worth of trade. Markets have absorbed this well as a war of words ahead of negotiations aimed at reducing the US trade gap with China by $100bn. While we expect worst-case scenarios to be avoided, the President's acerbic style ("trade wars are good, and easy to win") will only add to the uncertainty.
While the Trump victory has so far proved the high watermark for so-called populism, the risk posed by this political movement, continues to simmer. Condemned as right-wing or worse, populist parties have been on the rise in Europe since the financial crisis initially as protests against income inequalities, political correctness, liberal elites, globalisation and the EU. However, the migration crisis and Angela Merkel's Willkommenspolitik open door policy has seen many of these protest parties morph into anti-immigration / socially conservative parties that "defy classic left right categorisation". This issue has apparently driven a wedge between "old" and "new" Europe with some governments in the Visegrad group containing "political parties in favour of heterodox policies that break away from the patterns set by Western democracies" including Fidesz in Hungary led by Viktor Orban and Law and Justice in Poland. In Austria, the nationalist Freedom party joined the government having captured 26% of the vote in November elections. While this outcome has been avoided in Germany, Angela Merkel's party suffered its worst post-war election result during September elections. Immigration dominated the contest benefiting the Alternative for Germany (AfD) party which received 12.6% of the vote (identical to UKIP's share in 2005). Unlike UKIP - which achieved its Brexit referendum goal and then imploded - the AfD continues to gain support (>14% at present) because popular (illiberal) concerns continue to go unaddressed by (liberal) elites. Recently concluded Italian elections delivered the same message with Mario Renzi's ruling centre-left Democratic Party punished by voters worried about immigration at a time when the economy remains below pre-crisis levels with unemployment above 10%. As discussed last year, "continued failure by political establishments to listen to voters and unwind some of the perceived excesses will make a 1930s rerun significantly more likely" - a position that looks increasingly obvious and inauspicious twelve months later.
In addition to those outlined above, there are a number of additional risks that investors should consider. As in prior years, China represents a key risk to the global economy and financial markets. Having stabilised in 2017, growth is expected to slow this year as economic rebalancing continues. This trend may continue as President Xi - now the "most powerful Chinese leader of the modern age" having consolidated power by abolishing term limits - could continue to address the longer-term issues facing China's economy or make trade concessions to placate the US that come at the expense of near-term growth. These issues include excessive leverage (overall credit reaching >250% of GDP) and an overvalued housing market.
As we have consistently argued, China should be able to avoid a hard landing due to the self-funded nature of its growth, while reserves have been somewhat rebuilt and inflation remains relatively benign affording policymakers some room for manoeuvre. Political risk remains elevated, with North Korea and Iran likely focal points, while European populist movements (and arguably Jeremy Corbyn's Labour Party) represent latent threats to the (market friendly) status quo. Other risks include Brexit where the divorce from Europe "could take the best part of a decade", the ongoing challenge to nation states posed by Islamic extremism, unintended consequence of US Dollar strength particularly in emerging markets, and seasonality - the six months prior to mid-term elections (due in November) empirically "the weakest stretch of the Presidential cycle".
Worldwide IT spending is expected to reach $3.7tr in 2018 with estimated growth of 6.2%, the highest in a decade. While less impressive on a constant currency basis (+3.4%) technology spending appears to be recovering with the improved macroeconomic backdrop and the sector a beneficiary of fiscal reform as companies opt to reinvest their tax windfalls in order to reinvent themselves and stay relevant during a period of (what we believe is) unprecedented disruption. As in prior years, budgets continue to shift in favour of newer technologies with security, cloud software and mobility the top three IT priorities this year, according to Piper Jaffray. The combination of secular and cyclical factors saw the technology sector deliver outstanding growth in 2017 with revenue and earnings of 10.4% and 16.9%, well ahead of the S&P 500 which posted 6.3% and 10.8% respectively.
While the relative lustre of technology may dim this year as tax reform lifts all boats, technology earnings should be well supported by the better economy, improved margins and of course, lower taxes. Tax reform may also be acting as a tailwind for business spending with the CEO of Salesforce.com recently noting that "multiple customers were accelerating software investments due to tax reform". This view appears well supported by an outstanding first-quarter earnings season that has seen technology deliver the highest blended revenue growth of any sector (+16.1% y/y), nearly twice the overall market (+8.5%) rate. While the technology sector is expected to deliver less earnings growth than the broader market for the full year (16.1% vs. 19.2%), this reflects the uneven impact of tax reform and sharp recoveries expected in both energy and financials. However, in revenue terms technology (+11.9%) should substantially outgrow the S&P 500 (+7.2%) in 2018.
The combination of superior growth and marked outperformance saw the technology sector enjoy a well deserved re-rating over the past year leaving it trading on a forward PE of 18.0x as compared to 17.8x at prior year-end. This represents the highest level since 2007 and a c.9% premium to the broader market, ignoring the sector's relative balance sheet strength. Although we do not expect the sector to materially Re-rate versus the market over the coming year due to ongoing Cloud disruption, relative valuation downside should also prove limited given the sector's growth and balance sheet profile. Following another strong year, we remain constructive and continue to see significant opportunities within the technology sector for 2018. In contrast, many commentators instead remain focused on the downside risks associated with our sector while others believe technology stocks are in the middle of another bubble. We remain of the view that the 1990s parallel is too easy, while over- exuberance is contained to a few exciting longer-term opportunities. Rather than signalling a return to bubble-like conditions, we regard this excitement as normal fare for a sector where mainstream adoption often takes significantly longer than originally hoped.
Our own excitement remains underpinned by a new cycle thesis that appears to be gathering strength with every earnings season. Cloud adoption - the kernel of this long-held view - is continuing to capture "every" additional workload. Gartner - a long-time naysayer and proponent of the hybrid approach - recently conceded that public cloud computing was "growing more strongly than initially forecast". After reaching $34.7bn last year (+37% y/y), infrastructure as a service (IaaS) is forecast to grow 32% in 2018 as enterprises continue to migrate production workloads. Amazon Web Services (AWS) remains at the vanguard of this mass production form of computing having achieved a $22bn revenue run rate, with growth accelerating to +49% y/y in Q1'18. That AWS has been able to maintain its growth trajectory at scale speaks volumes about the size of the market opportunity, something that Amazon CEO Jeff Bezos called out in his 2014 letter to shareholders when he said that AWS was "market size unconstrained". Both Microsoft Azure and Google Cloud have also made good progress (estimated +90% and +75% y/y growth respectively), although Google remains a distant number three. While Alibaba has built a strong beachhead in China, everyone else appears all but irrelevant in an industry "where scale really matters". E (SaaS) has also continued to prosper, reaching $58.6bn last year and is expected to grow 22% in 2018. We expect growth in excess of 20% to continue for the foreseeable future as the market potentially triples during the so-called "second decade of SaaS". Platform as a service (PaaS) is also expected to grow c.25% this year driven by rapid-application development platforms (aPaaS) and low-code business process management (BPM).
The Cloud is the future
While it is impossible to know precisely where penetration is, a recent survey of 100 CIOs revealed that the public cloud accounts for c.21% of workloads today. This is headed much higher as adoption inflects with the same survey estimating penetration of 44% by 2021, while Cisco believes that more than 60% of workloads and compute instances will be processed by public cloud data centres three years from now. The reason that the Cloud has become the default computing platform reflects the fact it is more scalable and cheaper (we believe every $1 spent at AWS represents c.$4 lost to traditional IT), more secure (IaaS workloads will suffer at least 60% less security incidents than traditional data centres), increasingly global (number of hyperscale data centres expected to near double between 2016-21) with lower migration costs as offshore IT providers ramp their skills and capacity. The Cloud also allows enterprises to reduce maintenance spending - said to account for as much as 75% of IT budgets - by "eliminating technical debt associated with maintaining legacy systems". And for most companies, the Cloud represents the only real way to embrace Artificial Intelligence (AI) today. However, the overarching reason why Cloud adoption is accelerating is as a key enabler of the so-called digital transformation - "the business imperative of responding to needs of a new generation of customers, partners and suppliers who expect transactions to be seamless, real-time, Facebook-like in experience, Amazon-like in reliability". This requires the adoption of concepts such as DevOps and "innovation at scale" - likely beyond the capabilities of internal IT and legacy vendors but table stakes for AWS with multiple CIOs reporting that they "have never seen a technology company of this size and scale deliver this much continuous innovation to customers".
The growing divergence between incumbents and next-generation companies is likely to intensify over the coming years as workloads continue to gravitate towards the public cloud, while emerging technologies such as AI - where the Internet platforms enjoy a leadership position - are likely to accelerate this trend. This is already apparent from the reallocation of IT budgets away from legacy areas while deflation is permeating up the stack. According to Jeff Bezos, the Cloud threat "encompasses servers, networking, data centres, infrastructure software, databases, data warehouses, and more". The impact is already apparent today, with overall device unit growth having come to a halt and market shares in flux. However, the improving economy and improved pricing (aided by component shortages) are ameliorating this impact for now.
The PC market is expected to be flat in 2018 having contracted c.3% in unit terms during 2017, with enterprise "strength" due to Windows 10 offset by ongoing consumer weakness. Storage continues to fall as an IT priority despite expectations that the volume of data stored will triple by 2021. While the server market has been stronger than expected (+4.7% y/y in 2017) this largely reflects hyperscale / AI-related demand and pass-through of higher prices of components. Downward pressure on units will continue to be exerted by c.4x greater workload intensity in cloud data centres compared to traditional ones. Smartphone growth is also faltering with units forecast to grow 3% annually through 2021. While IT services are also expected to enjoy a c.4.5% five year CAGR, "segment growth will be varied" with IaaS driving net new spending with "next to zero" growth in infrastructure and network implementation.
The structural headwinds facing legacy technologies and once-dominant incumbents is most apparent at IBM which suffered 22 consecutive quarters of negative year-over-year revenue growth before "turning the corner" in Q1'18 when it posted 1% y/y growth which CEO Ginni Rometty "was pleased with".
Oracle has also fared poorly; having mocked the Cloud as "complete gibberish" and "idiocy" in 2008, CEO Larry Ellison has attempted to catch up via a series of acquisitions including Netsuite, Responsys and RightNow. However, Oracle's revenues are essentially flat with where they stood in 2011 despite spending more than $25bn on acquisition since then. Rival SAP has also been reinvesting vigorously having spent more than $28bn on M&A (we believe equivalent to c.90% of the free cash flow generated during the period) but has only rarely been able to deliver Cloud growth and margin improvement. While both Cisco and Intel are faring better - reflecting their dominant positions and less competition - they also appear increasingly reliant on M&A to shore up growth. Unlike people who can opt to age gracefully, technology companies cannot - terminal growth is negative, and the value of incumbency atrophies - thanks to deflation and the so-called innovator's dilemma.
The road to redemption is a difficult one that few successfully travel. Microsoft's successful Cloud pivot greatly aided by its dominance of office productivity software and a visionary CEO - is thus likely to prove a siren call for investors.
That said, at a time when global growth is reaccelerating, there is a chance that incumbents might enjoy an economic time-out as budgets lift. The improved economic environment prompted Mark Benioff - CEO of Salesforce.com - to recently declare he had "never seen a demand environment like this". Repatriation could also help as previously offshore cash is deployed on buybacks, M&A and business spending. Financial engineering has long been the mainstay of challenged incumbents - the potential return of c.$1tr of offshore cash by the largest technology companies will provide them with a new source of ammunition. However, this positive is likely being overplayed because incumbent balance sheets have already been greatly depleted via bond issuance to finance dividends, buybacks and of course, M&A. While it is true that tech giants are awash with cash, their net cash positions are far less healthy. For instance, we calculate that Oracle has negligible net cash once a 15% haircut is applied to its $58bn offshore cash and its onshore cash ($13bn) and debt ($61bn) are considered. Likewise, Microsoft's $146bn gross cash is nearer $23bn net, while Intel is in a net debt position. Even Apple's fully taxed net cash position is closer to $122bn, equivalent to c.42% of its headline $285bn gross cash. In contrast, no such distinction exists at either Alphabet or Facebook with their combined gross / net cash of $145bn / $132bn and debt of $4bn. Of course, generalist investors may not care about this nuance as technology balance sheets remain unusually strong compared to other sectors, something likely to become increasingly attractive as interest costs rise.
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 the greatest beneficiaries of smartphone ubiquity and plentiful bandwidth with more than 4.1bn people accessing the Internet today, c.54% of the world's population. While 2017 proved another vintage one for many Internet stocks, the subsector began the year amid greater regulatory scrutiny and ended it embroiled in a data / privacy debate following Cambridge Analytica revelations. The growing political and press narrative at times resembled an outright backlash, likely driven by growing Internet-related disruption. The introduction of General Data Protection Regulation (GDPR) in Europe - legislation designed to strengthen the data rights of EU citizens from May 2018 also helped shape the narrative. At the risk of sounding overly sanguine, we do not believe that the Internet platforms have breached anti-trust regulations either via higher pricing or consumer welfare - they are not exclusive suppliers and in many instances deliver their services for free in exchange for the collection and use of data. Nor do we think that GDPR (and similar data protection legislation that may follow) will undermine their raison d'etre. Not only do the Internet companies appear confident that they will be compliant, but they may end up benefitting as the inability to collect data in the offline world embellishes their inherent data advantage.
While the risk of greater taxation exists - for instance, a draft European Commission has proposed a levy based on where the customer rather than the company is located - we do not think it will prove easy to change the basis of global taxation. Instead, we hope that the internet sub-sector is able to avoid worst-case outcomes by proactively improving their business practices, use of data and "cleaning up" content on their platforms.
Risks and rewards
While regulatory risk may be dominating the headlines, the Internet economy remains in rude health. The outlook for online advertising (+16% y/y in 2017) remains resilient as it continues to take share from offline media spend. The US continues to lead with online accounting for c.40% of overall spending with mobile (search / display / video) a key growth driver. As previously, Alphabet (Google) and Facebook continue to dominate the market with their large audiences and ROI advantages that they deliver for their advertisers. This advantage is likely to persist as innovation around new ad formats and superior targeting contributes to the wide and deep moats both have established. However, both Amazon and eBay are also increasing their focus on their respective advertising opportunity. Retail remains the largest ad vertical in the US at c.20% of the total market and both companies have specific advantages specific to the sector in their purchase data and ability to close the attribution loop between advertising and purchases. Social media continues to grow its share of advertising Dollars and time spent online with Facebook the undisputed global leader with 2.1bn monthly active users (MAU) and 1.4bn daily active users (DAU) while its messaging platforms Messenger and WhatsApp boast 1.2bn and 1.5bn MAU respectively. In China, Tencent's WeChat remains the market leader in China with more than 1bn MAU.
The growth in e-commerce continues at a steady pace, assisted by the tailwinds of an improving global economy. In 2018, global retail is forecast to grow c.5% while eCommerce is expected to deliver 15%, with online penetration increasing a further 1% as it continues to take market share steadily from offline.
Mobile commerce (mCommerce) continues to outpace overall eCommerce, representing 23% of online but only 3% of overall US retail spending. There are still large retail categories significantly underpenetrated online such as grocery and home furnishings and a B2B eCommerce market ripe for disruption. Traditional bricks and mortar retailers are likely to continue to face headwinds, especially those who fail to adapt to the new digital environment or those with a larger store base than required today. Over 5,000 store closures were announced in the US during 2017, highlighting the level of stress experienced offline in contrast to the fortunes of Amazon which captured more than 70% of US online retail sales growth (and 35% of total retail growth) during 2017. Omnichannel remains a major theme following Amazon's acquisition of Whole Foods and the introduction of Alibaba's Hema supermarket store format, central to its "New Retail" strategy for blending offline and online experiences.
Internet-driven disruption is also accelerating in media content as time shifting to digital away from linear TV continues. Consumer consumption of media content remains in flux as new forms of content across a wide range of devices compete for leisure time. YouTube has now surpassed 1.5bn monthly logged-in users who spend on average more than one hour per day watching content just on their mobile device. However, its fastest growing medium of consumption is the TV, +90% y/y. As a key battleground, the race for premium video supremacy continues. In 2018 Netflix and Amazon are expected to spend c.$7bn and $5bn on content respectively, Google is forecast to invest several billion dollars to support YouTube, and both Twitter and Snap are also increasing spending. In this environment, it is not surprising that fears of "peak TV" have been wide of the mark - a phrase coined by the CEO of FX Networks in 2015 to describe the overwhelming amount of TV content available on broadcast, cable, satellite and streaming platforms.
At that time, a then record 422 scripted series aired in the US, but this has continued to grow, reaching 487 in 2017 with almost all of the growth driven by the enormous incremental budgets of the over-the-top (OTT) players. Subscription models remain a popular and successful mode of monetising media content employed by all of today's top ten grossing non-game apps in stark contrast with 2009 when none used it.
Video streaming category leader Netflix has reached 110m paying subscribers while music streaming leader and recent IPO Spotify has exceeded 70m. Dating app Tinder has quickly risen to become the second highest grossing app globally in 2017 aided by subscriptions and its innovative use of micropayments designed to boost profile views.
Smartphone: sales up, units down
Our concerns about a slowing smartphone market were borne out in 2017. Although smartphone sales to end users rose 2.7% y/y to 1.54bn units, worldwide sales recorded their first ever decline in Q4 with 408m units shipped (-5.6% y/y) while the Chinese market - the largest in unit terms - faltered as annual shipments fell year over year-. With global smartphone penetration estimated at 66% and 80-90% in the most advanced markets, the unit story is essentially over with growth forecast at c.3% CAGR between 2016-21. This may be further frustrated by extending replacement cycles which in the US increased to 2.6 years, up from 2.4 years in 2016. However, in value terms the smartphone market expanded by 9% in 2017 as average selling prices (ASPs) increased 6% and a whopping 11% in Q4 driven by the $1000 iPhone X and the $930 Galaxy Note 8. This is both new news and an unusual feature in mature technology markets following significant price hikes at the high-end of the market led by Samsung and Apple. Although higher prices reflect a significant increase in features (OLED screen, 3D sensors, wireless charging etc) and a corresponding bill of materials (BOM) the gross margin dollar uplift is material.
Apple and Samsung with their dominant share of profits and high-end smartphones look well placed to capture most if not all of this additional value. While higher prices make easy copy, high-end smartphones continue to represent incredible value for money given their utility and frequency of use (25% of users spend more than 7 hours per day on their smartphones) with high residual values also ameliorating the actual cost of ownership, particularly in the case of Apple. Nevertheless, it is clear that the best days of the smartphone market are behind it unless something like augmented reality (AR) can genuinely change everything by obsoleting the c.3.2bn smartphone installed base. Until then, we have no idea where replacement cycles will extend to, although the PC experience is sobering (now at 5-6 years).
Consistent with our long-held views, Apple remains our favourite smartphone-related stock which we believe is best understood as a mass affluent / luxury goods company whose premium brand, customer base and ecosystem allow it to capture a vast majority of industry profits with only c.16% smartphone market share. While disappointing iPhone X sales have put an end to hopes of a so-called supercycle, Apple's ability to raise prices is highly supportive of our own view. We also remain excited about its services business which generated $8.5bn in Q1 (+27% adjusting for the longer-quarter last year) and 500m customers visiting the App Store each week.
As this recurring revenue stream grows in Apple's mix its valuation may tend towards consumer peers such as Coca-Cola. However, our bullishness is constrained by smartphone-related headwinds (maturity and lengthening replacement cycles at a time when iPhone sales may be plateauing at c.215m units/ year). It will also be difficult for the company to grow units in the US where it already sells 70m units which represent 58% market share of c.120m phones that come up for replacement each year (assuming a 2.3 year upgrade cycle). Other risks include China, both in terms of demand (c.30% of iPhone sales) and supply (components made in China) in the event of a trade war. As such, we expect to retain a large but significant underweight position in this remarkable, inexpensively valued but growth challenged company.
The Apple-related inventory correction during the final third of our fiscal year took the shine off a remarkable year for the semiconductor sector which posted c.22% revenue growth during 2017. Surging memory prices greatly contributed to ASPs which rose 7% (the highest rate achieved since 2000), but even without this boost, the industry still delivered c.10% growth. We expect growth to slow during the year ahead due to smartphone-related weakness and as memory price increases moderate or potentially reverses.
However, AI and cloud computing should continue to drive demand while PC unit growth may turn positive for the first time in six years as chip-set security problems found in legacy Intel and AMD chip-sets ignite a corporate upgrade cycle. We are also very excited about opportunities related to power-train electrification but cautious on smartphone-related segments due to slowing unit growth, particularly at the high end where semiconductor content is multiple times higher than mainstream smartphones. Following a much quieter year for semiconductor M&A (value of deals declining to $27.7bn in 2017) we expect the muted deal backdrop to persist following President Trump's pre-emptive decision to block the proposed acquisition of Qualcomm by Broadcom on national security grounds.
The disappointing debut of the iPhone X also reminded investors of the smartphone exposure that comes with robotics in what was otherwise an outstanding year for industry fundamentals and share prices alike. The proliferation of machine vision, industrial IoT and real-time analytics aided by cheap compute and storage enabled by cloud computing has given robots new capabilities that have radically changed payback periods and reduced implementation costs. Modular production lines - thanks to improvements in control systems and reduced time spent reprogramming robots for multiple tasks - provide greater flexibility to manufacturers of multiple low volume products. This has created large incremental opportunities as users are able to achieve faster time to market, epitomised by so-called "Fast Retail". In addition, demand from traditional users of robots has remained strong. The automotive industry which accounts for c.35% of total robot volume, has accelerated its adoption of lightweight materials, leading to a meaningful increase of robot density to deal with more complicated manufacturing processes. Likewise, the adoption of new technologies has been driving demand in the smartphone industry, the growth of OLED (Organic Light-Emitting Diode) displays (included in the iPhone X) creating a large opportunity for the robotic industry due to the complicated manufacturing process. In addition, the Samsung battery issue and recall led to smartphone makers introducing machine vision-based production trace systems to improve quality control. While OLED-related weakness represents a near-term headwind, we remain hugely excited about longer-term prospects for the robotics industry.
After a difficult 2016, software stocks enjoyed a banner year as valuations recovered alongside fundamental strength. In addition to an improved backdrop for spending, the subsector also benefited from a shift in investor focus from consumer (Internet) names in favour of critical modernisations that are beginning to happen as the agility that consumers want and now expect, begins to ripple back up through the corporate structure. In this new data-driven world, "software has evolved from being a method of modernisation to a source of differentiation", but in order to meet the new exacting needs of customers, companies need agile yet broad back-end capabilities. It also requires the recognition that for every business, the showroom, the storefront is digital and the importance of leveraging the corporate treasure - its data. At the same time, the Cloud has enabled smaller companies (that may not even have an IT department) to access applications previously tackled with spreadsheets or pen and paper with just a credit card. Today there are myriad vertical SaaS apps that bestow upon their users domain expertise once the reserve of enterprise customers and their IT service partners. While we have taken some profits after a strong run and some multiple expansion, we believe the sector remains well supported by actual and potential M&A, much improved profitability and the emergence of "winners" in many of the most important business software categories.
Computer gaming companies enjoyed another strong year with most of our holdings significantly outperforming the technology market. With two-thirds of American households regularly playing them, video games have truly evolved into a mass market medium. Adoption has been enabled by the proliferation of increasingly capable electronic devices and Internet connectivity, which has enabled the creation of large player networks and digital distribution. The global video games software industry is estimated to have grown a healthy 10.7% in 2017 to $116bn with mobile (c.43% of the total industry) driving nearly all of the growth. In addition, industry profitability has been transformed by full game digital downloads (now c.40% penetrated) and additional digital content (DLC/MTX) which today accounts for between 20-40% of sales at EA, Activision and Take-Two with c.90% incremental gross margins. Back end monetisation is actually greater than upfront game sales at some successful digital franchises (GTA Online registered its highest ever bookings in Q4'17 more than four years after launch) and this trend looks set to continue with the emergence of AI which can leverage immense data sets of human behaviour to further improve monetisation.
While we remain constructive on the group, we are continuing to monitor the progress of Fortnite, a free to play console (and now mobile and PC) game which has attracted more than 45m players with a new game genre ("Battle Royal"). Unlikely to pose much risk to existing AAA franchises, the back-end only monetisation of Fortnite is new to console gaming and could potentially prove disruptive over time.
In addition, there are a number of other themes that we are excited about including payments where smartphone-enabled disruption is extending, driven by new entities that have been able to create superior user experiences and generate trust. Although these companies are enabled by technology, they are not about technology. It is about financial inclusion, consumer empowerment, and disruption of the status quo. For instance, Atom Bank - one of the UK's first digital banks, already offers mortgage products and has started taking customer deposits. Revolut started life as a provider of competitive foreign exchange rates, before broadening its offering. Monzo was initially pitched as an elegant way to ringfence spending but today its distinctive card is now prevalent among millennials in the UK. The updated European Payment Services Directive (or PSD2) came into force in January this year and will only exacerbate the problem for incumbents. Its central aim is to open the market to greater competition and ultimately lower the cost of payment processing. Banks are required to build Application Programme Interfaces (APIs) in order to allow qualified parties to access customer data (with the consumer's approval, of course). This should enable start-ups with very asset light models to compete on a reasonably level playing field, benefiting from existing infrastructure that banks have invested in. Although there are a limited number of pure-plays on this theme, we continue to favour Visa which should benefit from growth in digital spending which only accounted for 9% of total retail spend in 2016 but is expected to reach 15% by 2020. While losing part of the eBay business will create an earnings headwind, Paypal also remains a preferred payments play as it continues to enjoy strong core growth and good traction with its acquired assets. We also have exposure to two of the most important global payment assets - WeChat and AliPay - via our holdings in Tencent and Alibaba.
The final word belongs to AI following a breakthrough year when almost every company was alerted to the potential opportunities and disruption it posed. Interest in startups exploded as VC investors poured over $14bn into AI companies, 2.4x more than during 2016. Interestingly, c.70 exit events also happened in 2017 (+75% y/y) driven by corporates wanting to own the technology in-house. Acquirers included technology companies such as Apple, Cisco and Samsung but also non-traditional ones too including Centrica and John Deere.
This explosion in AI-related activity reflects the significant improvement in machine learning (ML) and deep learning - a network based on complicated algorithms capable of adapting to new data without being explicitly reprogrammed - that have driven the recent evolution of AI. For us, how AI diffuses in the real economy and brings changes to existing business models matters far more than a smart speaker capable of playing music via voice commands. If the target (and average age) of VC funding is any guide then we can get a sense which sectors are going to be disrupted. Speech translation / recognition is one of the very few AI applications reaching a mature phase as consumers use these technologies on their smartphones. Consumer-facing smart robots and recommendation engines are also considered potentially disruptive to incumbents while computer vision, natural language processing, video recognition and virtual assistants are still at an early stage but hold great potential.
Much of the recent excitement and why this potential is beginning to feel within reach reflects the remarkable progress made comparing human and AI systems when playing games - a relatively simple, controlled, experimental environment. According to this, AI has clearly made significant progress with performance achieving human (Jeopardy / Atari / Switchboard) and super-human (Go / Pac-Man) levels. However, just as 1970s calculators could perform arithmetic better than humans, AI today remains extremely narrow and not very intelligent. According to Facebook's head of AI, the most advanced systems today are "dumber than rats". Likewise, while as many as 800m jobs could be under threat from automation only 6% of the most repetitive jobs are at danger of being automated entirely.
This reality is in stark contrast with views held by Bill Gates and Steven Hawking who believe (malevolent) superhuman AI is coming while Elon Musk famously stated, "with artificial intelligence we are summoning the demon". This difference of opinion may be explained by the fact that the timeline to general purpose AI remains unknown. AI experts believe that so-called artificial general intelligence (AGI) could arrive between 2040-2050 while futurist Ray Kurzweil thinks the Singularity - the point where "there will be no distinction between human and machine" could occur in 2045. Until then (or some later date) it is more likely that "we will invent whole new modes of cognition that don't exist in us and don't exist anywhere in biology". As the founding executive editor of Wired explained "when we invented artificial flying we were inspired by biological modes of flying... But the flying we invented - propellers bolted to a wide fixed wing - was a new mode of flying unknown in our biological world." Likewise, the future of AI, at least for now, is not general AI. Rather "it will be many hundreds of extra-human new species of thinking… a galaxy of finite intelligences, working in unfamiliar dimensions, exceeding our thinking in many of them, working together with us in time to solve existing problems and create new ones". We can't wait.
Ben Rogoff & Team
17 July 2018
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.
1 Rebased to 100 at 30 April 2008.
2 The net asset value 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 relevant withholding taxes removed.
All data sourced from Polar Capital LLP
CLASSIFICATION OF INVESTMENTS*
as at 30 April 2018
*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.
FULL PORTFOLIO* as at 30 April 2018
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 strategies and potential for those strategies to succeed, including a fair review of the strategy and performance of the Company during the year ended 30 April 2018, 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 and the investment objective is to provide Shareholders with access to an actively managed portfolio of technology shares selected on a worldwide basis with the investment objective to maximise long-term capital growth.
Further information on the operation of the business is set out in the Directors' Report on pages 56 to 58.
The Board has appointed Polar Capital LLP as its Investment Manager and AIFM.
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, indices 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 broad 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.
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.
At the Annual General Meeting in 2012 the current investment policy was approved. The portfolio has been managed in accordance with the policy and restrictions in the year to 30 April 2018.
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.
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 UK Listing Authority'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 set out above.
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.
Notwithstanding the ability to invest up to 100% of the portfolio in any one market, with current and foreseeable investment conditions the Portfolio will be invested in accordance with the objective across worldwide markets within the following geographical and market parameters:
· 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.
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.
The Board monitors the level of gearing available to the Investment Manager and agrees, in conjunction with the AIFM, all bank facilities. Deployment of such facilities in excess of 20% of the net asset value of the Company at the time of draw down requires Board agreement.
During the year the Company had two three-year loan facilities with ING Bank NV: One for US Dollars 23,000,000 of which was drawn down on 2 October 2015 at a fixed rate of 2.21%pa and one for Japanese Yen 2,800,000,000 at a fixed rate of 0.995%pa. These loans fall due for repayment on 2 October 2018. It is anticipated that the loan facilities will be replaced following expiry of the current facilities.
Details of the loans are set out in Note 17 to the Financial Statements.
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 Manager's Report comment on the outlook.
At 30 April 2018 the total net assets of the Company amounted to £1,551,611,000 (2017: £1,252,525,000). The NAV per share rose by 22.7% from 945.39p to 1,159.69p. As at 30 April 2018 the portfolio comprised of 110 (2017: 120) investments. The top twenty investments in the portfolio at 30 April 2018 are described on pages 34 to 36 and a full listing of investments is on pages 30 to 33 and can also be found on the Company's website.
The portfolio has been analysed on pages 28 and 29 and provides details on the distribution of investments by market capitalisation and by the different sectors in the different principal geographies.
The changes in the share price, NAV and Benchmark over the financial year are shown on page 4.
A review and commentary are given in the Chair's Statement on pages 8 to 10 and the Manager's Report on pages 11 to 26.
The ongoing charges ratio shown on page 4 has been calculated in accordance with guidance issued by the AIC and constitutes the management fee in Note 8 and the other administrative expenses (Note 9) as a percentage of average daily net assets over the year. A second ongoing charge is provided which takes into account the performance fee detailed in Note 8.
The Company's revenue varies from year to year and the Board considers the dividend position in each year in order to maintain the Company's status as an investment company. 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 the payment of a dividend.
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 HSBC Bank Plc to act as the Depositary.
Both the AIFM and the Depositary have responsibilities under AIFMD for ensuring that the assets of the Company are managed in accordance with 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 Listing Rules and the Companies Act.
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 (other than those reflected in these Financial Statements) 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 set down 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.
The Company has no employees or premises and the Board is composed of Non-executive Directors. The day to day operations and functions of the Company have been delegated to third parties.
Polar Capital LLP has been appointed to act as the Investment Manager (Investment Manager or 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.
The Company also contracts directly with a number of third parties for the provision of regularly required services:
· Stifel Nicolaus Europe Limited were appointed on 3 November 2017 as corporate broker;
· Equiniti Limited as the share registrars;
· KPMG LLP as independent Auditors;
· Camarco as PR advisors; and
· Emperor as website designers, internet hosting services and designers and printers for Shareholder communications
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 comprise both specific financial and Shareholder related measures, these KPIs have not differed from the prior year.
PRINCIPAL BUSINESS RISKS AND UNCERTAINTIES
The Board is responsible for the management of risks faced by the Company in delivering long-term returns to Shareholders. The identification, monitoring and appraisal of the risks, any mitigation factors and control systems is crucial. The Directors carry out on an annual basis a robust assessment of the principal risks with the assistance of the Investment Manager through the use of a Risk Map which seeks to record risks in four main risk categories; Business, External, Portfolio Management and Infrastructure. Directors continually monitor risks faced by the Company and have met to discuss long-term risks outside of the normal cycle of Audit meetings.
The Risk Map is constructed by identifying and assessing various risks as to their likelihood and their severity of impact, then considering, both internal and external controls and factors that could provide mitigation to arrive at a post mitigation risk impact. The Risk Map therefore provides a structure for robustly reviewing the risks and controls as well a method to report and monitor changes and developments.
The investment objective is to invest the Company's funds in a portfolio of technology companies worldwide and as such the portfolio will be exposed to market and currency fluctuations with only limited ability to mitigate the consequences through the holding of cash in the portfolio and the use of derivatives and/or currency hedging.
The Board has identified top risks faced by the Company which are those classified as the having the highest risk level post mitigation, these are kept under regular review by the Board in addition to the periodic review of the full risk map which incorporates all risks and policies. The top risks are detailed below within the greater business risk categories of Business, External and Infrastructure.
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 achieve the optimum return for Shareholders and have valued the inclusion on the Board of Brian Ashford-Russell.
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 investment management agreement may be terminated by either party by 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.
The base fee is 1% on the Net Asset Value per share multiplied by the arithmetic mean of the number of shares up to £800m and above £800m the base fee reduces to 0.85%. On 1 January 2018 in connection with discussions and the Company's agreement to making a contribution to Research costs under MiFID II regulations, a temporary third tier management fee of 0.80% on assets over £1.7bn was introduced. The fee is payable quarterly in arrears based on the NAVat the end of each quarter. Any investments in funds managed by Polar Capital are wholly excluded from the base management fee calculation.
Performance periods will coincide with the Company's accounting periods.
· 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") is 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 will only be payable if, and to the extent that, the Adjusted NAV per share exceeds the highest of:
o the NAV per share on the last day of the previous performance period;
o 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 will be included in the NAV calculated in accordance with the AIC guidelines.
· The performance fee which can be paid by the Company in any one performance period is capped at 2% of net assets.
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 £13,202,000 (2017: £9,896,000) have been paid for the year to 30 April 2018, of which £nil (2017: £2,747,000) was outstanding at the year end. A performance fee of £11,169,000 has been earned for the year to 30 April 2018 (2017: nil), and the whole of this amount (2017: nil) was outstanding at the year end.
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 their 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 existing terms.
In accordance with the Corporate Governance provisions, the Company is required to make a forward looking longer-term viability statement. Due to this, the Board has considered and addressed the ability of the Company to continue to operate over a longer period.
The Board has considered the financial position of the Company and believes such extends significantly beyond the twelve-month period required for the going concern statement. In addition, the Board has considered the industry and the 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 considered; 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.
In establishing the positive outlook for the Company over the next five years to 30 April 2023, the Board has taken into account:
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 2023.
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 and 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 year under reviews performance of the portfolio (net assets +22.7%), being in line with the investment objective and strategy against the performance of the benchmark (+17.1%); the liquidity of the portfolio (99.4% liquid over 7 days) and the opportunity for investment and reinvestment of funds. The Board believe it appropriate to present the Company and the Financial Statements as a Going Concern.
Socially responsible investing and exercise of voting powers
The Board has instructed the Investment Manager to take into account the published corporate governance of the companies in which it invests.
The Company 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 127 meetings during the year under review in each case supporting the recommendations 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, gender reporting and human rights policy
The Company has no employees and the Board is comprised of two female and five male Non-executive Directors.
If any 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 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 and 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.
Approved by the Board on 17 July 2018
By order of the Board
Polar Capital Secretarial Services Limited
AUDIT COMMITTEE REPORT
INTRODUCTION FROM THE CHAIR
I am pleased to present, as Chair of the Audit Committee, what is my third annual report to shareholders for the year ended 30 April 2018.
The Committee comprises all of the independent Non-executive Directors; the Chair of the Board attends Committee meetings as an observer 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 on pages 52 and 53.
The Committee met four 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 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 which corresponds with the meeting schedule, 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 (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 2018, 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 Depository on its work and safe keeping of the Company's investments.
Other Reporting Matters
During the year the Committee ensured that the accounting policies as set out on pages 88 to 93 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.
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 2018 on a going concern basis. See page 48 for further details.
The Committee considered the longer-term viability requirements, so the Board may state that it has a 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 assessments took account of the Company's current financial position, its cash flows and its liquidity position and the principal risks as set out on pages 43 to 45 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 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 2023) are reasonable. See pages 46 and 47 for further details.
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.
Prior to the year under review, PricewaterhouseCoopers LLP provided services to the Company as tax agents in Taiwan and for the iXBRL tagging of the Company's accounts for submission to HM Revenue and Customs. These services for the year under review have been provided by Grant Thornton LLP and Arrk Solutions, respectively.
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.
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. During the year the Committee placed special attention on the cyber security policies and processes put in place by such suppliers.
The Audit Committee uses a Risk Map which seeks to identify, monitor and control 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 on pages 42 to 45. 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.
There were no issues which arose during the course of the year ended 30 April 2018 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 noted that the Investment Manager has policies on whistleblowing policy, antibribery policy and the Modern Slavery Act and has controls and monitoring to implement their policy 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 Criminal Corporate Offence of Tax Evasion. In addition to this the Company has issued a data privacy notice in relation to the General Data Protection Regulations. All such policies can be found on the Company's website www.polarcapitaltechnologytrust.co.uk.
The Audit Committee has also considered the policy and controls used by the Investment Manager surrounding the use of brokerage commissions generated from transactions in the Company's portfolio.
Appointment and Tenure
Following the formal competitive tender process in 2016, the Committee agreed to appoint KPMG LLP (KPMG) and the appointment was subsequently confirmed by Resolution of the Shareholders at the AGM held on 7 September 2017. 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.
In accordance with the current legislation, the Company is required to instigate a tender process for Auditors at least every 10 years and will have to change its auditor after a maximum of 20 years. In addition, the nominated Audit Partner will be required to rotate after serving a maximum of 5 years with the Company; it is therefore anticipated that Mr Waterson will serve as Audit Partner until completion of the audit process in 2022. The Company has complied throughout the year ended 30 April 2018 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, together with a separate Resolution to authorise the Directors to reconfirm the remuneration of the Auditors, at the AGM to be held on 6 September 2018.
There are no contractual obligations restricting the choice of external Auditors.
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 2018 audit, which were material or significant or which should be brought to Shareholders' attention.
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 Audit Committee felt that Mr Waterson and his audit team have provided a fresh perspective to and an in-depth review of the audit process which has been welcomed by the Committee and the Board.
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.
In order to fulfil the Committee's responsibility regarding independence of the Auditor, the Committee reviewed the senior staffing of 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.
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 (2017: £34,000).
The Audit Committee's policy on the provision of non-audit services by the Auditors is available on the Company's website www.polarcapitaltechnologytrust. co.uk. 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 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 two years. In 2017, PWC the then auditor, provided non-audit services amounting to £5,000, equivalent to 15% of their audit fee of £34,000.
EFFECTIVENESS OF THE COMMITTEE
The Company, as a member of the FTSE350, is required to engage in an external Board evaluation at least every three years. Such an external evaluation was last carried out in 2016 by Lintstock, an independent third-party specialising in board evaluation. The evaluation process in 2017 and 2018 were internal processes moderated by the Chair and Senior Independent Director with the assistance of the Company Secretary. Both the external and internal processes included a review of the work undertaken by the Audit Committee. I am delighted to confirm that the findings of both the external and internal evaluation processes were positive in all aspects and the Audit Committee was highly rated.
Charlotta Ginman, FCA
Chair of the Audit Committee
17 July 2018
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
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.
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 FINANCIAL REPORT
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 issuer, together with a description of the principal risks and uncertainties that they face.
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.
17 July 2018
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 April 2018
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 on pages 88 to 112 form part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 30 April 2018
The notes on pages 88 to 112 form part of these Financial Statements.
At 30 April 2018
The Financial Statements, on pages 84 to 87, were approved and authorised for issue by the Board of Directors on 17 July 2018 and signed on its behalf by:
The notes on pages 88 to 112 form part of these Financial Statements.
Registered number 3224867
CASH FLOW STATEMENT
For the year ended 30 April 2018
The notes on pages 88 to 112 form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 April 2018
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.
The financial position of the Company as at 30 April 2018 is shown in the balance sheet on page 86. As at 30 April 2018 the Company's total assets exceeded its total liabilities by a multiple of over 30. The assets of the Company consist mainly of securities that are held in accordance with the Company's investment policy, as set out on pages 37 and 38 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 Taxes Act 2010.
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 is 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.
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 Taxes 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.
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.
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) 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 27.
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.
(p) 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, however 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 1(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.
(q) 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.
At the date of authorisation of these financial statements, the following new and amended IFRSs are in issue but are not yet effective and have not been applied in these accounts:
IFRS 9 (2014) Financial Instruments, (effective 1 January 2018).
The requirements of IFRS9 and its application to assets and liabilities held by the Company were considered ahead of its adoption on 1 January 2018. All assets and liabilities held by the Company are currently recorded as fair value through profit and loss. 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, (effective 1 January 2018).
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.
IFRS 2 (amended) Classification and Measurement of Share-based payment transactions, (effective 1 January 2018).
IFRIC22 Foreign currency transactions and advance consideration, (effective 1 January 2018)
Annual Improvement Cycles 2015-2017, (effective 1 January 2019).
IFRS 16 Leases, (effective 1 January 2019).
IFRIC 23 Uncertainty over Income Tax Treatments (effective 1 January 2019).
IAS 19 (amended) Employee Benefits (effective 1 January 2019).
IAS 28 (amended) Investments in Associates and Joint Ventures (effective 1 January 2019).
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
All investment income is derived from listed investments.
4. OTHER OPERATING INCOME
5. GAINS ON INVESTMENTS HELD AT FAIR VALUE
6. (LOSSES)/GAINS ON DERIVATIVES
7. OTHER CURRENCY (LOSSES)/GAINS
8. INVESTMENT MANAGEMENT AND PERFORMANCE FEE
The basis for calculating the investment management and performance fees are set out in the Strategic Report on pages 45 and 46 and details of all amounts payable to the Manager are given in note 24 on page 103.
The quarterly investment management fee is calculated on the net assets on the last day of the prior quarter. The increase in the management fee for the year ended 30 April 2018 is due to the 24% increase in net assets which took place over the year to 30 April 2018.
9. OTHER ADMINISTRATIVE EXPENSES
1. Custody fees are based on the value of the assets and geographical activity. The size of the assets and level of activity both increased during the year under review.
2. The AGM in 2017 was held at Trinity House which incurred additional expenses. The AGM's prior to 2017 were held at The RAC Club, the AGM to be held in 2018 will return to The RAC Club.
3. Includes marketing expenses payable to Polar Capital LLP of £13,000. This is based on an annual marketing budget of £40,000 agreed with the board and applied from 1 January 2018.
4. These research costs relate solely to specialist technology research and represent 50% (up to an annual cap of £637,000 ($878,000), with the balance of 50% plus any amounts exceeding the cap being absorbed by Polar Capital. These costs applied from 3 January 2018. These costs were previously wrapped up in trade commission. Under MIFID II which applied from 3 January 2018, changes were made to how investment managers pay for their research. This new regime requires investment managers to budget separately for research and trading costs.
5. Includes non-executive director search fee.
10. FINANCE COSTS
*Under the Finance Act 2015, the rate of corporation tax was lowered to 19% from 1 April 2017.
The deferred tax asset is based on a prospective corporation tax rate of 17% (2017: 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. (LOSS)/EARNINGS PER ORDINARY SHARE
As at 30 April 2018, there are no potentially dilutive shares in issue and the earnings per share therefore equate to those shown above (2017: there was no dilution).
13. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
I) Changes in non-current assets investments
Included in additions at cost are purchase costs of £993,000 (30 April 2017: £1,237,000). Included in proceeds of disposals are sales costs of £1,156,000 (30 April 2017: £1,071,000). These comprise mainly of commission. MiFID II came into effect from 3 January 2018, the majority of the commission included in the purchases and sales was incurred prior to MiFID II.
II) Changes in derivative financial instruments
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 on page 90.
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.
IV) Unquoted investments
The value of the unquoted investments as at 30 April 2018 was £91,000 (30 April 2017: £319,000) and the portfolio comprised of the following holdings:
During the year Herald Ventures Limited Partnership distributed £51,000 (2017: £30,000) and Herald Ventures Partnership II distributed £225,000 (2017 : nil).
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 +/- £9,000 (2017: +/- £32,000) 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 Investment Manager.
The most recent valuation was carried out on 30 April 2018, the valuation principle remained as used in previous years, being the Herald Ventures 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.
The carrying values of other receivables approximate their fair value.
15. CASH AND CASH EQUIVALENTS
The carrying values of other payables approximate their fair value.
17. BANK LOANS
I) Bank loans
Bank loans are all due for settlement within 12 months and are stated at amortised cost. The main covenants relating to the above loans are:
(i) Total borrowings shall not exceed 40% of the Company's net asset value
(ii) The Company's minimum net asset value shall be £200 million
(iii) The Company shall not change the investment manager without prior written consent of the lenders.
II) Reconciliation of bank loans
The reduction 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'. As disclosed in note 7, the reduction in the liability creates a foreign exchange gain on bank loans held in the year.
18. SHARE CAPITAL
During the year a total of 1,308,000 ordinary shares (30 April 2017: 150,841 ordinary shares), nominal value £327,000 (30 April 2017: nominal value £37,710) were issued to the market to satisfy demand, at an average price of 1,111.85p per share, for a total consideration received of £14,517,000 (30 April 2017: £1,370,000).
Subsequent to the year end 30,000 ordinary shares were issued at a price of 1,330.0p per share.
This reserve is not distributable.
19. CAPITAL REDEMPTION RESERVE
The Capital Redemption Reserve represents the nominal value of shares repurchased and cancelled.
This reserve is not distributable.
20. SHARE PREMIUM
The share premium arises from excess of consideration received on the issue of the shares over the nominal value.
This reserve is not distributable.
21. SPECIAL NON-DISTRIBUTABLE RESERVE
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
* 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 maybe 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
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 arrangement 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 2018 were £13,202,000 (2017: £9,896,000) of which £nil (2017: £2,747,000) was outstanding at the year-end.
A performance fee amounting to £11,169,000. (2017: £nil) is payable in respect of the year, and the whole of this amount (2017: nil) was outstanding at the year end.
In addition, research costs of £209,000 (2017: nil) are payable in respect of period from 1 January 2018 to the year end of which £209,000 (2017: nil) outstanding at the year end.
(b) Related party transactions
The compensation payable to key management personnel in respect of short term employee benefits is £155,000 (2017: £137,000) which comprises £155,000 (2017: £137,000) paid by the Company to the Directors.
Refer to pages 73 to 76 for the Directors' Remuneration Report and Directors shareholdings.
25. NET ASSET VALUE PER ORDINARY SHARE
As at 30 April 2018, there were no potentially dilutive shares in issue (2017: there was no dilution).
26. SEGMENTAL REPORTING
Since the Company does not have external customers an analysis of the Company's investments held at 30 April 2018 by geographical segment and the related investment income earned during the year to 30 April 2018 is noted below:
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 on page 37. 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 on pages 30 to 33. 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 £2,369,000 (30 April 2017: £716,000).
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:
An analysis of the Company's portfolio is shown on pages 28 to 36.
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% (30 April 2017:15%) 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.
(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.
*2017 Restated - see below
Restatement of Foreign currency exposure as at 30 April 2017
The Hong Kong Dollars under monetary assets has been restated to (£1,255,000) (as previously reported 2017: £1,255,000) as it was previously shown as a positive number. The US Dollars and Japanese Yen under monetary liabilities were restated to £12,577,000 (as previously reported 2017: £13,000), £11,711,000 (as previously reported 2017: £12,000) respectively as the figures were incorrectly rounded twice. The US Dollars in the non-monetary items under investments had double counted the US Dollar option, this is therefore restated to £939,721,000 (as previously reported 2017: £940,437,000). As a result of these changes the total amount has been restated to £1,214,928,000 (as previously reported 2017: £1,241,701,000). There is no impact to the profit and loss account or the net asset value of the Company in this or any earlier period.
Foreign currency exchange rate movement
During the financial year sterling appreciated by 6.5% against the US Dollar (2017: depreciated by 11.7%), appreciated by 4.5% (2017: depreciated by 6.2%) against the Japanese Yen, depreciated by 4.1% (2017: depreciated by 7.1%) against the Euro, appreciated by 7.4% (2017: depreciated by 11.5%) against the Hong Kong Dollar, depreciated by 0.1% (2017: depreciated by 11.8%) against the Korean Won and appreciated by 4.4% (2017: depreciated by 17.4%) 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%, against the currencies shown, this would have the following effect:
Based on the year end position, if Sterling had appreciated, by a further 10%, against the currencies shown, this would have the following effect:
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.
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.
Interest rate sensitivity
The sensitivity analysis is based on the Company's monetary financial instruments held at each balance sheet date, with all other variables held constant.
The table below illustrates the Company's sensitivity to interest rate movements, with a change of 0.25% p.a. in the rates of interest available to the Company's financial assets and a change of 0.25% p.a in the rates of interest available to the Company's financial liabilities. The effect on the revenue and capital return after tax and the value of shareholders' funds are as follows if rates increased:
A corresponding decrease in the rate would have equal and opposite effect to that shown in the table above.
This level of change is considered to be reasonably possible based on observation of current market conditions. This is not representative of the year as a whole, since the exposure changes as level of cash/(loans) held during the year will be affected by the strategy being followed in response to the Investment Manager's perception of market prospects and the investment opportunities available at any particular time.
(b) Liquidity Risk
Liquidity risk is the possibility of failure of the Company to realise sufficient assets to meet its financial liabilities.
Management of the risk
The Company's assets mainly comprise readily realisable securities which may be sold to meet funding requirements as necessary.
Liquidity risk exposure
The maturity of the Company's existing borrowings are set out in note 17 to the financial statements. Short- term flexibility is achieved through the use of overdraft facilities.
At 30 April the financial liabilities comprised of:
(c) Credit Risk
Credit risk is the exposure to loss from failure of a counterparty to deliver securities or cash for acquisitions or disposals of investments or to repay deposits.
Management of the risk
The Company manages credit risk by using brokers from a database of approved brokers and by dealing through Polar Capital.
All cash balances are held with approved counterparties. HSBC Bank plc is the custodian of the Company's assets. The Company's assets are segregated from HSBC's own trading assets and are therefore protected in the event that HSBC were to cease trading.
These arrangements were in place throughout the current year and the prior year.
Credit risk exposure
The maximum exposure to credit risk at 30 April 2018 was £110,765,000 (30 April 2017: £84,591,000) comprising:
All of the above financial assets are current, their fair values are considered to be the same as the values shown and the likelihood of a material credit default is considered low.
None of the Company's financial assets are past due or impaired. All deposits were placed with banks that had a rating of A or higher.
Investment transactions are carried out with a large number of brokers, the credit standing of each is reviewed periodically by the Investment Manager are set on the amount that may be due from any one broker.
(d) Gearing risk
The Company's policy is to increase its exposure to equity markets through the judicious use of borrowings. When borrowings are invested in such markets, the effect is to magnify the impact on Shareholder's funds of changes, both positive and negative, in the value of the portfolio.
Management of the risk
The Company uses short-term loans to manage gearing risk, details of which can be found in note 17.
Gearing risk exposure
The loans are valued at amortised cost, using the effective interest rate method in the financial statements. The Board regulates the overall level of gearing by raising or lowering cash balances.
(e) Capital Management Policies and Procedures
The Company's capital, or equity, is represented by its net assets which are managed to achieve the Company's investment objective set out on page 37.
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:
(i) the planned level of gearing through the Company's fixed rate loan facility and
(ii) the need to issue or buy back equity shares for cancellation, which takes account of the difference between the net asset value per share and the share price (ie the level of share price discount or premium).
The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
The Company is subject to externally imposed capital requirements through the Companies Act with respect to its status as a public company.
In addition in order to pay dividends out of profits available for distribution by way of dividend, the Company has to be able to meet one of the two capital restriction tests imposed on investment companies by company law. The Company is also subject to externally imposed capital requirements through the loan covenants set out in the loan facility.
These requirements are unchanged since the previous year end and the Company has complied with them.
ALTERNATIVE PERFORMANCE MEASURES (APMS)
The Company considers the following APMs which are considered to be known industry metrics:
A description of the difference between the share price and the net asset value per share usually expressed as a percentage (%) of the net asset value per share.
The share price at 30 April 2018 was 1148.00p and the NAV was 1159.69p, the discount would be 1.0%, (1148.00p-1159.69p)/1159.69p.
Net Asset Value (NAV)
The NAV is the value attributed to the underlying assets of the Company less the liabilities, presented either on a per share or total basis.
The value of the Company's assets, principally investments made in other companies and cash being held, minus any liabilities. The NAV is also described as "Shareholders' funds" per share. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the shar price which is the price at which the Company's share can be bought or sold by an investor.
As at 30 April 2018, the total equity was £1,551,611,000 and there were 133,795,000 ordinary shares in issue. The NAV per share was therefore 1159.69p. £1,551,611,000/133,795,000.
Ongoing charges are calculated in accordance with AIC guidance by taking the Company's annualised ongoing charges, excluding performance fees and exceptional items, if any, and expressing them as a percentage of the average month end net asset value of the Company over the year.
Ongoing charges include all regular and expected costs and expenses of the Company expressed. Transaction costs, interest payments, tax and non-recurring expenses are excluded from the calculation as are the costs incurred in relation to share issues and share buybacks.
Where a performance fee is paid or is payable, a second ongoing charge is provided, calculated on the same basis as the above but incorporating the amount of performance fee due or paid.
Ongoing charges for the year equals management fee of £13,202,000 plus other operating expenses of £1,119,000 divided by the average NAV in the period. £14,321,000/£1,452,155,855 = 0.99%
Ongoing charges including performance fee based on the above plus the performance fee of £11,169,000. £25,490,000/£1,452,155,855=1.76%
Comprising all the operating costs of the Company including transaction costs, interest payments, tax and non-recurring expenses excluded from the ongoing charge calculation. Costs in relation to share issues and share buybacks are excluded from the calculation.
The total cost input can be found in the statement of comprehensive income above.
Total Net Assets
The value of the Company's assets, principally investments made in other companies and cash being held, minus any liabilities.
The total net assets input can be found in the balance sheet above.
NAV Total Return
The NAV total return shows how the net asset value per share has performed over a period of time taking into account both capital returns and dividends paid to shareholders.
NAV Total return reflects the change in value of NAV plus the dividend paid to the shareholder. Since the Company has not paid dividend the NAV total return is the same as the NAV per share as at year end 30 April 2018.
Share Price Total Return
Share price total return shows how the share price has performed over a period of time. It assumes that dividends paid to shareholders are reinvested in the shares at the time the shares are quoted ex dividend.
Share price total return reflects the change in share price value plus the dividend paid to the shareholder. Since the Company has not paid dividends the share price total return is the same as the price per ordinary share as at year end 30 April 2018.
American Association of Individual Investors sentiment survey showing the mood of individual investors - Bullish/Neutral/Bearish
A report prepared in accordance with Audit and Assurance Faculty guidance issued by the Institute of Chartered Accountants in England and Wales. Utilised within the review of internal controls.
The Annual General Meeting, to be held at 2:30pm on Thursday, 6 September 2018 at The RAC Club, 89 Pall Mall, London SW1Y 5HS.
Association of Investment Companies, the industry body for closed ended investment companies.
Alternative Investment Fund Managers Directive. Issued by the European Parliament in 2012 and 2013, the Directive requires that, while the Board of Directors of an Investment Trust remains fully responsible for all aspects of the Company's strategy, operations and compliance with regulations, all alternative investment vehicles ("AIFs") in the European Union, must appoint a Depositary and an Alternative Investment Fund Manager ("AIFM"). The Company's AIFM is Polar Capital LLP.
The Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes).
The advisory public referendum which was held on 23 June 2016 in the United Kingdom to indicate whether voters wanted to remain or withdraw from membership of the European Union (EU). The referendum vote was cast in favour to leave the EU. The process of actually leaving is termed BREXIT.
Closed-ended Investment Company
An Investment Company with a fixed issued ordinary share capital, the shares of which are traded on an exchange at a price not necessarily related to the net asset value of the company and which can only be issued or bought back by the company in certain circumstances.
The Custodian is HSBC Bank plc, a financial institution responsible for safeguarding, worldwide, the listed securities and certain cash assets of the Company, as well as the income arising therefrom, through provision of custodial, settlement and associated services.
The Depositary is also HSBC Bank plc. Under AIFMD rules the Company must appoint a Depositary whose duties in respect of investments, cash and similar assets include: safekeeping; verification of ownership and valuation; and cash monitoring. Under the AIFMD rules, the Depositary has strict liability for the loss of the Company's financial assets in respect of which it has safe-keeping duties. The Depositary's oversight duties will include but are not limited to share buybacks, dividend payments and adherence to investment limits.
A contract between two or more parties, the value of which fluctuates in accordance with the value of an underlying security. Examples of derivatives are Put and Call Options, Swap contracts, Futures and Contracts for Difference. A derivative can be an asset or a liability and is a form of gearing because it can increase the economic exposure to shareholders.
Discount / Premium
The Company's share price is determined by market demand for the Company's shares. If the share price is lower than the NAV per share, the shares are said to trade at a discount. If the share price is higher than the NAV, this is described as trading at a premium. Trading at a discount might indicate a higher level of sellers in the market while trading at a premium might indicate higher buying demand.
Ben Rogoff of Polar Capital LLP has been delegated responsibility for the creation of the portfolio of investments subject to various parameters set by the Board of Directors.
The Generally Accepted Accounting Practice. This includes UK Financial Reporting Standards (FRS) and International GAAP (IFRS or International Financial Reporting Standards applicable in the European Union).
Calculated using the Association of Investment Companies definition. Total assets, less current liabilities (before deducting any prior charges (such as borrowings)) minus cash/ cash equivalents divided by Shareholders' funds, expressed as a percentage.
Section 833 of the Companies Act 2006. An Investment Company is defined as a company which invests its funds in shares, land or other assets with the aim of spreading investment risk.
Investment Trust taxation status
Section 1158 of the Corporation Tax Act 2010. UK Corporation Tax law allows an Investment Company (referred to in Tax law as an Investment Trust) to be exempted from tax on its profits realised on investment transactions, provided it complies with certain rules. These are similar to Section 833 above but further require that the Company must be listed on a regulated stock exchange and that it cannot retain more than 15% of income received. The Directors' Report contains confirmation of the Company's compliance with this law and its consequent exemption from taxation on capital gains.
The Company's auditor is KPMG LLP, represented by John Waterson, Partner.
As defined under AIFMD rules, leverage is any method by which the exposure of an AIF is increased through borrowing of cash or securities or leverage embedded in derivative positions. Leverage is broadly equivalent to gearing but is expressed as a ratio between the assets (excluding borrowings) and the net assets (after taking account of borrowings).
Polar Capital LLP (Polar Capital), also appointed as AIFM. The responsibilities and fees payable to Polar Capital are set out in the Directors' Report.
The Company is managed by a Board of Directors who are appointed by letter rather than a contract of employment, with the Company. The Company does not have any executive Directors. Remuneration of the Non-executive Director is set out in the Directors' Remuneration Report while the duties of the Board and the various Committees is set out in the Corporate Governance Statement.
The Packaged Retail and Insurance-based Investment Products regulations which came into force on 1 January 2018 in the UK and EU. The regulations require generic pre-sale disclosure of investment "product" costs, risks and certain other matters.
The Statement of Recommended Practice. The financial statements of the Company are drawn up in accordance with the Investment Trust SORP issued by the AIC.
FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report and Financial Statements contain forward-looking information concerning the Company's strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which the Company operates. By their nature, forward- looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Company's control or can be predicted by the Company. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the principal risks and uncertainties included in the Strategic Report Section on pages 8 to 49 of the Annual Report. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Polar Capital Technology Trust plc or any other entity, and must not be relied upon in any way in connection with any investment decision. The Company undertakes no obligation to update any forward-looking statements.
Annual Report Notice of AGM
The Annual Report and Financial statements for the Year ended 30 April 2018 and a separate Notice of Meeting for the Annual General Meeting have been published and are available on the Company's websitewww.polarcapitaltechnologytrust.co.uk and will be posted to shareholders shortly. Copies of the documents are alsoavailable from the company secretary at the Registered Office, 16 Palace Street, London SW1E 5JD or from the company's website at www.polarcapitaltechnologytrust.co.uk
The Annual General Meeting will be held on 6 September 2018 at 2.30pm at the RAC Club, 89 Pall Mall, St.James's, London SW1Y 5HS.
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