POLAR CAPITAL TECHNOLOGY TRUST
PLC
AUDITED RESULTS ANNOUNCEMENT
FOR THE FINANCIAL YEAR TO 30 APRIL 2024
FINANCIAL
HIGHLIGHTS
FINANCIAL
SUMMARY
|
Change
%
|
|
As at
30 April
2024
|
As
at
30 April
2023
|
Year
Ended 2024
|
Year
Ended 2023
|
Total net assets
|
£3,804,533,000
|
£2,828,141,000
|
34.5%
|
(7.3%)
|
Net
Asset Value (NAV) per ordinary share
|
3,154.11p
|
2,239.48p
|
40.8%
|
(2.8%)
|
Benchmark1
|
5007.08
|
3604.43
|
38.9%
|
2.9%
|
Price per ordinary share
|
2,920.00p
|
1,940.00p
|
50.5%
|
(4.9%)
|
Discount of ordinary share price to the NAV per ordinary
share2
|
(7.4%)
|
(13.4%)
|
|
|
Ordinary shares in issue3
|
120,621,569
|
126,285,544
|
(4.5%)
|
(4.6%)
|
Ordinary shares held in treasury
|
16,693,431
|
11,029,456
|
51.4%
|
122.4%
|
KEY DATA
|
For the year to 30 April
2024
|
Local Currency
%
|
Sterling
Adjusted %
|
Benchmark1
|
|
Dow Jones Global Technology Index
(TR)
|
38.4
|
38.9
|
Other Indices over the year (total return)
|
|
FTSE World
|
18.6
|
19.2
|
FTSE All-Share
|
|
7.5
|
S&P 500 Composite
|
22.7
|
23.3
|
Nikkei 225
|
35.6
|
17.8
|
Eurostoxx 600
|
11.9
|
9.0
|
|
As at 30
April
|
EXCHANGE
RATES
|
2024
|
2023
|
US$ to £
|
1.2522
|
1.2569
|
Japanese Yen to £
|
197.04
|
171.15
|
Euro to £
|
1.1711
|
1.1385
|
|
For the year to 30
April
|
EXPENSES
|
2024
|
2023
|
Ongoing charges
ratio2
|
0.80%
|
0.81%
|
Ongoing charges ratio including
performance fee2
|
0.80%
|
0.81%
|
Data supplied by Polar Capital LLP
and HSBC Securities Services.
1 Dow Jones Global Technology
Index (total return, Sterling adjusted, with the removal of
relevant withholding taxes). See annual report further
details.
2 Alternative Performance Measures
provided in the Annual Report.
3 The issued share capital as at
close of business on 11 July 2024 (latest practicable date) was
137,315,000 ordinary shares of which 17,657,777 were held in
treasury.
HISTORIC PERFORMANCE
As at 30 April
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2021
|
2022
|
2023
|
2024
|
Net Assets (£m)
|
606.6
|
793.0
|
801.3
|
1,252.5
|
1,551.6
|
1,935.6
|
2,308.6
|
3,408.8
|
3,051.0
|
2,828.1
|
3,804.5
|
Share price (pence)
|
442.0
|
592.0
|
566.0
|
947.0
|
1,148.0
|
1,354.0
|
1,774.0
|
2,364.0
|
2,040.0
|
1,940.0
|
2,920.0
|
NAV per share (pence)
|
458.4
|
599.2
|
605.5
|
945.4
|
1,159.7
|
1,446.4
|
1,715.6
|
2,496.4
|
2,305.1
|
2,239.5
|
3,154.1
|
Indices of Growth1
|
|
|
|
|
|
|
|
|
|
|
|
Share price2
|
100.0
|
133.9
|
128.1
|
214.3
|
259.7
|
306.3
|
401.4
|
534.8
|
461.5
|
438.9
|
660.6
|
NAV per
share2
|
100.0
|
130.7
|
132.1
|
206.2
|
252.9
|
315.5
|
374.2
|
544.5
|
502.8
|
488.5
|
688.0
|
Dow Jones Global Technology
Index 3
|
100.0
|
129.5
|
129.3
|
198.3
|
232.2
|
281.9
|
333.0
|
487.3
|
483.1
|
496.9
|
690.3
|
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.
Notes:
1 Rebased to 100 at 30 April
2014
2 Total return assumes
reinvestment of dividends.
3 Dow Jones World Technology Index
(total return, Sterling adjusted) with the removal of relevant
withholding taxes.
All data sourced from Polar
Capital LLP.
For further information please contact:
|
Ben Rogoff
|
Ed Gascoigne-Pees
|
Polar Capital Technology Trust
PLC
|
Camarco
|
Tel: 020 7227 2700
|
Tel: 020 3757 4984
|
CHAIR'S
STATEMENT
Introduction
On behalf of myself and the Board
I am pleased to present to you the Annual Report of the Company for
the financial year ("FY24") ended 30 April 2024.
In my last full year statement to
you, we reflected on the acceleration of Artificial Intelligence
("AI"), the investment opportunities this could bring and the wider
impact on our sector. During the financial year under review, we
continued to see widespread adoption and exciting developments in
generative AI. Notwithstanding this, the market backdrop remains a
challenge with geopolitical events dominating much of the year and
interest rates continuing to rise sharply throughout the
year.
Performance
The Manager's report is provided
in the annual report and gives an overview of the year past and the
outlook for the near future.
I am pleased to be reporting
strong absolute performance during the financial year under review.
This was largely due to the Manager's decision to rotate towards AI
as a primary investment theme and focus on the enablers and
beneficiaries in this space including semiconductor and component
subsectors. The diminution in the risks of prolonged high inflation
and recession have helped equity markets generally. The Company
performed well against its peer group with the net asset value
(NAV) per share rising from 2,239.48p to 3,154.11p, an increase of
40.8%, versus an increase in the benchmark of 38.9% in Sterling
terms over the same period.
Discount Management
The Company's discount narrowed
during the financial year under review, ending the year at 7.4%
compared to 13.4% at the end of FY23.
The Board continually monitors the
discount at which the Company's ordinary shares trade in relation
to the
Company's underlying NAV and,
whilst the Board does not have a formal discount policy, it will
continue to exercise its discretion to buy back shares at a
discount. Equally, the Board will also use discretion to issue
shares at a premium.
Utilising this discretion, we
repurchased a total of 5,663,975 ordinary shares (representing 4.1%
of the issued share capital) in the year under review at an average
price of 2,442.50 pence per share and an average discount of 12.3%.
Following the year end and up to close of business 11 July 2024,
the Company has bought back a further 964,346 shares. While
purchase levels have been relatively low on an individual
transaction basis, we should note that this activity does not
preclude the Manager determining that a more significant amount
than usual on any one day should be purchased. Such a decision may
be influenced by, in the Manager's view, there being a particular
investment opportunity best accessed through buying shares in the
Company rather than buying individual securities.
Board Composition
As noted in my Half Year Statement
to Shareholders, Charlotta Ginman stepped down as Audit Chair
on
31 October 2023 and was succeeded
by Jane Pearce as part of a smooth and orderly transition.
Charlotta remained on the Board as a non-executive Director of the
Company and will retire at the Company's Annual General Meeting
("AGM") in September 2024 following nine years continuous service.
On behalf of the Board, I would like to thank Charlotta for her
service to the Company over the years.
Subsequent to Charlotta's
retirement the Board will comprise five non executive Directors;
while the Board considers the composition to be appropriate and
covering all skills required we are in the midst of a recruitment
process. It is three years since the Board last undertook a market
search and we felt we should survey the market and seize the
opportunity to hire an additional individual who would add to the
Board's existing diversity and skill sets should such an individual
be identified. We have appointed a
recruitment consultant with a perceived ability to fulfil a search
criterion focussed on exploring a broad pool of candidates and in
particular, candidates with minority ethnic and/or diverse
backgrounds. Further information will be shared when
available.
There have been no other changes
to the membership of the Board during the year under review. The
Directors' biographical details are available on the Company's
website and are provided in the annual report.
Directors' Fees
As is detailed further within the
Remuneration Committee Report, an annual fee review was undertaken
to ensure that remuneration paid to Directors remains attractive,
competitive and in line with those of its peers to attract and
retain the best candidates. The Board usually favours modest
increases year on year (where applicable) and with effect from 1
May 2024, the Directors' base fee increased by c.3% to £36,000 and
the fee of the Chair to £65,500. The supplement for the Audit
Committee Chair was increased to £8,500 to reflect the additional
time required in connection with increased audit regulation and
overall responsibility of the Chair of the Audit Committee, whilst
the supplement for the Senior Independent Director remained
unchanged at £4,200.
In aggregate, the Directors fees
for FY25 will be £235,000. The maximum level currently provided for
in the Company's Articles of Association is £300,000. In order to
provide headroom and flexibility particularly should the Board find
it wants to recruit an additional member, it is proposed that the
Articles are updated, by way of special resolution at the AGM, to
increase the maximum level to £350,000 per annum.
Share Split
The price of the Company's
existing ordinary shares ('Existing Ordinary Shares') has
increased in recent years and particularly during the financial
year under review with our shares now trading regularly above £30
per share. Whilst this is positive for the Company and our
Shareholders, we recognise that a higher share price might be a
barrier to investment for certain investors including regular
savers who may wish to invest smaller amounts per transaction on a
regular basis.
The Directors are therefore
proposing the sub-division of each Existing Ordinary Share into 10
new ordinary shares (the "New
Ordinary Shares") (the "Share Split"), thereby resulting in a
lower market price per ordinary share. The Share Split will not
itself affect the overall value of any shareholder's holding in the
Company and the New Ordinary Shares will carry the same rights and
be subject to the same restrictions (save as to nominal value) as
the Existing Ordinary Shares. We have made arrangements to ensure
that there will be no interruption to trading in the ordinary
shares on the London Stock Exchange when the Share Split takes
place.
The Share Split requires the
approval of shareholders and, accordingly, resolution 10 in the
Notice of AGM seeks this approval. The Share Split is conditional
on the New Ordinary Shares being admitted to the Official List of
the Financial Conduct Authority and to trading on the London Stock
Exchange's main market for listed securities. If resolution 10 is
passed, the Share Split will become effective on admission. Further
details of the proposed Share Split are set out in the Directors'
Report in the annual report and in the Notice of
AGM
Annual General Meeting
We are pleased to confirm that the
Company's AGM will be held on 11 September 2024 at 2:30pm at The
Royal Institution, 21 Albemarle St, London W1S 4BS. We look forward
to welcoming shareholders to the meeting, at which they will
receive a presentation from the Manager and his team and
shareholders will also have the opportunity to ask questions and
meet the Board; light refreshments will be available following the
meeting.
The notice of AGM will shortly be
provided to shareholders and will also be available on the
Company's website. Shareholders are encouraged to read the detailed
explanations on the formal business and the resolutions to be
proposed at the AGM contained within the Shareholder Information
section of the annual report as well as the Notice of AGM. In order
to ensure that shareholders are able to follow the proceedings of
the AGM without attending in person, the Company will also
broadcast the meeting online via zoom videoconferencing. However,
please note that shareholders joining via zoom will not be able to
vote online during the AGM and are therefore encouraged to submit
their votes via proxy, as early as possible. All formal resolutions
will be voted on by way of a poll.
We are conscious of the importance
of shareholder engagement and would like to encourage shareholders
to engage with the Board and the Investment Manager. As such, the
Board invites shareholders to submit questions in writing to which
we will respond, as far as possible, ahead of the AGM date. Please
send your questions to cosec@polarcapital.co.uk with the subject
heading PCTT
AGM.
Environmental, Social and Governance (ESG)
The Investment Manager
incorporates ESG considerations into its investment process and the
Board continues to engage closely with the Manager to monitor its
progress and receives regular updates on the developments on the
corporate side of Polar Capital's business. As at 30 April 2024,
based on MSCI ESG ratings, the portfolio and the benchmark were
both A rated.
Please refer to the ESG Report in
the annual report which incorporates both the investment and
corporate approaches.
Outlook
The outlook for the technology
sector is exciting as Artificial Intelligence (AI) capabilities
develop at a rapid pace. The parallel computing infrastructure to
support this growth has dominated sector and market returns - as
the Manager argues is typical during the 'buildout' phase of a new
general-purpose technology (GPT). This has brought concentration
challenges in the near term but should provide immense future
opportunities as AI is applied to every industry.
The Manager has continued to
invest in the team to take advantage of the AI opportunity, adding
two additional investment analysts during the year. Shareholders
will have the opportunity to hear from the technology investment
team members at the AGM.
FINANCIAL AND PERFORMANCE
REVIEW FOR THE YEAR ENDED 30 APRIL 2023
The NAV per share increased to
3,154.11p as at 30 April 2024 from 2,239.48p at the start of the
year, which represents a 40.8% increase, and the Company finished
the year with total net assets of £3,804.5m. The Investment
Manager's Report sets out in detail the performance of the Company
for the financial year. The chart contained in the annual report
shows in greater detail the movement in total net assets for the
year.
Total Return
The Company generates returns from
both capital growth (capital return) and dividend income received
(revenue return). The total return from the portfolio for the year
was a gain of £1,115.4m (2023: £105.2m loss), of which there was a
£1,124.6m gain (2023: £98.3m loss) from capital and a £9.2m loss
(2023: £6.9m loss) on our income account which offsets all expenses
against dividend income. Full details of the total return can be
found in the Statement of Comprehensive Income in the annual
report. As a matter of policy, all expenses are allocated to income
with the exception of the performance fee which is allocated to
capital. The Company's allocation of expenses is described in Note
2(d) in the annual report and the allocation methodology is
considered on an annual basis. No change to the policy is
recommended (2023: no change). The earnings per share were 904.21p
(2023: losses of 81.28p per share). These were made up of 911.68p
from capital return and a loss of 7.47p from revenue
return.
Capital Return
The investment portfolio was
valued at £3,713.8m (2023: £2,640.2m) at the year end 30 April
2024. The investment portfolio delivered a total of realised and
unrealised gains of £1,147.9m (2023: £106.8m loss) for the year
ended 30 April 2024. The Company's valuation approach is described
in Note 2 (f) in the annual report. The derivative losses of £22.0m
(2023: £0.03m gains) have arisen as a result of the call and put
options which are used to facilitate efficient portfolio
management. Full details of the derivatives are set out in the
Investment Managers Report.
Revenue Return
The total investment income of
£15.5m (2023: £16.2m) represents dividend income derived from
listed investments. During the year under review, the Company
received other operating income of £6.4m (2023: £3.8m) which was
derived from bank interest and Money Market Fund ("MMF") interest.
It should be noted, however, that the MMF is held primarily as a
cash diversification factor rather than an income generating
investment. As stated above, as a matter of policy, all expenses
(excluding the performance fee) are charged to revenue and as a
result, expenses normally exceed the income received in any given
year. As has been the case for many years, the revenue reserve
therefore remains negative. The Company historically has not paid
dividends given the nature of its focus on longer-term capital
growth. The Directors do not recommend the payment of a dividend
for the financial year under review. The Board reviews this stance
on a periodic basis.
Total Expenses and Finance Costs
The total expenses for the year
under review amounted to £27.3m (2023: £23.1m).These are made up of
investment management fees of £25.9m (2023: £21.9m) and
administrative expenses of £1.4m (2023: £1.2m). In addition, the
Company had finance costs of £1.9m (2023: £1.6m). The Company's
operating expenses comprise predominantly variable costs, such as
management, depositary and custody fees which increase and decrease
based on the net asset value. Other expenses remained at a similar
level to the last year. The Company keeps under close review the
costs and expenses associated with the running of the Company to
ensure that they continue to provide value for money. There was no
performance fee accrued at the year ended 30 April 2024 (2023:
£nil).
Ongoing Charges
Ongoing Charges Ratio (OCR) is a
measure of the ongoing operating costs of the Company. It is
calculated in line with the AIC recommended methodology, represents
the total expenses of the Company, excluding finance costs, and is
expressed as a percentage of the average daily net asset value
during the year. The OCR demonstrates to Shareholders the annual
percentage reduction in NAV as a result of recurring operational
expenses, that is, the expected cost of managing the portfolio.
Whilst based on historical information, the OCR provides an
indication of the likely level of costs that will be incurred in
managing the Company in the future. The OCR for the year to 30
April 2024 was 0.80%, a slight reduction from the previous year of
0.81%. The OCR including the performance fee for the year to 30
April 2024 was the same as no performance fee was accrued at the
year end. See Alternative Performance Measures in the annual
report
Cash and Cash Equivalents
As in the prior years, the
Company's absolute level of cash remained relatively high, closing
the year at £102.6m (2023: £239.1m), this equates to less than 3%
of the Company's NAV as at 30 April 2024. As noted above, as part
of the Company's cash diversification strategy, the Company has
taken a cautious approach and has chosen to invest 50% of its USD
cash balance into a USD Treasury Money Market Fund. As at 30 April
2024, the Company held the BlackRock Institutional Cash Series - US
Treasury Fund with a value at year end of £33.0m (2023:
£90.4m).
Portfolio Turnover
Portfolio turnover (purchases and
sales divided by two) totalled £2,836.5m equating to 85.5% for the
year to 30 April 2024 (2023: 77%) of average net assets over the
year. Details of the investment strategy and portfolio are given in
the Investment Manager's Review.
Gearing
The Company can use gearing for
investment purposes as stated in the annual report. As at the year
end, the Company had fully drawn the two, two-year fixed rate term
loans (JPY 3.8bn and USD$36m) with ING Bank N.V. Both loans fall
due for repayment on 30 September 2024. The repayment of both
loans, totalling approximately £48.0m (2023: £50.8m), would equate
to less than 2% of the Company's NAV as at 30 April 2024.
Consideration of the future level of borrowings required by the
portfolio manager is currently under review.
Foreign Exchange
The majority of the Company's
assets and revenue are denominated in currencies other than
Sterling and are impacted by foreign exchange movements. As at the
year ended 30 April 2024, the other currency losses of £1.3m (2023;
gains of £8.4m) represents the exchange losses on currency balances
of £4.1m (2023: gains of £7.2m) and net gains on translation of
loan balances of £2.8m (2023: gains of £1.2m). The Company's total
return and net assets can be affected by the currency translation
and movements in foreign exchange. Note 27 (a) (ii) in the annual
report, analyses the currency risk and the management of such
risks.
Catherine Cripps
Chair
16 July 2024
INVESTMENT MANAGER'S
REPORT
Market Review
Equity markets delivered strong
returns during the Trust's fiscal year as inflation trended back
towards target, unemployment remained low and economic growth
surprised to the upside. The MSCI All Country World Net Total
Return Index in Sterling returned +18.1% during the fiscal year,
while the S&P 500 and the DJ Euro Stoxx 600 indices returned
+23.3% and +9.0% respectively. The 'goldilocks' combination of
disinflation and strong economic growth was entirely at odds with
investor pessimism and bearish positioning at the start of the
fiscal year, which reflected a torrid 2022, adverse financial
conditions, above-average valuations and the allure of
significantly higher risk-free rates. Investors poured $1.3trn into
money market funds during 2023, 10x more than flowed into equity
funds.
The fiscal year began amid the
fallout from the collapse of Silicon Valley Bank and Credit Suisse.
Decisive policymaker actions prevented contagion and reminded
investors that in extremis the so-called 'Fed put' (an assumption
that if necessary the Fed will step in to support financial
markets) was alive and well. Global markets rebounded from lows in
March to almost recover their December 2021 highs by the end of
July 2023, supported by resilient consumer spending and strong
labour markets, even as central banks hiked rates aggressively.
Inflation trended down ('core PCE' declined from 5.2% in 2022 to
4.1% in 2023 and is forecast to reach 2.6% in 2024) without
triggering a recession or even an increase in the unemployment
rate, which remained below pre-pandemic levels in many
countries.
Strong equity market returns
depended on the (surprising) fact that aggressive rate hikes did
not derail the economy. Instead, US real GDP growth of 2.5% in 2023
(and expectations for 2.7% in 2024) significantly exceeded
expectations at the start of 2023 (1.4% and 1.0% for 2023 and 2024
respectively). This 'goldilocks' scenario was tested during the
fiscal year, however, as US bond yields touched 5% in October 2023
on a narrowly-averted US government shutdown, increased US Treasury
issuance, a ratings agency downgrade and emerging 'higher for
longer' interest rate commentary from central bankers.
The rise in yields proved
short-lived and they retraced to c3.9% by the end of the calendar
year, spurring a cross-asset rally. Favourable seasonal trends were
buoyed by investors' growing hopes of a soft landing (where
inflation comes down without a significant increase in
unemployment). Markets took dovish commentary from Fed policymakers
and supportive inflation data as a signal that the Fed had
completed its hiking cycle and began to price the first rate cut in
March, with expectations for six or seven 25-basis-point interest
rate cuts by the end of 2024.
The New Year (and final third of
the Trust's fiscal year) presented challenges as US 10-year
Treasury yields rebounded to c.4.6% in April as labour markets and
economic data remained firm, and inflation readings came in a
little hotter than expected. This pushed out market expectations of
the timing of the first Fed cut from March to November and put
upward pressure on real yields (government bond yields adjusted for
inflation), which moved from 1.7% coming into the year to c.2.2% by
the end of April.
Despite still being incomplete,
the rise and fall of inflation has been remarkable, demonstrating
that credible central banks can contain inflation by controlling
inflation expectations, rather than just slowing down the economy.
The Fed also enjoyed notable tailwinds including productivity
gains, benign weather and a tepid Chinese recovery. We have
previously argued (in our 1945-1947 inflation parallel) that many
Covid-related imbalances would probably have resolved themselves
eventually, but the historic path taken by the Fed reflected the
uniqueness of the post-pandemic episode. Larry Summers, a former
Treasury Secretary, described the Fed's actions in the two years
after 2021 as a "less than 1% probability set of actions relative
to what the market expected".
An inescapable feature of equity
markets during the fiscal year was the dominance of a select group
of mega-cap technology stocks, the so-called 'Magnificent Seven' -
latterly the 'Fab Four' (or Five) - which returned +60% combined in
USD terms, according to Bloomberg. These returns emerged following
a disastrous calendar 2022 when the group declined -45%, and FY24
returns were driven almost entirely by positive estimate revisions.
Their dominance of equity returns (and indeed profit pools) has
been felt more widely across the market as large cap stocks
(Russell 1000) outperformed small cap (Russell 2000) by 10ppts
during the fiscal year, 32ppts over the past 3 years and 50ppts
over the past 5 years.
Technology Review
The technology sector led global
equity markets higher during the Trust's fiscal year as the Dow
Jones Global Technology Index returned +38.9% against the MSCI All
Country World Net Total Return Index's +18.1%. Technology
outperformance was driven by a number of factors: better than
expected growth, positive earnings revisions, improved margins, and
the increasing likelihood of an economic 'soft landing'. However,
the most important technology theme during the year was the
proliferation, evolution, and investment implications of Generative
AI (GenAI). Our previous fiscal year saw the launch of ChatGPT in
November 2022, followed by Microsoft's $10bn investment in OpenAI
in January 2023. However, GenAI became impossible for investors to
ignore in May 2023, when NVIDIA delivered remarkable Q1 results
accompanied by the largest guidance beat ($11bn vs. $7.15bn) in the
history of the semiconductor industry.
At the stock level, companies
exposed to AI computing (where demand for servers, chips and
related components increased significantly) delivered positive
returns during the fiscal year, led by NVIDIA which gained a
staggering +213%. This helped the Philadelphia Semiconductor Index
(SOX) return +58.7% over the same period, led by AI-related chip
makers and semiconductor capital equipment companies, as cloud
providers invested aggressively in the new technology.
Strength in AI-related data centre
spending 'crowded out' non-AI spending in areas such as CPU and
cloud servers, reinforcing the divergence between AI and non-AI
returns. Non-AI semiconductor fundamentals were mixed:
communications infrastructure spending remained weak, PC and
smartphone inventory cycles appeared to bottom, while automotive
and industrial end markets softened significantly before
potentially bottoming towards fiscal year end. Apple had a
challenging year amid China market share loss concerns while the
distinct lack of a positive AI narrative weighed on Apple's
multiple.
The software sector delivered
reasonable absolute returns as the Bloomberg Americas Software
Index returned +23.8%, but significantly lagged the technology
sector on a relative basis. This was due to a lack of positive
revenue growth revisions (revenue growth in the software sector
overall has been decelerating since mid-2021) and the deterioration
of the narrative around AI's impact on existing application
software vendors. Enterprise IT budgets remained fairly tight and
continued to consolidate around the largest vendors as a more
ROI-focused 'best of suite' approach overtook the 'best of breed'
buying behaviour more generous technology budgets enabled during
covid. Microsoft was the clearest beneficiary of this trend,
topping almost every CIO 'spending intentions' survey.
Infrastructure software companies
generally struggled as the fiscal year progressed, despite the fact
that public cloud aggregate revenue growth (to which their growth
is often tethered) reaccelerated to +21% in Q4 2023 and +24% in 1Q
2024, as customer 'optimisation' activities attenuated. AI was
called out as a meaningful contributor at Microsoft and Amazon, but
this has yet to translate into improved performance in cloud
consumption stocks. Cybersecurity stocks fared better, reflecting
robust budgets, spend consolidation and the likelihood of
AI-enabled cyberattacks requiring new tools. Ransomware attacks
reaccelerated to +70% yoy in 2023 as hackers begin to use GenAI
tools to help them create malware faster than ever before. The
average cost of a breach reached $4.5m in 2023, a 3-year CAGR of
+15%, and United Health's $1.6bn ransomware attack was the first
>$1bn breach.
The NASDAQ Internet Index returned
+37.2% following a challenging FY23 (+1%), during which consumer-
focused internet companies were hurt by post-pandemic normalisation
trends and concerns about an imminent recession. The recession in
the US never arrived and the largest e-commerce and advertising
platforms (such as Amazon, Google and Meta) dominated returns in
FY24. These companies consolidated market share gains and delivered
strong results as the online consumer remained resilient. Newfound
expense discipline helped deliver significant upside to earnings
estimates for the megacap internet companies. Furthermore, a higher
cost of capital decimated smaller peers - a dynamic which helped
other 'vertical leaders' such as Uber Technologies and DoorDash.
The AI narrative around the largest internet platforms oscillated
during the fiscal year. Concerns around longer-term disruption
weighed against near-term revenue benefits from better AI-driven ad
targetting, product enhancements and strategic advantages from
their data assets, scale, distribution, compute and technical
expertise. Smaller players struggled, especially those with weaker
balance sheets or aggressive online Chinese competition, such as
Match.com and Etsy.
Long-duration assets and
second-liners struggled for footing against a backdrop of high
yields, mixed fundamentals and limited exposure to AI. This
resulted in unusual performance divergence among technology funds
and trusts, with those striving to discover the 'next' Microsoft,
Meta and NVIDIA largely missing out on returns generated by the
existing ones. As important as early AI enablers and beneficiaries,
the absence of these stocks from portfolios meant many failed to
capture AI- driven returns during the year. The IPO market
tentatively reopened during the fiscal year, as the high profile
ARM IPO raised c$5.2bn. There was a smattering of other noteworthy
technology IPOs (Instacart; Klaviyo; Kokusai Electric), but capital
markets activity remained fairly subdued overall.
Large-cap technology stocks once
again significantly outperformed their small and mid-cap peers as
the Russell 1000 Technology Index and Russell 2000 Technology Index
delivered returns of +43.5% and +29.8% respectively. Returns were
led by the largest technology companies, which in part explains why
the S&P 500 Information Technology Sector saw its valuation
premium to the S&P 500 Index expand to 1.36x from 1.21x at the
start of the calendar year, against a 10-year average of 1.1x.
However, this valuation expansion was not experienced beyond the
US; the Dow Jones Global ex-US Technology sector (W2TEC) which has
no mega-cap constituents, significantly underperformed
(+1.8%).
Portfolio Performance
The Trust outperformed its
benchmark with the net asset value per share rising +40.8% during
the fiscal year versus an increase of 38.9% for the Dow Jones
Global Technology Index. The Trust's share price advanced by 50.5%,
reflecting the additional impact of the discount narrowing from
13.4% to 7.4% during the period. We continue to monitor the
discount and the Trust bought back 5.66m shares during the fiscal
year, at an average discount of 12.3% to NAV.
While the zeitgeist of 2023 was
captured by a select group of mega-cap stocks, returns during the
Trust's fiscal year were less uniformly positive for the so-called
Magnificent 7. Instead, returns were dominated by the
proliferation, evolution and investment implications of generative
AI (GenAI) following NVIDIA's remarkable quarter and record
guidance delivered in May.
The Trust benefited from our
decision to rotate decisively towards AI as a primary investment
theme, as outlined in our interim report. This was largely focused
on the semiconductor and component subsectors, including
memory-related assets, advanced packaging, testing and EDA
software. In addition, we made a series of investments in smaller
Asian component and materials companies that we expect to play a
more significant role in AI computing than they did during the
Cloud era. While the Trust was broadly neutral NVIDIA (which
returned a staggering +213%), it benefited from a slew of other
AI-related assets, including chipmakers AMD (+78%), ARM (+98%) and
Micron (+76%), datacentre spending beneficiaries Arista Networks
(+61%), Fabrinet (+83%) and Pure Storage (+122%), as well as
semiconductor capital equipment makers Disco (+158%) and KLA
(+79%).
While software sector fortunes
were more mixed, select Trust holdings such as ServiceNow (+52%)
and HubSpot (+44%) benefited from spend consolidation and a
supportive AI narrative. The same dynamic drove returns in the
cybersecurity subsector as tool consolidation and the need for
scaled data assets to defend against more sophisticated AI-powered
attacks supported spending. The Trust benefited from strong
performance in a number of its cybersecurity holdings including
CrowdStrike (+145%), Cloudflare (+87%), CyberArk (+93%), Palo Alto
Networks (+60%) and Zscaler (+93%).
In the internet subsector, the
Trust enjoyed strong returns from its exposure to dominant
franchises in ecommerce and streaming that delivered strong revenue
growth and improved profitability amid a more benign competitive
landscape. These included Amazon (+67%), DoorDash (+112%), Netflix
(+68%), Shopify (+47%), Spotify (+111%) and Uber
(+114%).
The Trust also benefitted from the
decision to reduce and/or exit companies we believed would prove
limited beneficiaries or eventual losers from AI. The most
significant of these was Apple (+1%) that meaningfully
underperformed during the year due to smartphone market headwinds
and a limited AI narrative. Our underweight Apple position was
responsible for 336bps of positive contribution to the Trust's
relative performance during the year. Performance also benefited
from not holding Intel (-1%), which had execution issues in its
business model transition, non-AI related semiconductor companies
that experienced inventory digestion as well as an underweight
exposure to EV-related assets. We extended this underweight EV
position during the year following the sales of On Semiconductor
(-2%) and Infineon (-4%) amid deteriorating automotive
datapoints.
In terms of negatives, liquidity
proved the largest headwind to performance as cash (4.5% average)
cost 249bps and Nasdaq puts an additional 76bps. While meaningful,
our cash and put positions are designed to ameliorate our portfolio
beta (which is considerably higher than our benchmark) in the event
of a market setback. They also inform portfolio construction,
emboldening us to hold larger positions in higher beta stocks than
we might otherwise. Relative performance was also negatively
impacted by further large-cap outperformance with the Russell 1000
Technology Index (large cap) and Russell 2000 Technology Index
(small cap) returning +43% and +30% respectively. On a three and
five-year basis, the gap has extended in favour of large caps to
62% and 138% respectively. During the fiscal year, this was largely
transmitted via underweight positions in Meta (+80%) and Alphabet
(+52%), which comprised more than 10% of our portfolio but dragged
on relative performance given they made up 13% of the
benchmark.
While AI drove the Trust's
performance during the year, there were also some negative offsets
including an underweight position in chipmaker Broadcom (+109%),
which dragged on our relative performance by 120bps. In addition,
there were some smaller AI positions to which we arrived late
and/or failed to capture the upside from, including Gold Circuit,
Unimicron and Rambus. Earlier hopes that infrastructure software
would benefit from AI-related application development also proved
premature with a lack of revenue reacceleration or AI participation
weighing on holdings such as MongoDB (-19%), Snowflake (+5%) and
Teradata (-4%).
Trust performance was also
negatively impacted by exposure to more rate-sensitive areas such
as fintech and alternative energy. Within fintech, our holdings in
Mastercard (+19%) and Visa (+17%) both generated strong positive
returns but fell well short of our benchmark. Smaller fintech
companies fared meaningfully less well, although our exits of Adyen
(-24%) and Flywire (-29%) helped reduce this impact. Our modest
exposure to alternative energy proved an additional drag, again
ameliorated by several stock sales including Enphase Energy (-33%)
and First Solar (-3%). Smaller Trust holdings in factory automation
and robotics-related companies such as Harmonic Drive Systems
(-16%), Keyence (+0%) and Cognex (-12%) were negatively impacted by
China weakness. Our decision to modestly add back to some
longer-duration stocks such as Roblox (+0%) and Tesla (+12%)
towards the end of 2023 also proved premature as yields rebounded
in early 2024, leading to sustained underperformance from this
group.
Market Outlook
If the market surprise of 2022 was
how high inflation remained for so long, 2023's revelation was how
little impact the fastest monetary tightening cycle in a generation
had on the real economy. Various explanations include: a delay in
the 'transmission' of higher rates given the high proportion of
mortgages and corporate debt which had been fixed at very low rates
during the 'zero-rates' era; the benefit of interest income on
'excess consumer deposits' in supporting consumer spending;
corporate unwillingness to let go of the workers they had fought
hard (and paid up) to attract and retain. In contrast with prior
years, our base case for 2024 is broadly in line with consensus on
many of the key near-term debates (inflation, rates, valuations)
and our belief is that where we do differ, the range of outcomes is
narrower. Some of the other 'known' risks are more binary in nature
(e.g. US presidential elections).
In its April 2024 update, the IMF
projected 3.2% global growth in 2024, 30bps higher than its October
2023 forecast, and 3.2% in 2025. This outlook is described as
"surprisingly resilient, despite significant central
bank
interest rate hikes to restore
price stability". The persistence of US growth is striking, now
expected to accelerate modestly from 2.5% in 2023 to 2.7% in 2024,
against expectations for a deceleration to 2.1% for both years in
the IMF's January 2024 update. Despite strong economic growth, the
disinflation process remains broadly on track and "monetary policy
should ensure that inflation touches down smoothly": global
headline inflation is expected to fall from 6.8% in 2023 to 5.9% in
2024 and 4.5% in 2025.
Our base case remains that central
banks have won the battle on inflation. Much of the earlier excess
inflation proved to be supply-side driven including covid
disruptions (e.g. container freight rates increased 5x between 2020
and late 2021) and exogenous commodities price shocks from Russia's
invasion of Ukraine. Demand imbalances have also played a part,
including government stimulus and demand swings for goods versus
services. Common causes have seen common solutions: disinflation
dynamics have been reasonably homogeneous across countries. Goods
disinflation has been widely observed while services has proven
stickier, around c3-5% in developed economies.
For its part, the Fed kept
long-term inflation expectations 'well-anchored' and prioritised
credibility above all else; the '5yr5yr' - a market-implied
expected average inflation rate over a five-year period that begins
five years from today - remained in a 2-2.5% range despite headline
CPI inflation in the high single-digits. This proved sufficient to
deliver a 'soft landing' most thought impossible, judging by the
c75% of economists who expected a recession coming into 2023, and
the Fed futures curve which anticipated the Fed would have to cut
rates by the second half of 2023. We expect the Fed to manage the
balance between keeping rates restrictive enough to ensure
inflation returns to target and cutting early enough to prevent a
recessionary outcome.
The path of inflation is the key
determinant of Fed policy, and it will (rightly) remain 'data
dependent', but
policymakers are clearly cognizant
of the need to manage de facto tightening from higher 'real' rates
as inflation trends lower and policy rates sit unchanged. Indeed,
real rates are already around c2%, versus an average 3% level at
which the Fed has historically started cutting, and other central
banks including Sweden's Riksbank, the ECB and the BoE have either
begun cutting or signalled they will soon. The 'maximum employment'
aspect of the Fed's 'dual mandate' will also likely receive more
attention, and arguably Chair Powell introduced a form of 'labour
market put' at the January FOMC press conference: "If we saw an
unexpected weakening in… the labor market, that would certainly
weigh on cutting sooner. Absolutely."
Equities tend to rally after the
Fed begins a cutting cycle, although the returns are
(unsurprisingly) better in non- recessionary scenarios. Deutsche
Bank found that the S&P 500 has returned +7% in the 12 months
following the first rate cut in recessionary scenarios, and +18% in
non- recessionary scenarios. Longer-term, Goldman Sachs found a
c50% positive return over 2 years absent a recession and negative
mid-teens returns when a recession occurred. Interestingly, the
overall level of the market coming into the rate cutting cycle has
made little difference historically. Since 1980, there have been 20
times when the Fed has cut rates when the S&P 500 was within 2%
of all-time highs, and the market has been higher a year later on
all 20 occasions.
Investors should also be comforted
by central banks' increasing ability and confidence in using their
balance sheets to deal with sector or asset-class specific issues.
Indeed, one of the great challenges last year was understanding how
an aggressive Fed tightening cycle did not cause a spike in
unemployment or a recession. In addition to the reasons suggested
above, liquidity provided by years of Quantitative Easing plus
covid-era balance sheet expansion (from 18% of GDP in 2019 to 28%)
mollified the impact of monetary tightening from rate cuts. In
addition, central banks have been very willing to use their balance
sheets to support the economy and the debt and labour markets (and,
by extension, risk assets), as seen with the Fed's Bank Term
Funding Program (BTFP) and the Bank of England's successful
intervention during the LDI crisis. We expect balance sheet
operations to remain a permanent part of the landscape.
Valuations appear extended, but
not unreasonable. Equity market valuations have rebounded since
June and October 2023 lows (c15.5x) and the S&P now trades on
21x 2024 consensus earnings and 18.5x 2025, based on +11% and +9.5%
EPS growth. Historically, equity valuations have expanded following
the end of Fed hiking cycles, but multiple expansion is typically
accompanied by a decline in bond yields. Economic growth appears
positive but moderating (total revenue growth tracks nominal GDP
growth normally), which suggests upside to revenues (absent
AI-related areas) might be limited. S&P profit margins are back
to pre-GFC highs and elevated versus history, having troughed in Q4
2022. Several incremental headwinds to further margin expansion
suggest profit growth could be more similar to revenue growth in
2024, although analysts are still assuming significant operating
leverage with S&P 500 expected earnings growth (+11%) ahead of
revenue growth of 4.9%. However, we are optimistic longer-term that
AI could drive sufficient labour productivity for knowledge workers
to make a material difference to the c$53trn global wage bill (c54%
of GDP). Our valuation base case is that significant further
multiple expansion is unlikely from this point, and equity returns
should better track EPS growth absent a recession or bull case
scenario.
Market Risks
The most significant risk to the
market outlook is the prospect of a recession or 'hard landing'.
Past economic downturns have seen S&P 500 EPS decline by 11%
peak-to-trough and the index level fall by -24%, although prices
and valuations typically bottom faster than earnings. The median
forecasted probability of a US recession in the next 12 months fell
steadily from 65% to 30% during the fiscal year. However, there
remains a possibility that the 'long and variable lags' of the
fastest monetary tightening cycle in a generation will ultimately
push the economy into recession. Cracks in commercial real estate
have caused concern, but the office market accounts for just 2-3%
of banks' loan portfolios while office investment is only 0.35% of
GDP.
We believe the odds of a US
recession are still relatively low, despite warnings from several
traditional leading indicators such as the yield curve (still
inverted) and the Conference Board's Leading Indicator, which has
never experienced such a large 6- month decline without a
recession. On the monetary side, the money supply has never
contracted this fast without some sort of negative outcome - even
in our favoured parallel the post-WW2 'recovery loop', there was a
brief recession in 1948-49 as the economy transitioned from a
wartime to a peacetime footing. Central bankers may have more data
(and some other tools) to help the economy adjust, but if there is
an asset quality problem rather than a liquidity problem, there is
only so much they can do.
The most bearish market view is
any challenge to the idea that the Fed actually has managed to get
inflation sustainably under control, and the threat from a 'second
wave' of inflation could necessitate further tightening. There was
a second (and third) wave of high inflation in the 1970s related to
geopolitical developments (Vietnam war, energy crisis, deficit
spending). This would hurt equity performance: markets were flat
between 1967-1980 and credit outperformed significantly as yields
averaged >7%.
A longer-term issue which could
contribute to a higher neutral interest rate and lower equity
multiples is the growth in public debt, which has reached record
levels as a percentage of GDP in many countries. Historically (e.g.
1919, 1946, 1995), peak government debt-to-GDP has been resolved by
a combination of lower fiscal deficits (or surpluses) and an
acceleration in GDP. This has not (yet) occurred; since the 2020
peak, GDP growth has been strong, but the federal deficit in FY23
was c$2trn (7% of GDP), doubling from $1.0trn in FY22.To date, this
increased deficit has been of limited concern to the bond market
but our working assumption is that it 'cares' about deficits in a
non-linear way, and perhaps 5% on the 10-year US treasury might
mark a potential 'break point'. However, we also acknowledge that
being the reserve currency of the world may allow for ongoing
structural US deficit financing with limited penalties.
Beyond a recession, we are most
concerned about geopolitical risk, a topic we covered in depth last
year. This risk is heightened in what is an election-heavy year,
where countries accounting for >60% of global GDP are holding
elections - US, India, and UK among them - but also because there
is an emerging narrative about the reversal of the post 1980s
'peace dividend' which has supported global growth, trade,
stability, and asset values. The emerging 'multipolar' world could
reverse this feedback loop as trade and supply chains decouple,
higher inflation and higher deficits become embedded - the '1970s
scenario'. China represents its own category of geopolitical and
economic risk. A bearish view might consider the 'success' of
China's initial lockdown as its zenith as a global power before the
inherent limitations of an investment-led growth model and/or
totalitarian leadership were laid bare. China's nominal GDP growth
has decelerated to the lowest level since the 1970s which helps
explain the weakness in Chinese equity and property markets. This
could reflect a new normal for China after three decades of
double-digit nominal GDP growth.
In terms of US-Sino relations,
there are several paths that a deterioration might take in 2024.
These include further outbound investment restrictions, export
controls, and even the revocation of 'Most Favoured Nation' status,
something of which Trump is in favour. China may also be at risk of
exporting deflation to the rest of the world but the economic
impact to the US should be contained (exports to China make up 0.6%
of US GDP), and a direct effect of a 1% shock to Chinese growth on
US GDP is estimated at less than 0.01%.
A far greater risk comes from the
potential for an escalation in tensions surrounding Taiwan as
President Xi described unification as "a historical inevitability"
in his 2024 New Year's address. A second Trump presidency would
bring an added element of uncertainty and higher likelihood of a
miscalculation. A recent 'war game' simulation estimated the
potential impact on the global economy of a war in the Taiwan
Strait at c$10trn or c10% of global GDP, significantly larger than
the GFC or the pandemic. As it relates to PCT, Taiwan accounts for
60% of global semi shipments and >90% of leading-edge semi
manufacturing capacity. For context, OPEC has about 40% of global
oil capacity. It might take 5 years + to rebuild Taiwan's
semiconductor capacity and would undoubtedly set the evolution of
AI back materially.
Increasing market concentration
has been a feature of the post-GFC market, with the largest 10% of
stocks' accounting for a portion of the overall stock market
(c.75%) not seen since the Wall Street Crash of 1929.
This is not just a technology
sector phenomenon as large caps are outpacing small caps nearly
everywhere, even on a sector-neutral basis. The rejuvenation of
small caps has been long called for by active managers (including
us), but the case for broadening is not straightforward.
A more supportive rate environment
should help small cap outperformance as we saw in Q4 2023, when
yields dropped sharply back to c3.8% and small and mid-caps led the
market higher. As we saw then, the upside from a small cap rally
can be explosive as Russell 2000 bull markets have produced average
gains of 131%, with 7 of 11 bull markets producing triple-digit
gains. However, the earnings picture is complicated as large-cap
market dominance has reflected higher EPS estimates, in contrast
with small-caps where earnings have trended lower since the start
of 2022. Absent an earnings recovery, it is hard to argue for
structurally higher small-cap multiples.
The risk profile of small caps is
also less appealing: the Russell 2000 has a record percentage of
unprofitable companies with significantly more debt to refinance in
the next few years, in stark contrast with strong balance sheets at
larger corporates. Finally, the dominance of large caps may simply
reflect the changing nature of the economy as larger companies have
enjoyed increasing returns to scale, formerly having been subject
to diminishing returns. This reflects a number of structural
changes including the increasing relative importance of network
effects, globalisation and potentially large cap companies' ability
to develop and exploit proprietary software. In fact, returns on
capital for large companies were generally lower than for smaller
companies in the 1980s and 1990s, but since 2000 they have become
significantly higher for larger companies. The gap may also reflect
different attitudes to investment. For example, total capex and
R&D spending for the Magnificent Seven this year is expected to
total c$350bn and the Magnificent 7 reinvests c60% of their
operating cash flow back into capex and R&D, or about 3x rate
of the other 'S&P 493'. Our view is that while a broadening of
the market is certainly possible and would be welcome, change of
leadership often require a break in the cycle.
There is risk to equity markets
from competition from other asset classes. Yields on equities, high
grade bonds, T-bills and REITs recently converged for the first
time in 20 years. As such, there is far greater competition for
capital with investors able to collect the same earnings yield as
the S&P 500 at varying risk/return profiles. If rates trend
lower as expected, we should expect some rotation into US equities,
although equity ownership as a percentage of total assets is
already at record highs.
Our broader conclusion remains
unchanged from our interim report: whether there is a recession or
not and what equity markets do over the next six to 12 months
perhaps misses the point. Astounding new innovations such as AI
augur well for a longer-term innovation-led growth and prosperity
cycle. Markets appear fully valued if we think the timeline to AI's
economic impact is 5+ years away, but much more reasonable if that
timeline is sooner. The shortening timeline to Artificial General
Intelligence (AGI) - the ability to understand, learn, and apply
knowledge across a broad range of tasks and domains at a level
comparable to human intelligence- presents a further upside
scenario.
Technology Outlook
Earnings outlook
Having stabilised in 2023 with
growth of 3.5% y/y, worldwide IT spending is expected to reach
$5.1trn this calendar year representing an increase of 8% y/y, in
current dollar terms. This represents a notable acceleration and an
upward revision from the +6.8% forecast in January. While Gartner
believe it will take until 2025 to translate into enterprise
budgets, it is clear that AI has already become a corporate
imperative with c45% of CIOs planning to adopt AI within 12-24
months. Strength expected in datacentre spending (+10% y/y)
suggests that the digital groundwork for AI is being built ahead of
enterprise adoption, led by hyperscalers. Likewise, an expected
rebound in devices, following two very weak consecutive prior
years, is predicated on AI-related product cycles.
For 2024, the technology sector is
expected to deliver revenue growth of 9.3%, while earnings are
expected to increase by 18% which would represent the best year for
earnings since 2021. These forecasts are well in excess of
anticipated S&P 500 market growth, where revenues and earnings
are pegged at 4.9% and 11% respectively. The technology sector's
outperformance is expected to continue in 2025 with early forecasts
for 10.8% / 13.8% comfortably ahead of market expectations (5.8% /
9.5%). While macroeconomic conditions may create crosscurrents, we
believe technology fortunes this year will be determined by the
path of AI progress.
Valuation
The forward P/E of the technology
sector has expanded during the past year. A year ago, valuations
had recovered to c24x forward P/E, having ended 2022 at c.19x.
Since then, valuations have increased further as technology
earnings and stock performance (especially Mag-7) 'crowded out' the
broader market. At time of writing, technology stocks trade at
26.5x, well ahead of five (23.9x) and ten-year (20.3x) averages.
This reflects the arrival of AI as an investment theme and a much
improved inflationary backdrop. The premium enjoyed by the sector
expanded during the past year with excitement around AI resulting
in the sector making post-bubble highs (1.4x the market multiple),
levels last seen briefly during the pandemic period. At time of
writing, this premium has fallen back to c.1.3x - at the high end
of the post-bubble range. While this suggests less valuation upside
in the near- term, we believe that AI represents a unique moment
for the technology sector such that the post-bubble range (between
0.9-1.3x) may no longer be valid.
Magnificent
7
However, the valuation question is
greatly influenced by a select group of mega-cap stocks that - as
well as driving returns last year - also dominate technology
indices. As such, this year we present some high-level thoughts on
the so-called 'Mag-7' given the implication for future returns,
prospects of a broadening market and, of course, our own
positioning.
While 2023 proved a remarkable
year for the group, returns are highly sensitive to the starting
point; since the beginning of 2021, Mag-7 - at time of writing -
has only outperformed the S&P 500 by 10%. At time of writing,
the group sports a premium valuation; a forward P/E of 29.6x as
compared with 20.9x for the overall index and 18.6x for the
remaining 493 S&P 500 (SPX) companies. However, Mag-7 accounts
for c.29% of SPX market cap and is expected to generate c.22% of
SPX net income. One might argue a little extended, but very clearly
far from bubble territory. Moreover, the group is expected to
deliver three year compound annual revenue growth of 12% versus 3%,
higher margins (22% vs. 10%) and a greater re-investment ratio (61%
vs. 18%) than the SPX493. This superior profile has shown little
sign of abating as in Q1 2024, expected S&P 500 earnings growth
of +6% y/y is expected to come from Magnificent 7 earnings growth
tracking to +48% y/y while the remaining 'S&P 493' are forecast
to deliver -2% y/y. These metrics reflect the group's uniqueness,
with each member dominating large markets, enjoying scale
advantages or natural monopoly status while investing heavily in
new opportunities to avoid the so-called innovator's dilemma. Most also have
strong AI stories in our opinion, and all are what we consider
non-fungible companies and stocks. As such, we expect to retain
sizeable positions in the largest stocks in the benchmark over the
coming year, assessing each on its own merits and not defaulting to
a market broadening narrative, even if we (and other active
managers) strongly desire it.
Next generation /
longer-duration stocks
Next-generation valuations have
also expanded as we predicted in last year's Annual Report when we
suggested it was 'highly likely' that we had already seen the lows.
Since then, an improved inflation outlook and moderating cloud
optimisation headwinds have seen software valuations recover to
c.7.0x forward EV/sales, having bottomed at around 5.1x (and
peaking at 16x in 2021). According to KeyBanc, this leaves them
ahead of five and ten-year pre-covid averages of 6.1x and 7.2x
respectively. Higher growth stocks have experienced a greater
valuation recovery with companies growing revenues above 20% today
trading at 10.9x forward EV/sales; down 62% from highs but well
ahead of pre-COVID five-and ten-year averages of 7.8x and 7.0x
respectively. In contrast, unprofitable growth stocks have recently
made new valuation lows, trading at less than 3.0x forward
EV/sales.
Survival of the
fittest
The partial recovery in software
valuations (and related lack of market interest in unprofitable
growth stocks) reflects a slower growth environment ameliorated by
higher industry margins. This year, the median software growth rate
is forecast at 14-15% as compared to 17% in 2023, and 26-27% in
2022. However, the adoption of the so-called PE playbook, as highlighted last year,
has become the norm for most software companies and has been
rewarded by the market. Unlike prior downcycles, the recalibration
was rapid, reflecting unique post-pandemic challenges - bloated and
disconnected workforces, waning product and corporate relevance,
the end of 'free money' and, more recently, the birth of genAI. The
focus on more profitable growth has seen the median software
company's free cashflow margin expand by a remarkable 1500bps from
c.5% in 2019 to c.19-20% in 2024E. This recalibration has seen the
best companies become better versions of themselves. For instance,
while CrowdStrike stock has more than recaptured 2021 highs, over
the past c.3 years it has grown revenues from $1.1bn to $2.9bn
while expanding operating margins (OMs) from 10% to 19%. ServiceNow
- recently at all-time highs - has grown revenues from $5.5bn to
$8.5bn while expanding OMs from 25% to 29%. In addition, both
companies should be able to use AI to deliver further margin
improvement as well as monetise the technology via AI-enhanced
product lines.
Against this backdrop,
unprofitable companies are not merely anachronistic - they
represent a pool of companies unwilling or (more likely) unable to
deliver margin expansion. They are former pandemic / WFH winners,
derivative plays on now unloved themes, SPACs, or companies that
might have changed the world in 2040 had zero interest rates
prevailed. They are the broken toys used by equity investors to
play themes that didn't last or never happened. Some may yet
reinvent themselves, but history suggests most will disappear, to
be combined, reconstructed, or dismantled by private equity. As
such, we continue to tread tentatively in longer-duration stocks,
doing our best to avoid the siren call of 'cheaper
valuations'.
More M&A activity
likely
Following a dismal 2023 for
M&A, this year has got off to an encouraging start. After a
notable absence of strategic M&A, 2024 has already seen HP
announce the $14bn acquisition of Juniper Networks, while Synopsys
and Ansys are set to combine in a $35bn stock and cash transaction.
More recently, IBM scooped up Hashicorp for $6.5bn, representing
c.8.5x EV/CY25 revenues and a 42% one-day premium, while in the UK,
there was recently a bidding war between Viavi and Keysight for
Spirent. In addition, private equity is likely to remain active
with c.$2.5trn in 'dry powder' having acquired Alteryx, New Relic
and most recently, Darktrace. We expect AI to play a part in
greater M&A too, as point solution companies continue to
struggle versus platforms with LLMs likely to prove highly
disruptive to pre-GenAI vintages. Nonetheless, a recovery in
M&A activity should provide some downside support to current
valuation multiples.
Cloud / AI Update
Cloud reacceleration
After decelerating for ten
quarters, public cloud revenue growth finally reaccelerated in
Q4'23 reflecting the combination of waning optimization activity
and ramping AI workloads. In Q1'24, aggregate cloud revenue growth
reaccelerated 3ppts sequentially to +24% y/y - remarkable given a
greater than $210bn industry revenue run-rate. We are hopeful that
the post-COVID optimization process is largely complete, a view
supported by CIO surveys that suggest cloud spending should more
closely track consumption from here. More importantly, AI workloads
are beginning to 'move the needle' with AI called out as a
meaningful contributor at Microsoft (7pts of Azure revenue growth
in its most recent quarter) and Amazon ("multibillion-dollar
revenue run rate" in AWS). We expect these tailwinds to grow
stronger as the public cloud remains a key conduit for accessing
AI. Foundation models with ever greater parameter counts require
larger clusters of connected AI servers, while the compute
requirements of AI applications are said to double every 3.5
months; both needs fit well with cloud flexibility and
scalability.
A new architecture for
AI
The hyperscalers also have the
'deep pockets' required to invest in AI infrastructure, which due
to extreme performance required by AI training is heralding a
significant shift in IT architecture from serial to parallel
compute. We consider the architectural break far more significant
than the transition to cloud from on-premise compute. This is
apparent from an AI server bill of materials (BOM) said to be 25x
greater than a general purpose cloud server. A useful parallel for
this might be comparing a Toyota Prius with Formula 1; both are
cars, but one is designed for general purpose and efficiency
(cloud), the other for extreme performance (AI).
Unprecedented growth
The nascent 'AI war' that began a
year ago (when Microsoft looked to leverage its OpenAI relationship
to challenge Google's search business) has given way to something
far more significant, accompanied by an unusual urgency that feels
reminiscent of the 1990s. Having increased by c.5% during 2023,
datacentre capex will materially accelerate this year with all of
the US hyperscalers raising future spending intentions in both
Q4'23 and Q1'24. At time of writing, hyperscaler capex is expected
to exceed $170bn in 2024, representing growth of 44% y/y. This is
sharply higher than earlier expectations of +26% after Q4 results,
and +18% at the beginning of the calendar year. According to
Gartner, AI servers will account for nearly 60% of hyperscaler
total server spending in 2024.
To date, the greatest beneficiary
of AI infrastructure spending has been Nvidia as its GPU chips sit
at the epicentre of the new AI architecture. In its most recent
quarter, the company registered datacentre revenues of $18.4bn, a
remarkable 409% y/y increase. Growth at this scale is extremely
unusual in technology history, leading many to suggest that AI
spending is a 'bubble'. We strongly disagree and consider instead
that we are early in the accelerated buildout of a general purpose
technology.
Building the AI rails
Sizing the AI infrastructure
opportunity is difficult to say the least - in last year's paper we
had the temerity to suggest that AI capex "might exceed $100bn".
Since then, Jensen Huang, CEO of Nvidia, has sized the AI market at
$1Trn while Dr Lisa Su, CEO of rival AMD, has suggested the market
for AI chips will reach $400bn by 2027, which including other
component, system and networking costs implies an $800bn
opportunity. At face value this suggests that AI spending could
increase at a 70% CAGR through 2027 by which time it would reach
c.0.8% of global GDP.
This would be extraordinary, but
not unprecedented given that between 1830-1839, US railroad
investment increased from 0.2% of GDP to just above 0.9% by 1839,
corresponding to a 31% CAGR in nominal terms. After a digestion
period, railroad investment reaccelerated, averaging 1.7% of GDP
between 1850 and 1859. This astonishing period included a blow-off
(bubble) phase after 1850, with investment peaking at 2.6% of GDP
in 1854. At the height of the equivalent UK railroad boom,
investment averaged 7% of GDP for three years. More recently, the
dotcom period witnessed telecom companies spend $1trn (in today's
money) building out the Internet during the five years following
the Telecommunications Act of 1996. While both historic parallels
are useful reminders that infrastructure builds often end badly,
current AI spending appears to us to be in its infancy.
The Biggest Opportunity
Underpinning AI spending is the
scale of the AI opportunity, reflecting its would-be general
purpose technology (GPT) status. Because it addresses knowledge
work, economist Erik Brynjolfsson has described AI as "the ultimate
GPT - the most general of GPTs". Accenture estimates that as much
as 40% of all working hours will be supported or augmented by
language-based AI while McKinsey believe that generative AI could
automate 30-50% of tasks in about 60% of occupations, adding the
equivalent of between $2.6-4.4trn in economic output annually by
2030.
These longer-term opportunities
are buttressed by early AI monetisation. Less than four years after
launching a 'capped profit' arm in 2019, OpenAI is said to have
reached a $2bn revenue run-rate with more than 92% of the Fortune
500 as customers. Meta has also demonstrated its ability to
monetise GenAI by improving advertiser ROI and reducing the cost of
customer acquisition.
Enterprise adoption of copilots
(AI-powered companion software) and premium AI-enabled products has
also
been encouraging. These tools
enable knowledge workers to be more productive; Github Copilot
(launched by Microsoft in collaboration with OpenAI in 2022) is
helping software developers code up to 55% faster by writing 46% of
the code. Lexis+ AI - a legal GenAI assistant from RELX - allows
users to "draft clauses, legal documents.. and summarise case law..
(and) the reasoning behind the case". Law enforcement technology
provider Axon recently announced 'Draft One', AI-powered software
capable of auto drafting police reports based on body-camera
footage, saving officers an hour per day on paperwork; in Colorado,
police experienced an 82% decline in time spent writing reports.
Payment provider Klarna also announced it had replaced 700
full-time contact centre employees with AI agents saving the
company $40m per annum. These are early glimpses into AI innovation
and disruption, less than two years after the launch of
ChatGPT.
Happening now
Rapid adoption and monetisation of
nascent AI tools points to a faster than expected diffusion rate.
History shows that the delay between invention and widespread use
of new technologies has fallen significantly over time, while
analysis of earlier GPTs by the Brookings Institute suggests that
implementation lag halves with each successive GPT: 80 years for
steam, 40 years for electricity, and 20 years for ICT. We expect AI
to take less than 10 years to diffuse widely as it 'stands on the
shoulders of giants' - technologies such as cloud, internet,
leading edge semiconductors and billions of smartphones. Key AI
breakthroughs did not happen overnight; the Cloud is nearly 20
years old. NVIDIA has been designing GPUs since 1999. Billions of
smartphones and other connected devices have created vast datasets
for training AI models and a near-ubiquitous channel for its
distribution.
The idea of rapid AI diffusion is
visible in real-world developments that include growing recognition
among policymakers of the importance of AI and the need to address
it through legislation with the number of AI-related bills passed
into law increasing from just one in 2016 to 37 by 2022. The
Hollywood writers' strike in May 2023 was another notable
development as 11,500 film and television writers began industrial
action amid concerns around the AI's role in scriptwriting, fearing
that AI-generated scripts could undermine writers' work and
compensation. While some investors may be concerned about the risk
of slower AI diffusion, the actions of those most exposed to the
technology and legislators charged with controlling it suggest
otherwise.
A model of improvement
Diffusion, monetisation, and
corresponding capex are highly dependent on continued AI model
progress. We believe the advent of the transformer model in 2017
represented a key breakthrough which is why we describe it as the
'Bessemer moment for AI'. As with steel in 1856, this breakthrough
has resulted in discontinuous technology progress; the parameter
count of OpenAI's GPT-4 (2023) is rumoured to be one million times
larger than the DeepMind model that beat Lee Sedol at Go just seven
years ago. Higher parameter counts have significantly increased the
learning capacity of AI models, enabling them to handle a broader
range of general-purpose tasks.
Recent model progress includes
multimodality (able to analyse images and audio) and far larger
token context windows (the amount of information that can be
processed in any prompt). In February, OpenAI announced Sora, a
remarkable AI 'text-to-video model' able to generate video based on
descriptive prompts with "an
emergent grasp of cinematic grammar". The furious pace of
model improvement recently saw Google's Gemini Ultra become the
first model to exceed the 'human expert performance' threshold on
MMLU, an AI benchmark which measures knowledge across 57 subjects.
Improved performance is also helping ameliorate earlier technology
challenges with newer LLMs such as GPT-4 experiencing lower
hallucination rates (incorrect model outputs). The expected launch
of OpenAIs GPT-5 over the summer as well as the launch of Meta's
425bn-parameter Llama 3 and Amazon's 2trn parameter Olympus will
serve as important waypoints to assess continued AI model
progress.
Our confidence in continued AI
progress is underpinned by scaling laws which have so far predicted
improvements in model performance based on increasing model size,
the amount of training data and computing power applied. This is a
complex topic to tackle here, but to us it is highly reminiscent of
Moore's Law, which famously stated that the number of transistors
on a microchip would double approximately every two years. Humans
struggle to model non-linear change, but Moore's Law held true for
many decades, predicting the exponential progress of semiconductors
that followed. We believe that for as long as they hold, scaling
laws predict a continued non-linear pace of AI model improvement
and ever-greater investment required to stay on the curve. In a
recent interview, Mark Zuckerberg defended Meta's decision to
significantly increase AI spending with reference to scaling laws:,
"I think it's likely enough that we'll keep going. I think it's
worth investing the $10bns or $100bn+ in building the
infrastructure.
General intelligence
Zuckerberg's excitement (and capex
plans) reflects an apparently shortening timeline to artificial
general intelligence (AGI), a point where AI might achieve the
cognitive abilities of humans across a wide range of tasks. This
would have seemed remarkable -crazy even - just a few years ago,
but within the AI community, AGI is widely considered attainable in
the near future. Founder of DeepMind Demis Hassabis has said AGI
could be less than a decade away, while Shane Legg, Google's chief
AGI scientist, believes there is a 50% chance of general
intelligence by 2028. Sam Altman also believes it could be reached
within the next four or five years. A shortening timeline to AGI
might make sense of a series of peculiar recent AI developments
including the late 2023 debacle at OpenAI when Altman himself was
fired and rehired in a matter of days, as well as decision by
Geoffrey Hinton ('The Godfather of AI') to leave Google in May 2023
so he "could talk about the dangers of AI". It might also explain
why Altman has mooted the idea of raising $7trn - twice the size of
UK GDP - to 'reshape the semiconductor industry'. After all, if we
are indeed close to achieving AGI, the world is going to need a lot
of chips.
Welcome to the AI-era
We expect AI to profoundly change
the world. At a prosaic level, AI should deliver a significant
productivity boost, as was the case with prior GPTs. Current
expectations for US productivity to average c.1.4% this decade look
mismodelled; GS believe that AI could increase US productivity by
1.5% annually over the next decade, while Erik Brynjolfsson expects
US productivity to average "at least 3%".
Risk to jobs
If so, the coming decade could be
"the best ever" although we acknowledge that concerns about AI risk
to jobs is understandable given its scope and pace of AI
improvement. However, history demonstrates that humans have adapted
well to prior technology disruption; in 1850, agriculture explained
two-thirds of US jobs before mechanisation steadily reduced this to
just 4% by 1970. Despite this, and subsequent technology
innovations, median G7 unemployment has "oscillated based on
economic cycles, rather than any technological waves" since
1750.
While knowledge work is in the
crosshairs of this new GPT, we expect the first wave of AI to
complement rather than substitute human work, as is the usual
pattern of technology change. Even when AI adoption becomes more
disruptive all is far from lost, as the agricultural experience
demonstrates. While focus will inevitably fall on jobs 'lost to AI'
there should be many more made possible by the union of human +
machine.
Unfortunately, we cannot know what
new opportunities will be made possible by AI. However, we do know
that earlier tools and GPTs created opportunities that were
previously unthinkable. For instance, the sewing machine changed
the relationship between humans and clothing. Previously, clothes
were prohibitively expensive; Singer's sewing machine (1855)
transformed this by increasing stitches per minute 22-fold,
reducing the time it took to produce a shirt from 14 ½ hours to c.1
Today, apparel is a $2trn industry.
Likewise, the telegraph - the
precursor of all modern communication systems - "freed
communication from transportation". By changing the relationship
between information and distance, the telegraph (1837) challenged
price arbitrage, changed the way wars were waged, created the
'information industry' (news agencies such as Reuters and AP) and
gave life to the first 'fintech' application - wire transfer -
introduced by Western Union in 1871.
Hopefully these two lesser known
case studies help explain why we know AI will create massive new
markets, and challenge existing relationship that exist today.
However, we cannot yet know what form these will take, just as
Morse - who tried to sell his telegraph system to the US government
for $100,000 - did not fully understand its commercial
potential.
Idea Generation
We know that earlier technology
tools and GPTs have changed relationships. Our early bet is that AI
changes the relationship between people and ideas. Transportation
technologies (horse, canals, railroads, containers, aviation etc)
tamed distance by transforming the movement of physical goods
(freight, people). Communication technologies (telegraph,
telephone, internet etc) tamed distance by changing the velocity of
information. We suspect AI will transform the speed of knowledge
creation after years of declining research productivity. The
ability to inject limitless AI into research should meaningfully
accelerate scientific progress, and unlock new ideas, just as the
telegraph acted as "an agency for the alteration of
ideas".
Technology Risks
Given its centrality to sector
fortunes, the key risk posed to technology stocks relate to AI. A
complex and fluid topic, the most important of these is that the AI
monetisation timeline disappoints, perhaps because early
productivity gains prove limited. Greater availability of AI chips
might also lead to a less intense demand environment, leading to
concerns about industry growth. Other potential AI- related risks
include greater antitrust scrutiny and other legal challenges
relating to data use. We remain sanguine that regulation designed
to slow AI proliferation will prove manageable as countries talk a
better story than they implement given the strategic importance of
AI. We also note that better provision of guardrails could actually
accelerate AI diffusion, just as improved safety following the
regulation of the aviation industry acted as a tailwind for
consumer adoption. We should also remind investors that should AI
become a GPT that there are likely to be far more losers than
winners from today's cohort of companies within and beyond the
technology sector. However, the most significant AI risk relates to
model improvement failing to keep up with scaling laws which would
negatively impact hyperscaler capex plans and our (AGI-related)
bull case.
Beyond AI, there are many
macroeconomic risks that are covered elsewhere in this report. As
previously highlighted, the most important of these relate to
inflation (failing to return to pre-pandemic levels) and recession
(brought on by higher interest rates or sharply higher energy
prices). As such, the timing and magnitude of interest rate cuts is
likely to remain a key focal point for investors. In addition,
there is likely downside risk to technology spending should CEO
confidence meaningfully deteriorate. Similarly earnings estimates
will remain subject to macroeconomic turbulence with less scope for
cost cutting now technology margins have recovered to 25.6% in
Q1'24, up from 22.4% a year ago. While we hope this would be
disproportionately felt by non-AI segments, it might also result in
weaker consumption trends and a disappointing recovery trajectory
for cloud spending.
Valuation remains a key risk too,
particularly following the absolute and relative re-rating in
technology stocks. Heightened sensitivity to earnings
disappointments during Q1 earnings season is symptomatic of
elevated valuations and investor expectations. While we believe the
re-rating is appropriate given the arrival of AI as a key
investment theme, higher risk-free rates and/or diminished
prospects of interest rate cuts could challenge this view. We are
also dismissive of the notion that AI stocks are in a bubble, akin
to the dotcom period in the late 1990s. While there are features of
today's market that rhyme with that earlier period, we do not
believe investors are really considering trillion dollar market
opportunities, scaling laws and an accelerated path to AGI. Factors
that would challenge this view include much higher valuations (tech
traded above 2x the market multiple in 2000), a 'hot' IPO market
dominated by immature AI companies and the application of new
valuation metrics necessary to justify elevated valuations. None of
these conditions exist today.
As in prior years, regulation
beyond AI remains a key risk too, with potentially adverse outcomes
in outstanding antitrust cases against Alphabet and Amazon likely
to impact other natural monopolies within our sector. In Europe,
large 'gatekeeper' technology platforms will be forced to comply
with the Digital Markets Act (DMA) designed to foster greater
competition, with fines of up to 10% of global revenues for
non-compliance. However, we believe worst- case outcomes will
continue to be averted, in part because many of these companies
represent the vanguard in the emerging AI battleground with China.
Instead, deteriorating US-Sino relations may represent a more
significant risk, given that Taiwan represents a critical
geopolitical fault line and could potentially impact a significant
portion of our portfolio.
Concentration risk
In addition, it would be remiss of
us not to again remind shareholders about the concentration risk
both within the Trust and the market-cap weighted index around
which we construct the portfolio. After another year of large-cap
outperformance, this risk remains elevated. At year end, our three
largest holdings - NVIDIA, Microsoft, and Alphabet - represent c.
27% and c.35% of our NAV and benchmark respectively while our top
five holdings (which additionally includes Apple and Meta)
represent c37% and c53% of our NAV and benchmark respectively. We
continue to believe that this concentration risk is justified
because they are unique, non-fungible assets that capture the
zeitgeist of this technology cycle and appear well positioned for
AI given their significant scale advantages.
That said, we remain unafraid of
the idea of moving to materially underweight positions in the
largest index constituents should we become concerned about their
growth or return prospects, or should we find more attractive
risk-reward profiles elsewhere in the market. This past year, we
have meaningfully reduced our Apple position to c820bps underweight
at the end of the fiscal year. However, the timing of a more
concerted move away from mega-caps remains highly uncertain, not
least because in aggregate the stocks continue to enjoy strong
relative earnings revisions while valuations remain far from
ebullient.
In the meantime, we should remind
shareholders that while PCT is able to hold up to a full benchmark
weight subject to a maximum limit of 15%, we are unlikely to hold
positions much above 10%. When we do so, it is likely to be via
smaller equity positions held in combination with a slither of call
options designed to ameliorate upside risk in exchange for a modest
premium. In the end, we struggle with the notion that we are
reducing risk by making the portfolio ever more concentrated.
Instead, we continue to believe that a diversified portfolio of
AI-exposed growth stocks capable of outperformance, but also
constructed to withstand investment setbacks, should deliver
superior returns over the medium term, particularly on a
risk-adjusted basis.
Conclusion
We hope this (long) outlook
section adequately conveys our excitement about Generative AI. We
truly believe the AI story is just beginning. Where others may
predict steady diffusion, we expect AI adoption to follow the
pattern of electrification which was "sweeping and widespread". For
now, we (and the Trust portfolio) are heavily focused on the
companies helping build the AI 'rails': chips, systems, storage,
networking. We believe these are the most direct beneficiaries of
an infrastructure build-out that is only a few quarters old. After
decades of understandable investor focus on software enabled by the
cloud, AI has turned the spotlight back to hardware; the c.25x
higher bill of materials of an AI server epitomises an
architectural shift away from general purpose cloud in favour of
high-performance compute. In addition to large holdings in NVIDIA,
AMD and Broadcom, we have added a series of Asian suppliers (PCBs,
systems, testers and more) that we expect to benefit from higher
ASPs and growing AI share of their revenue mix. We are also
intrigued by edge AI opportunities in traditional technology
segments such as PC and smartphone - markets we typically eschew as
growth investors. While we will tread carefully in these otherwise
mature areas, AI has the potential to steepen innovation curves,
shorten replacement cycles and render massive PC and smartphone
installed bases obsolete. Combined with Cloud and several
infrastructure software companies, these AI enablers explain around
two-thirds of the Trust portfolio today.
In time, there should be other
software winners too; for now we have gravitated towards the
largest incumbents, particularly those with large, unique, and
critical datasets such as Microsoft, SAP, and ServiceNow that are
able to monetise their domain expertise via copilots or
premium-priced products. Longer-term, we remain unsure about how
the deterministic, packaged software industry of today will coexist
with the probabilistic
nature of AI models. How will software innovation and codified
'best practice' contend with recursive AI able to adapt, learn and
iterate?
While this question is longer-term
and more theoretical in nature, there is already genuine investor
debate about whether Adobe (not held) - a truly remarkable software
company - is a 'winner' or 'loser' from AI less than two years
after the launch of ChatGPT. This speaks to the pace of model
improvement, as well as the reach and disruptive capabilities of
AI. We expect this debate and the shadow cast by AI to extend
within software and other technology subsectors as AI becomes ever
more capable. This is why we introduced a so- called 'AI lens' to
our investment process last year; not only to help us identify
potential AI winners, but to ensure that we have properly
considered and debated the risks posed by the nascent General
Purpose Technology (GPT).
Our approach may appear premature
and at odds with the current consensus view that AI will take a
reasonably long time to diffuse. History also suggests we might be
early given that incumbents can benefit from the early adoption
stage of a new GPT as it creates incremental opportunities to
leverage existing (if soon to be obsolete) investments,
particularly while the new technology is inferior, expensive, or
limited in scope. However, if we are right about rapid AI diffusion
and model improvement (our base case), investors may have less time
than they think to avoid the potential losers from AI. Our
experience investing during the internet, cloud and smartphone
cycles reminds us it is considerably easier to spot early losers
from disruptive new technologies than it is to identify the early
winners.
The combination of accelerated
infrastructure build-out and concomitant model improvement,
together with potential for more rapid disruption elsewhere
explains why we have pivoted the portfolio towards AI during the
past year. While this may result in somewhat greater daily
volatility, our enthusiasm for AI will continue to be matched by a
pragmatic (and highly liquid) approach to portfolio construction
given heightened levels of uncertainty and opportunity associated
with AI disruption and a new computing stack.
Following a number of thematic
'false-starts' in recent years, we understand why some investors
might default to bubble at times like this. However, we believe AI
represents the next general purpose technology. If so,
relationships between computers and humans, humans and ideas, are
likely to be upended. One of the biggest impediments to the
development of AI has been Polanyi's paradox, that "we know more
than we can tell"; tasks which humans can intuitively understand
how to perform but cannot verbalise or formally encode. Generative
AI may have solved this riddle by finding the unknown relationships
across vast bodies of data. In the near future, AI may tell us more
than we can know today. At times like this, it may be tempting to
seek shelter from the uncertainty that discontinuous technological
change brings. Instead, we attempt to embrace the unknown, taking
comfort from the fact that many of the smartest people who ever
lived were unable to know in advance- as Samuel Morse exclaimed in
1844 in his first telegram -'what hath God wrought'
Ben Rogoff & Ali Unwin
16 July 2024*
*Data and statistics referenced
within the Investment Manager's report may have changed between the
financial year end and the date of publication.
The Investment Managers' Core Themes and ESG Report from a
corporate and investment perspective are included in the Annual
Report and Accounts.
PORTFOLIO
REVIEW
Breakdown of Investments by Region
|
As at
30 April
2024
|
As
at
30 April
2023
|
US & Canada
|
72.6
|
72.8
|
Asia Pacific (ex-Japan)
|
10.0
|
10.4
|
Europe (inc - UK)
|
6.6
|
3.9
|
Japan
|
5.1
|
4.4
|
Middle East & Africa
|
3.0
|
1.2
|
Other Net Assets
|
2.4
|
6.6
|
Latin America
|
0.3
|
0.7
|
Market Capitalisation of Underlying
Investments
|
As at
30 April
2024
|
As
at
30 April
2023
|
>$10bn
|
89.3%
|
92.1%
|
$1bn-$10bn
|
10.0%
|
7.5%
|
<$1bn
|
0.7%
|
0.4%
|
All data sourced from Polar
Capital LLP.
CLASSIFICATION OF INVESTMENTS*
as at 30 April 2024
|
North
America
(inc. Latin America) %
|
Europe
%
|
Asia
Pacific (inc. Middle East)
%
|
Total
30
April
2024
%
|
Total
30
April
2023
%
|
Benchmark Weightings as at 30 April 2024
%
|
Semiconductors & Semiconductor
Equipment
|
23.0
|
4.5
|
7.7
|
35.2
|
24.0
|
31.5
|
Software
|
19.4
|
0.7
|
2.7
|
22.8
|
24.1
|
27.3
|
Interactive Media &
Services
|
12.6
|
0.1
|
0.7
|
13.4
|
11.7
|
16.3
|
Technology Hardware, Storage &
Peripherals
|
6.0
|
-
|
2.2
|
8.2
|
13.4
|
16.8
|
Electronic Equipment, Instruments
& Components
|
1.2
|
-
|
2.6
|
3.8
|
1.4
|
0.4
|
IT Services
|
2.8
|
-
|
0.2
|
3.0
|
4.0
|
4.6
|
Entertainment
|
1.1
|
1.1
|
0.3
|
2.5
|
1.0
|
0.3
|
Broadline Retail
|
2.2
|
-
|
-
|
2.2
|
3.3
|
-
|
Communications
Equipment
|
1.6
|
-
|
-
|
1.6
|
1.4
|
2.1
|
Aerospace & Defence
|
0.8
|
-
|
-
|
0.8
|
0.2
|
-
|
Automobiles
|
0.8
|
-
|
-
|
0.8
|
1.1
|
-
|
Machinery
|
-
|
-
|
0.8
|
0.8
|
0.9
|
-
|
Hotels, Restaurants &
Leisure
|
0.4
|
0.1
|
-
|
0.5
|
1.2
|
0.2
|
Media
|
0.5
|
-
|
-
|
0.5
|
-
|
-
|
Building Products
|
-
|
-
|
0.4
|
0.4
|
-
|
-
|
Healthcare Equipment &
Supplies
|
0.2
|
-
|
0.2
|
0.4
|
1.0
|
-
|
Ground Transportation
|
0.3
|
-
|
-
|
0.3
|
0.9
|
-
|
Financial Services
|
-
|
-
|
0.2
|
0.2
|
3.3
|
-
|
Chemicals
|
-
|
-
|
0.1
|
0.1
|
-
|
-
|
Life Sciences Tools &
Services
|
-
|
0.1
|
-
|
0.1
|
-
|
-
|
Healthcare Technology
|
-
|
-
|
-
|
-
|
0.4
|
-
|
Electrical Equipment
|
-
|
-
|
-
|
-
|
0.1
|
-
|
Total investments (£3,713,758,000)
|
72.9
|
6.6
|
18.1
|
97.6
|
93.4
|
|
Other net assets (excluding
loans)
|
2.8
|
0.2
|
0.7
|
3.7
|
8.4
|
|
Loans
|
(0.8)
|
-
|
(0.5)
|
(1.3)
|
(1.8)
|
|
Grand total (net assets of £3,804,533,000)
|
74.9
|
6.8
|
18.3
|
100.0
|
-
|
|
At 30 April 2023 (net assets of
£2,828,141,000,000)
|
78.9
|
4.8
|
16.3
|
-
|
100.0
|
|
* 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 2024
|
|
|
|
|
Value of
holding
|
% of net
assets
|
Ranking
|
|
|
|
30
April
2024
|
30
April
2023
|
30 April
2024
|
30 April
2023
|
2024
|
2023
|
Stock
|
Sector
|
Region
|
£'000
|
£'000
|
%
|
%
|
1
|
(4)
|
Nvidia
|
Semiconductors & Semiconductor
Equipment
|
North America
|
395,876
|
130,855
|
10.4
|
4.6
|
2
|
(1)
|
Microsoft
|
Software
|
North America
|
335,337
|
302,791
|
8.8
|
10.7
|
3
|
(3)
|
Alphabet
|
Interactive Media &
Services
|
North America
|
278,153
|
174,388
|
7.3
|
6.2
|
4
|
(7)
|
Meta Platforms
|
Interactive Media &
Services
|
North America
|
188,666
|
82,047
|
5.0
|
2.9
|
5
|
(2)
|
Apple
|
Technology Hardware, Storage &
Peripherals
|
North America
|
163,959
|
284,199
|
4.3
|
10.0
|
6
|
(8)
|
Taiwan Semiconductor
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
139,427
|
61,421
|
3.7
|
2.2
|
7
|
(5)
|
Advanced Micro Devices
|
Semiconductors & Semiconductor
Equipment
|
North America
|
134,752
|
94,299
|
3.5
|
3.3
|
8
|
(-)
|
Broadcom
|
Semiconductors & Semiconductor
Equipment
|
North America
|
96,108
|
-
|
2.5
|
-
|
9
|
(10)
|
ASML
|
Semiconductors & Semiconductor
Equipment
|
Europe
|
86,304
|
49,941
|
2.3
|
1.8
|
10
|
(-)
|
Micron Technology
|
Semiconductors & Semiconductor
Equipment
|
North America
|
85,513
|
-
|
2.2
|
-
|
Top 10 investments
|
|
|
1,904,095
|
|
50.0
|
|
11
|
(14)
|
CrowdStrike
|
Software
|
North America
|
74,376
|
36,041
|
2.0
|
1.3
|
12
|
(11)
|
Amazon.com
|
Broadline Retail
|
North America
|
73,038
|
46,756
|
1.9
|
1.7
|
13
|
(13)
|
Arista Networks
|
Communications
Equipment
|
North America
|
62,166
|
38,201
|
1.6
|
1.4
|
14
|
(25)
|
Cloudflare
|
IT Services
|
North America
|
60,421
|
29,973
|
1.6
|
1.0
|
15
|
(59)
|
Pure Storage
|
Technology Hardware, Storage &
Peripherals
|
North America
|
57,835
|
10,694
|
1.5
|
0.4
|
16
|
(31)
|
CyberArk Software
|
Software
|
Asia Pacific
|
56,882
|
24,330
|
1.5
|
0.9
|
17
|
(29)
|
Disco Corporation
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
55,005
|
26,960
|
1.4
|
1.0
|
18
|
(16)
|
KLA-Tencor
|
Semiconductors & Semiconductor
Equipment
|
North America
|
47,574
|
35,072
|
1.3
|
1.2
|
19
|
(9)
|
ServiceNow
|
Software
|
North America
|
43,916
|
51,884
|
1.2
|
1.8
|
20
|
(6)
|
Samsung Electronics
|
Technology Hardware, Storage &
Peripherals
|
Asia Pacific
|
40,845
|
83,894
|
1.1
|
3.0
|
Top 20 investments
|
|
|
2,476,153
|
|
65.1
|
|
21
|
(-)
|
Spotify Technology
|
Entertainment
|
Europe
|
40,702
|
-
|
1.1
|
-
|
22
|
(-)
|
Synopsys
|
Software
|
North America
|
39,552
|
-
|
1.0
|
-
|
23
|
(23)
|
Qualcomm
|
Semiconductors & Semiconductor
Equipment
|
North America
|
39,171
|
32,525
|
1.0
|
1.1
|
24
|
(41)
|
Confluent
|
Software
|
North America
|
32,585
|
18,140
|
0.9
|
0.6
|
25
|
(64)
|
ASM International
|
Semiconductors & Semiconductor
Equipment
|
Europe
|
31,519
|
9,614
|
0.9
|
0.3
|
26
|
(74)
|
Axon Enterprise
|
Aerospace & Defence
|
North America
|
31,277
|
5,357
|
0.8
|
0.2
|
27
|
(-)
|
Datadog
|
Software
|
North America
|
30,917
|
-
|
0.8
|
-
|
28
|
(50)
|
Tesla
|
Automobiles
|
North America
|
30,877
|
13,358
|
0.8
|
0.5
|
29
|
(27)
|
Salesforce.com
|
Software
|
North America
|
30,681
|
27,910
|
0.8
|
1.0
|
30
|
(-)
|
Unimicron Technology
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
30,078
|
-
|
0.8
|
-
|
Top 30 investments
|
|
|
2,813,512
|
|
74.0
|
|
31
|
(-)
|
Cadence Design System
|
Software
|
North America
|
28,912
|
-
|
0.7
|
-
|
32
|
(-)
|
Netflix
|
Entertainment
|
North America
|
28,412
|
-
|
0.7
|
-
|
33
|
(-)
|
Quanta Computer
|
Technology Hardware, Storage &
Peripherals
|
Asia Pacific
|
27,418
|
-
|
0.7
|
-
|
34
|
(12)
|
HubSpot
|
Software
|
North America
|
26,899
|
45,203
|
0.7
|
1.6
|
35
|
(66)
|
Elastic
|
Software
|
North America
|
26,879
|
9,134
|
0.7
|
0.3
|
36
|
(-)
|
SAP
|
Software
|
Europe
|
26,651
|
-
|
0.7
|
-
|
37
|
(-)
|
Advantest
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
26,645
|
-
|
0.7
|
-
|
38
|
(15)
|
Tencent
|
Interactive Media &
Services
|
Asia Pacific
|
26,331
|
35,666
|
0.7
|
1.3
|
39
|
(-)
|
Applied Material
|
Semiconductors & Semiconductor
Equipment
|
North America
|
25,924
|
-
|
0.7
|
-
|
40
|
(-)
|
JFrog
|
Software
|
Asia Pacific
|
25,751
|
-
|
0.7
|
-
|
Top 40 investments
|
|
|
3,083,334
|
|
81.0
|
|
41
|
(47)
|
eMemory Technology
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
25,127
|
14,524
|
0.7
|
0.5
|
42
|
(35)
|
MongoDB
|
IT Services
|
North America
|
24,703
|
22,107
|
0.6
|
0.8
|
43
|
(-)
|
Amphenol
|
Electronic Equipment, Instruments
& Components
|
North America
|
23,267
|
-
|
0.6
|
-
|
44
|
(26)
|
Shopify
|
IT Services
|
North America
|
21,874
|
29,497
|
0.6
|
1.0
|
45
|
(53)
|
Harmonic Drive Systems
|
Machinery
|
Asia Pacific
|
20,982
|
12,777
|
0.6
|
0.5
|
46
|
(-)
|
Coherent
|
Electronic Equipment, Instruments
& Components
|
North America
|
20,575
|
-
|
0.6
|
-
|
47
|
(70)
|
Teradyne
|
Semiconductors & Semiconductor
Equipment
|
North America
|
20,228
|
7,012
|
0.5
|
0.2
|
48
|
(-)
|
Monday.com
|
Software
|
Asia Pacific
|
19,936
|
-
|
0.5
|
-
|
49
|
(-)
|
The Trade Desk
|
Media
|
North America
|
19,913
|
-
|
0.5
|
-
|
50
|
(57)
|
E Ink
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
19,435
|
12,028
|
0.5
|
0.4
|
Top 50 investments
|
|
|
3,299,374
|
|
86.7
|
|
51
|
(-)
|
DoorDash
|
Hotels, Restaurants &
Leisure
|
North America
|
19,289
|
-
|
0.4
|
-
|
52
|
(49)
|
Marvell Technology
|
Semiconductors & Semiconductor
Equipment
|
North America
|
16,984
|
13,879
|
0.4
|
0.5
|
53
|
(-)
|
Nitto Boseki
|
Building Products
|
Asia Pacific
|
16,690
|
-
|
0.4
|
-
|
54
|
(33)
|
Tokyo Electron
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
16,318
|
23,016
|
0.4
|
0.8
|
55
|
(-)
|
ARM ADR
|
Semiconductors & Semiconductor
Equipment
|
Europe
|
14,683
|
-
|
0.4
|
-
|
56
|
(-)
|
King Slide Works
|
Technology Hardware, Storage &
Peripherals
|
Asia Pacific
|
14,362
|
-
|
0.4
|
-
|
57
|
(-)
|
Gold Circuit
Electronics
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
14,100
|
-
|
0.4
|
-
|
58
|
(-)
|
BE Semiconductor
Industries
|
Semiconductors & Semiconductor
Equipment
|
Europe
|
13,834
|
-
|
0.4
|
-
|
59
|
(-)
|
Elite Material
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
13,469
|
-
|
0.4
|
-
|
60
|
(60)
|
Intuit
|
Software
|
North America
|
13,442
|
10,538
|
0.4
|
0.4
|
Top 60 investments
|
|
|
3,452,545
|
|
90.7
|
|
61
|
(42)
|
Roblox
|
Entertainment
|
North America
|
13,212
|
17,444
|
0.4
|
0.6
|
62
|
(46)
|
Pinterest
|
Interactive Media &
Services
|
North America
|
12,816
|
15,134
|
0.3
|
0.5
|
63
|
(-)
|
Fabrinet
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
12,655
|
-
|
0.3
|
-
|
64
|
(-)
|
CommVault Systems
|
Software
|
North America
|
12,120
|
-
|
0.3
|
-
|
65
|
(24)
|
Monolithic Power
Systems
|
Semiconductors & Semiconductor
Equipment
|
North America
|
11,850
|
32,453
|
0.3
|
1.1
|
66
|
(-)
|
SÜSS MicroTec
|
Semiconductors & Semiconductor
Equipment
|
Europe
|
11,590
|
-
|
0.3
|
-
|
67
|
(82)
|
Braze
|
Software
|
North America
|
11,516
|
3,668
|
0.3
|
0.1
|
68
|
(-)
|
Kokusai Electric
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
10,810
|
-
|
0.3
|
-
|
69
|
(36)
|
MercadoLibre
|
Broadline Retail
|
North America
|
10,587
|
20,965
|
0.3
|
0.8
|
70
|
(-)
|
Nintendo
|
Entertainment
|
Asia Pacific
|
10,149
|
-
|
0.3
|
-
|
Top 70 investments
|
|
|
3,569,850
|
|
93.8
|
|
71
|
(30)
|
Uber Technologies
|
Ground Transportation
|
North America
|
9,230
|
25,788
|
0.3
|
0.9
|
72
|
(75)
|
GMO Payment Gateway
|
Financial Services
|
Asia Pacific
|
8,623
|
5,224
|
0.2
|
0.2
|
73
|
(-)
|
Dell Technologies
|
Technology Hardware, Storage &
Peripherals
|
North America
|
8,545
|
-
|
0.2
|
-
|
74
|
(48)
|
Hoya
|
Healthcare Equipment &
Supplies
|
Asia Pacific
|
8,276
|
14,264
|
0.2
|
0.5
|
75
|
(71)
|
Fuji Machine
Manufacturing
|
Machinery
|
Asia Pacific
|
8,066
|
5,680
|
0.2
|
0.2
|
76
|
(-)
|
STMicroelectronics
|
Semiconductors & Semiconductor
Equipment
|
Europe
|
7,787
|
-
|
0.2
|
-
|
77
|
(-)
|
Nutanix
|
Software
|
North America
|
7,726
|
-
|
0.2
|
-
|
78
|
(58)
|
Kinaxis
|
Software
|
North America
|
7,651
|
11,909
|
0.2
|
0.4
|
79
|
(37)
|
Lattice Semiconductor
|
Semiconductors & Semiconductor
Equipment
|
North America
|
7,316
|
20,572
|
0.2
|
0.7
|
80
|
(-)
|
ASMPT
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
7,231
|
-
|
0.2
|
-
|
Top 80 investments
|
|
|
3,650,301
|
|
95.9
|
|
81
|
(-)
|
Nova
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
7,111
|
-
|
0.2
|
-
|
82
|
(51)
|
Intuitive Surgical
|
Healthcare Equipment &
Supplies
|
North America
|
6,821
|
13,230
|
0.2
|
0.5
|
83
|
(21)
|
Workday
|
Software
|
North America
|
6,661
|
33,429
|
0.1
|
1.2
|
84
|
(-)
|
Varonis Systems
|
Software
|
North America
|
5,461
|
-
|
0.1
|
-
|
85
|
(-)
|
MEC
|
Chemicals
|
Asia Pacific
|
4,692
|
-
|
0.1
|
-
|
86
|
(-)
|
Wix.com
|
IT Services
|
Asia Pacific
|
4,391
|
-
|
0.1
|
-
|
87
|
(-)
|
Ferrotec
|
Semiconductors & Semiconductor
Equipment
|
Asia Pacific
|
4,241
|
-
|
0.1
|
-
|
88
|
(-)
|
Deliveroo
|
Hotels, Restaurants &
Leisure
|
Europe
|
4,197
|
-
|
0.1
|
-
|
89
|
(18)
|
Palo Alto Networks
|
Software
|
North America
|
4,101
|
34,847
|
0.1
|
1.2
|
90
|
(-)
|
Hamamatsu Photonics
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
3,461
|
-
|
0.1
|
-
|
Top 90 investments
|
|
|
3,701,438
|
|
97.1
|
|
91
|
(-)
|
Klaviyo
|
Software
|
North America
|
2,841
|
-
|
0.1
|
-
|
92
|
(76)
|
Zuken
|
IT Services
|
Asia Pacific
|
2,748
|
5,187
|
0.1
|
0.2
|
93
|
(-)
|
VTEX
|
Interactive Media &
Services
|
Europe
|
2,532
|
-
|
0.1
|
-
|
94
|
(84)
|
Seeing Machines
|
Electronic Equipment, Instruments
& Components
|
Asia Pacific
|
2,186
|
3,265
|
0.1
|
0.1
|
95
|
(-)
|
Oxford Nanopore
Technologies
|
Life Sciences Tools &
Services
|
Europe
|
2,012
|
-
|
0.1
|
-
|
96
|
(87)
|
Cermetek
Microelectronics
|
Electronic Equipment, Instruments
& Components
|
North America
|
1
|
1
|
-
|
-
|
|
Total equities
|
3,713,758
|
97.6
|
|
|
Other net assets
|
90,775
|
2.4
|
|
|
Total net assets
|
3,804,533
|
100.0
|
|
Note: Asia Pacific includes Middle
East and North America includes Latin America.
STRATEGIC REPORT
This report has been provided in
accordance with The Companies Act 2006 (Strategic Report and
Directors' Report) Regulations 2013. The aim of this report is to
provide information to shareholders on the Company's strategy and
the potential for such to succeed, including a fair review of the
Company's performance during the year ended 30 April 2024, the
position of the Company at the year end and a description of the
principal risks and uncertainties, including both economic and
business risk factors underlying any such forward-looking
information.
Business Model and Regulatory Requirements
The Company's business model
follows that of an externally managed investment trust providing
shareholders with access to an actively managed portfolio of
technology shares selected on a worldwide basis.
The Company is designated as 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 Investment Manager
(or 'Manager') 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 the 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's Listing Rules and the
Companies Act 2006.
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 to the information requiring disclosure. Any information
requiring immediate disclosure pursuant to the AIFMD will be
disclosed to the London Stock Exchange. Statements from the
Depositary and the AIFM can be found on the Company's
website.
Investment Objective and Policy
While observing the Dow Jones
Global Technology Index (total return, Sterling adjusted, with the
removal of relevant withholding taxes) as the Benchmark against
which NAV performance is measured, shareholders should be aware
that the portfolio is actively managed and is not designed to track
any particular benchmark index or market. The performance of the
portfolio can vary from the Benchmark performance, at times
considerably.
Over recent 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
broader 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.
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 to its Investment Policy. No changes to the
Investment Policy are presently anticipated.
Investment Strategy Guidelines and Board
Limits
The Board has 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.
Asset Allocation
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.
Market Parameters
With current and foreseeable
investment conditions, the Portfolio will be invested in accordance
with the Investment Objective and Policy across worldwide markets,
generally within the following ranges:
•
North America up to 85%.
•
Europe up to 40%.
•
Japan and Asia up to 55%.
•
Rest of the world up to 10%.
The Board has set specific upper
exposure limits for certain countries where they believe there may
be an elevated risk.
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.
Investment Limits
In applying the Policy, 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, 15% of the Company's gross
assets.
•
The Company will have a maximum exposure to companies listed in
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.
Such limits are 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 FCA'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.
Cash, Borrowings (Gearing) 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 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.
Cash
The Company may hold cash or 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 and the benefits of
diversification.
Gearing and Derivatives
The Company's Articles of
Association permit borrowings up to the amount of its paid-up share
capital plus capital and revenue reserves. The Company may use
gearing in the form of bank loans which are used on a tactical
basis by the Investment Manager, when considered appropriate. The
Board monitors the level of gearing available to the Portfolio
Manager and agrees, in conjunction with the AIFM, all bank
facilities in accordance with the Investment Policy. The Board
approves and controls all bank facilities and any net borrowings
over 20% of the Company's net assets at the time of draw down will
only be made after approval by the Board.
During the year, the Company had
two loan facilities with ING Bank NV: one for 36m US Dollars at a
fixed rate of 5.43% pa and one for 3.8bn Japanese Yen at a fixed
rate of 1.13% pa, both of which were drawn down in September 2022.
These loans fall due for repayment in September 2024. The loan
facilities will be reviewed and may be replaced on
expiry.
Details of the loans are set out
in Note 17 to the Financial Statements.
The Investment Manager's use of
derivatives is monitored by the Board in accordance with the
Company's investment policy and any leverage from the use of such
derivatives will be subject to the restriction on
gearing.
Future Developments
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
geopolitical forces. In accordance with the Articles of
Association, the Board will propose the next five-yearly
continuation vote of the Company at the Annual General Meeting to
be held in September 2025. The Chair's Statement and the Investment
Manager's Report comment on the outlook.
Dividends
The Company's revenue varies from
year to year and the Board considers the dividend position each
year in order to maintain the Company's status as an investment
trust. 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, for the year under review, the
payment of a dividend (2023: no dividend
recommendation).
Service Providers
Polar Capital LLP has been
appointed to act as the Investment Manager and AIFM as well as to
provide or procure company secretarial services, marketing and
website services which it arranges through Huguenot Limited, and
administrative services, including accounting, portfolio valuation
and trade settlement which it has arranged to deliver through HSBC
Securities Services ('HSS' or "the Administrator").
The Company also contracts
directly, on terms agreed periodically, with a number of third
parties for the provision of specialist services. The cost of the
services outlined below are paid for directly by the Company and
are separate from the Investment Management Fee payable to Polar
Capital:
•
Stifel Nicolaus Europe Limited as Corporate Broker;
•
Equiniti Limited as Share Registrars;
•
HSBC Securities Services as Custodian and Depositary;
•
RD:IR for Investor Relations and Shareholder Analysis;
•
Camarco as PR advisors; and
•
Perivan Limited as designers and printers for shareholder
communications.
Investment 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 help
to achieve the optimum return for shareholders. As such, the Board
and the Investment Manager operate in a supportive, co-operative
and open environment.
The Investment Manager is Polar
Capital LLP ('Polar Capital'), which is authorised and regulated by
the Financial Conduct Authority, to act as Investment Manager and
AIFM of the Company with sole responsibility for the discretionary
management of the Company's assets (including uninvested cash) and
sole responsibility to take decisions as to the purchase and sale
of individual investments. The Investment Manager also has
responsibility for asset allocation within the limits of the
investment policy and guidelines established and regularly reviewed
by the Board, all subject to the overall control and supervision of
the Board.
Polar Capital provides a team of
technology specialists led by Ben Rogoff. Each team member focuses
on specific areas while Ben Rogoff, with Alastair Unwin as Deputy,
has overall responsibility for the portfolio. Polar Capital also
has other specialist and geographically focused investment teams
which may contribute to idea generation. The technology investment
team's biographies can be found in the annual report. The
Investment Manager has other investment resources which support the
investment team and has experience in administering and managing
other investment companies.
Fee Arrangements
Under the terms of the Investment
Management Agreement, the Company pays to the Investment Manager a
base fee, and if certain performance criteria are met, a
performance fee is payable by the Company.
Management fee
With effect from 1 May 2022, the
base management fee paid by the Company monthly in arrears to the
Manager is calculated on the daily Net Asset Value ('NAV') as
follows:
•
Tier 1: 0.80 per cent. for such of the NAV up to and including
£2bn;
•
Tier 2: 0.70 per cent. for such of the NAV between £2bn and £3.5bn;
and
•
Tier 3: 0.60 per cent. for such of the NAV above £3.5bn.
Any investment in funds managed by
Polar Capital are wholly excluded from the base management fee
calculation. Management fees of £25,919,000 (2023: £21,918,000)
have been paid for the year to 30 April 2024 of which £2,386,000
(2023: £1,827,000) was outstanding at the year end.
Under the terms of the IMA, the
Board may undertake a three-yearly review of the fee arrangements,
the next of which would normally commence in 2024, with the
anticipation that any changes proposed and subsequently agreed will
take effect from the start of the following financial year. The
Board is however at liberty to review the fees at any time should
they deem it appropriate and in the best interests of Shareholders
to do so.
Further details on the performance
fee methodology and calculation are provided within the Shareholder
Information section of the annual report.
Longer-Term Viability
In accordance with the AIC Code of
Corporate Governance, the Company is required to make a
forward-looking longer- term viability statement. The Board has
considered and addressed the ability of the Company to continue to
operate over a period significantly beyond the twelve-month period
required for the going concern statement. The Board has considered
the industry and market in which the Company operates and believes
that despite the market volatility and geopolitical events
experienced during the financial year under review, there continues
to be a strong appetite for technology investment. The Board
continues to use five years as a reasonable term over which the
viability of the Company should be viewed; 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 2025.
The process and matters considered
in establishing the longer-term viability are detailed within the
Audit Committee Report in the annual report. In establishing the
positive outlook for the Company over the next five years to 30
April 2029, the Board has taken into account:
The ability of the Company to meet
its liabilities as they fall due
|
The assessment took account of the
Company's current financial position, its cash flows and its
liquidity position, the principal risks as set out in the Strategic
Report 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 assessment was then
subject to a sensitivity analysis over a five-year period, which
stress tested a number of the key assumptions underlying the
forecasts both individually and in aggregate for normal, favourable
and stressed conditions and considered whether financing facilities
will be renewed.
The portfolio comprises a spread
of investments by size of company, traded on major international
stock exchanges.
99.6% of the current portfolio
could be liquidated within seven trading days and there is no
expectation that the nature of the investments held within the
portfolio will be materially different in future.
The expenses of the Company are
predictable and modest in comparison with the assets and there are
no capital commitments foreseen which would alter that position.
The ongoing charges of the Company for the year ended 30 April 2024
(excluding performance fees) were 0.80% (2023: 0.81%).
Repayment of the bank facilities,
drawn down at the year end, and due in September 2024, would equate
to approximately 47% of the cash or cash equivalents available to
the Company at 30 April 2024, without having to liquidate the
portfolio of investments.
The Company has no employees and
consequently does not have redundancy or other employment related
liabilities or responsibilities.
|
The Company will propose a
resolution on the continuation of the Company at the AGM in
September 2025
|
Under the AIC SORP, where
Shareholders have the opportunity to vote in favour or against a
company continuing in existence, it will normally be the case that
shareholders will have to vote in favour of a liquidation before it
can occur. It is reasonable to believe that if positive long-term
performance is achieved over the period until the next continuation
vote shareholders will vote in favour of continuation.
|
Factors impacting the forthcoming
years
|
The Investment Manager's Report
and the Strategic Report provide a comprehensive review of factors
which may impact the Company in forthcoming years. In making its
assessment, the Board considered these factors alongside the
Principal Risks and Uncertainties, and their corresponding
mitigation and controls, in the Annual Report and
Accounts.
|
Regulatory changes
|
Despite the increased level of
regulation and the unpredictability of future requirements it is
considered that regulation will not increase to a level that makes
the running of the Company uneconomical or untenable in comparison
to other competitive products.
|
Closed-ended Investment
Funds
|
Despite recent high discounts
across the sector, it is believed that the business model of being
a closed ended investment fund will continue to be wanted by
investors and the Investment Objective will continue to be desired
and achievable.
|
Further, the Board recognises that
there has been significant progress made 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 have a reasonable expectation that the company will be
able to continue in operation and meet its liabilities as they fall
due over the five years to 30 April 2029.
GOING CONCERN
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 liquidity position and
its assessment. In addition, the Company's cash flows were stressed
tested for base case and reasonable worse case scenarios. Further
detail on the assessment for going concern is provided in the
Report of the Audit Committee and in Note 2(a) of the Financial
Statements.
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 of the KPIs comprise both
specific financial and shareholder related measures and these KPIs
have not differed from the prior year.
KPI
|
Control process
|
Outcome
|
The provision of investment
returns to shareholders measured by long-term NAV growth and
relative performance against the Benchmark.
The Board is aware of the
vulnerability of a sector specialist investment trust to a change
in investor sentiment to that sector.
|
The Board reviews the performance
of the portfolio in detail and hears the views of the Investment
Manager at each meeting.
The Board discusses the market
factors giving rise to any discount or premium, the long or
short-term nature of those factors and the overall benefit to
Shareholders of any actions. The market liquidity is also
considered when authorising the issue or buy back of shares when
appropriate market conditions prevail.
|
At 30 April 2024 the total net
assets of the Company amounted to £3,804,533,000 (2023:
£2,828,141,000). The Company's NAV over the year to 30 April 2024,
outperformed the Benchmark by 1.9%. The NAV per share rose by 40.8%
from 2,239.48p to 3,154.11p while the Benchmark increased 38.9% in
Sterling terms over the same period. As at 30 April 2024 the
portfolio comprised 96 (2023: 87) investments.
Investment performance is
explained in the Chair's Statement and the Investment Manager's
Report. The performance of the Company over the longer-term is
shown by the ten year historic performance chart in the Annual
Report and Accounts.
|
Monitoring and reacting to issues
created by the discount or premium of the ordinary share price to
the NAV per ordinary share with the aim of reduced discount
volatility for Shareholders.
|
The Board receives regular
information on the composition of the share register including
trading
patterns and discount/premium
levels of the Company's ordinary shares.
A daily NAV per share, diluted
when appropriate, calculated in accordance with the AIC guidelines,
is issued to the London
Stock Exchange.
The Company does not have an
absolute target discount level at which it buys back shares but has
historically bought back significant amounts of the outstanding
share capital when deemed appropriate and will continue to do so.
This approach does not preclude a more active approach as discounts
widen and the Investment Manager may consider that a single
purchase or a series of purchases of shares in current or greater
volumes, which would enhance the Company's NAV per share, would be
an attractive investment of the Company's cash resources, given the
positive long-term prospects for the Company's portfolio. As
always, the Board keeps the level of discount under careful review
and has been buying back shares actively at levels set out in the
adjacent column.
|
The discount/premium of the
ordinary share price to NAV per ordinary share (diluted when
appropriate) has been as follows:
Financial year to 30 April
2024:
•
Minimum discount over year: 7.41%
•
Maximum discount over year: 15.87%
•
Average discount over year: 12.38%
In the year ended 30 April 2024,
the Company bought back 5,663,975 ordinary shares (representing
4.1% of the issued share capital) at an average discount of 12.3%.
Subsequent to the year end and to close of business 11 July 2024,
the Company bought back a further 964,346 shares.
Over the previous five financial
years ended 30 April 2024:
· Maximum premium over period: 6.06%
· Maximum discount over period: 17.28%
· Average discount over period: 8.22%
Over the previous five financial
years ended 30 April 2024 the Company has issued 3,490,000 Ordinary
shares as a result of market demand.
|
To qualify and continue to meet
the requirements for Sections 1158 and 1159 of the Corporation Tax
Act 2010 ('investment trust status').
|
The Board receives regular
financial information which discloses the current and projected
financial position of the Company against each of the tests set out
in Sections 1158 and 1159.
|
This has been achieved for every
year since launch in 1996.
HMRC has approved the investment
trust status subject to the Company continuing to meet the relevant
eligibility conditions and ongoing requirements.
The Directors believe that the
tests have been met in the financial year ended 30 April 2024 and
will continue to be met.
|
Efficient operation of the Company
with appropriate investment management resources and services from
third party suppliers within a stable and risk-controlled
environment.
|
The Board considers annually the
services provided by the Investment Manager, both investment and
administrative, and reviews on a cycle the provision and costs of
services provided by third parties.
The annual operating expenses are
reviewed and any non-recurring project related expenditure is
approved separately by the Board.
|
The Board has received and
considered satisfactory the internal controls report of the
Investment Manager and other key suppliers including contingency
arrangements to facilitate the ongoing operations of the Company in
the event of withdrawal or failure of services.
The ongoing charges of the Company
for the year ended 30 April 2024 excluding the performance fee were
0.80% of net assets (2023: 0.81%). There was no performance fee
payable for the year ended 30 April 2024 (2023: nil) and therefore
the ongoing charges including the performance fee were 0.80% (2023:
0.81%) of net assets.
|
PRINCIPAL RISKS AND UNCERTAINTIES
The Board is responsible for the
management of risks faced by the Company and, through delegation to
the Audit Committee, has established procedures to manage risk,
oversee the internal control framework and determine the nature and
extent of the principal risks the Company is willing to take in
order to achieve its long-term strategic objectives.
The established risk management
process the Company follows, identifies and assesses various risks,
their likelihood, and possible severity of impact, considering both
internal and external controls and factors that could provide
mitigation. A post mitigation risk impact score is then determined
for each principal risk.
At each Audit Committee,
identified principal risks are reviewed and reassessed against the
backdrop of the ever-changing world the Company is operating in.
The Audit Committee carries out, at least annually, a robust
assessment of overall risks and uncertainties faced by the Company
with the assistance of the Investment Manager. During the year
under review, the Audit Committee undertook a full review of the
content and format of the Company's Risk Map including the
mitigating factors and controls associated with each risk. As part
of this process, the Committee also introduced a risk appetite
rating for each risk to clearly define the types of risk the Board
and Manager are willing to take to achieve the Company's objective
of maximising shareholder returns whilst operating within a strong
governance and control framework.
The Committee also identifies any
emerging risks during its review process and continues to closely
monitor these risks as they develop, implementing mitigating
actions as necessary. Emerging risks during the financial year
under review included the geopolitical landscape, consolidation of
wealth managers and the rise of post truth politics, the latter
having the potential to ensnare Big Tech in the ensuing political
fallout. In addition, further consideration was given to the
deterioration of relations between China and Taiwan, using a
detailed horizon analysis to assess the medium and longer term
impacts on the Company's portfolio.
The Principal Risks post
mitigation are detailed on the following pages along with a
high-level summary of their management through mitigation and
status arrows to indicate any change in assessment over the past
financial year.
Management of risks through
Mitigation & Controls
|
PORTFOLIO
RISK
|
Trend year on
year
|
Failure to achieve
investment objective on an absolute or relative
basis
|
![](https://dw6uz0omxro53.cloudfront.net/0/f1f28e0f-81db-416f-9d58-3b8d4b5d1c9a.png)
|
Regular reporting and monitoring
of the Company's investment performance against peer group,
benchmark and detailed annual review of investment strategy with
Investment Manager.
Clear communication with
Shareholders on the investment strategy through annual, half year
reports and monthly factsheets. The Investment Manager also visits
large shareholders and has regular interaction with
clients.
|
|
Portfolio management errors
including breach of investment policy
|
![](https://dw6uz0omxro53.cloudfront.net/0/d0b125a0-23a7-4c18-a560-4b3ac54a79f0.png)
|
Investment limits and restrictions
are encoded into dealing and operations systems of the Manager to
ensure there is early warning of any potential issue of compliance
or regulatory matters. HSBC Depositary oversees all trades and
monitoring against investment limits.
|
|
OPERATIONAL
RISK
|
|
Failure in services provided
by Investment Manager (Polar Capital LLP)
|
|
Compliance, trading and risk
oversight by fully resourced and expert Polar Capital compliance,
operations and risk functions.
|
|
Accounting / Financial
and/or Custody Errors
|
![](https://dw6uz0omxro53.cloudfront.net/0/d0b125a0-23a7-4c18-a560-4b3ac54a79f0.png)
|
Management accounts are produced
and reviewed monthly, statutory reporting and daily NAV
calculations are produced by the external Administrator and
verified by the Investment Manager. Accounting records are tested,
and valuations verified independently as part of the year-end
financial reporting process.
|
|
Failure of Depositary,
Custodian, Sub-Custodian or Deposit taker
|
![](https://dw6uz0omxro53.cloudfront.net/0/f9751968-7c4b-46af-8ce8-28a157a15416.png)
|
Due diligence and service reviews
are undertaken with third-party service providers including the
Custodian and Depositary with any exceptions highlighted to the
Board.
|
|
Unforeseeable natural disaster or other unpredictable event ("Black
Swan").
|
![](https://dw6uz0omxro53.cloudfront.net/0/6ced6270-705a-435b-b063-268057a8080e.png)
|
The Company has a disaster
recovery plan in place along with a Black Swan Committee comprised
of any two directors, who are able to provide a response to such
events as necessary.
|
|
IT Failure, Fraud and Cyber
Risk
|
![](https://dw6uz0omxro53.cloudfront.net/0/9c583cd9-fd12-47d3-af3b-b69b6d7c0c60.png)
|
Annual review of internal control
reports from suppliers including cyber protocols and disaster
recovery procedures.
Following the year under review,
the Board agreed to elevate the post-mitigation score associated
with this risk in light of the increased potential for fraud and
cyber attacks. The pre-mitigation remains unchanged.
|
|
REGULATORY
RISKS
|
|
Breach of Statutes and
Regulation
|
![](https://dw6uz0omxro53.cloudfront.net/0/ccc97441-8019-405a-9b8d-5b079684dbe0.png)
|
Polar Capital Compliance &
Operations ensure a strong compliance environment and report to
Board on an annual basis.
There is an independent risk
function at Polar Capital. AIFMD limits are hardcoded into
Bloomberg and monitored by the Operations and Compliance teams. The
Depositary also monitors AIFMD limits and reports exceptions to the
Board. In addition, the Fund Accounting Manager reports to the
Board on a monthly basis through the Investment Limits
schedule.
The Board receives regulatory
reports for discussion and, if required, considers the need for any
remedial action. In addition, as an investment company, the Company
is required to comply with a framework of tax laws, regulation and
company law.
The Board monitors regulatory
change with the assistance of the Investment Manager, Company
Secretary and external professional suppliers and implements
necessary changes should they be required.
|
|
Failure to effectively
communicate significant events to the shareholder and investor
base
|
![](https://dw6uz0omxro53.cloudfront.net/0/d0b125a0-23a7-4c18-a560-4b3ac54a79f0.png)
|
Polar Capital Sales Team and the
Corporate Broker provide periodic reports to the Board on
communications with shareholders and feedback received.
Experienced sales and client
services team maintain the Company's website and ensure it contains
documents holding relevant information and presentations from the
Manager.
Annual, half year reports and
monthly factsheets are prepared by experienced company secretaries
or specialist advisors. Statutory/regulatory documentation is
compiled and checked by legal advisors, auditors or brokers (when
necessary) and the Board undertakes a review prior to publication.
Once published, the Chair offers annual meetings with
shareholders.
|
|
ECONOMIC AND MARKET
RISK
|
|
Global geopolitical risk
affecting changes in policy regarding taxes/assets, tariffs,
trade
agreements (NAFTA, China,
Mexico), immigration and political tensions
|
![](https://dw6uz0omxro53.cloudfront.net/0/9c583cd9-fd12-47d3-af3b-b69b6d7c0c60.png)
|
The impact on the portfolio from
geopolitical changes is monitored through existing control systems
such as the monthly investment limits schedule.
The Investment Manager regularly
reports to the Board on geographic influences, the macro economic
outlook and matters of interest in relation to the portfolio and
utilises horizon scanning where appropriate
|
|
Uncertainty in regulatory
environment (including inflation, recession and interest
rates)
|
![](https://dw6uz0omxro53.cloudfront.net/0/d0b125a0-23a7-4c18-a560-4b3ac54a79f0.png)
|
Potential regulatory change as a
result of the changing political environment is closely monitored
by the board with the help of the company secretary.
The Investment Manager's
Operations team monitors FX and interest rate exposure of
portfolio. Note 27 in the Annual Report and Accounts describes the
impact of changes in foreign exchange rates.
|
|
KEY STAFF
RISK
|
|
Loss of Portfolio Manager or
other key professionals by the Investment Manager
through
resignation, redundancy or
change of control
|
![](https://dw6uz0omxro53.cloudfront.net/0/d0b125a0-23a7-4c18-a560-4b3ac54a79f0.png)
|
The strength and depth of
investment team provides comfort that there is not over-reliance on
one person with alternative senior technology portfolio managers
available to act if needed. For each key business process roles,
responsibilities and reporting lines are clear and
unambiguous.
Key personnel are incentivised by
equity participation in the investment management company. Ali
Unwin was appointed as Deputy Fund Manager and is responsible for
managing the portfolio of the Company alongside Ben Rogoff, Lead
Manager since 1 May 2006.
|
|
The Board has insufficient
resource and breadth of experience to oversee its
operations
|
![](https://dw6uz0omxro53.cloudfront.net/0/d0b125a0-23a7-4c18-a560-4b3ac54a79f0.png)
|
Respected industry recruiters are
used to source suitably experienced candidates for non-executive
directorships with detailed succession planning and skills analysis
driving the recruitment process at Board level. A Board, Committee
and Individual evaluation process is carried out annually and
justification for re-election of Directors is provided in Annual
Report to Shareholders.
|
|
![](https://dw6uz0omxro53.cloudfront.net/0/b8e0d454-32d5-4ec0-b853-e8aedb8a91a3.png)
|
Increase
|
|
|
![](https://dw6uz0omxro53.cloudfront.net/0/de1f0c19-02b7-4ca2-9bb1-a96148fde2bc.png)
|
Decrease
|
|
|
![](https://dw6uz0omxro53.cloudfront.net/0/75a34d32-7d51-456e-a319-725b11e49414.png)
|
Unchanged
|
SECTION 172 OF THE COMPANIES ACT 2006
The statutory duties of the
Directors are detailed in s171-177 of the Companies Act 2006. The
Board recognises that under s172, Directors have a duty to promote
the success of the Company for the benefit of its shareholders as a
whole and in doing so have regard to the consequences of any
decision in the long term, as well as having regard to the
Company's wider stakeholders amongst other considerations. The
fulfilment of this duty not only helps the Company achieve its
Investment Objective but ensures decisions are made in a
responsible and sustainable way for shareholders.
To ensure that the Directors are
aware of, and understand, their duties, they are provided with an
induction, including details of all relevant regulatory and legal
duties as a director when they first join the Board, and continue
to receive regular and ongoing updates on relevant good practice,
legislative and regulatory developments. They also have continued
access to the advice and services of the Company Secretary and,
where deemed necessary, the Directors may seek independent
professional advice. The Schedule of Matters Reserved for the
Board, as well as the Terms of Reference of its committees are
reviewed annually and further describe Directors' responsibilities
and obligations and include any statutory and regulatory
duties.
The Board seeks to understand the
needs and priorities of the Company's shareholders and stakeholders
and these are taken into account during all of its discussions and
as part of its decision-making process. As an externally managed
investment company, the Company does not have any employees or
customers, however the key stakeholders and a summary of the
Board's consideration and actions where possible in relation to
each group of stakeholders are described in the table
below.
SHAREHOLDERS
Engagement
The Directors have considered
shareholder engagement when making the strategic decisions during
the year that affect shareholders, the confirmation of the
continued appointment of the Investment Manager and the
recommendation that shareholders vote in favour of the resolutions
to be proposed at the AGM. The Directors have also engaged with and
taken account of shareholders' interests during the
year.
The Portfolio Manager has held
numerous face to face meetings and interacted with a number of
shareholders and institutions in addition to presenting at a number
of conferences during the year. Where appropriate, directors are
invited to attend these conferences to meet with shareholders and
prospective investors; in addition, the annual Investor Relations
dinner was again held in October 2023. Positive feedback was
received from all attendees of the dinner who welcomed the
opportunity to interact with the Board and Manager.
The Chair will write to the
Company's largest shareholders following the publication of the
Annual Report and Financial Statements offering the opportunity to
meet to discuss any matters of interest or concern.
The Company's next AGM will be
held at 2:30pm on Wednesday 11 September 2024 at The Royal
Institution, 21 Albemarle Street, London, W1S 4BS. The Board
recognises that the AGM is an important event for shareholders and
the Company and is keen to ensure that shareholders are able to
exercise their right to attend, vote and participate. Shareholders
will also be able to watch the proceedings of the AGM live via Zoom
Conference. Details of how to access the online link are provided
in the Notice of AGM. Once again, we will be inviting feedback from
shareholders and will take this into account when planning the 2025
meeting.
The Board believes that
shareholder engagement remains important and is keen that the AGM
be a participative event for all shareholders who attend.
Shareholders are encouraged to send any questions ahead of the AGM
to the Board via the Company Secretary at cosec@polarcapital.co.uk stating the
subject matter as PCTT-AGM.
The investment manager will give an in-person presentation and the
Chair of the Board and all members of the Board will be in
attendance and will be available to respond to questions and
concerns from shareholders.
Should any significant votes be
cast against a resolution, the Board will engage with shareholders.
Should this situation occur, the Board will explain in its
announcement of the results of the AGM the actions it intends to
take to consult shareholders in order to understand the reasons
behind the votes against. Following the consultation, an update
will be published no later than six months after the AGM and the
next Annual Report will detail the impact the shareholder feedback
has had on any decisions the Board has taken and any actions or
resolutions proposed.
Relations with Shareholders
The Board and the Manager consider
maintaining good communications and engaging with shareholders
through meetings and presentations a key priority. The Board
regularly considers the share register of the Company and receives
regular reports from the Manager and the Corporate Broker on
shareholder meetings attended and any concerns that have been
raised in those meetings. The Board also reviews correspondence
from shareholders and may attend investor presentations.
The Chair has met with
shareholders during the year and responded to comments raised both
at the AGM and via email.
Shareholders are able to raise any
concerns directly with the Chair or the Board without intervention
of the Manager or Company Secretary, they may do this either in
person at the AGM or at other events, or in writing either via the
registered office of the Company or to the Chair's specific email
address Chair.pctt@polarcapital.co.uk.
Shareholders are kept informed by
the publication of annual and half year reports, monthly fact
sheets, access to commentary from the Investment Manager via the
Company's website and attendance at events in which the Investment
Manager presents.
The Company, through the sales and
marketing efforts of the Investment Manager, encourages retail
investment platforms to engage with underlying shareholders in
relation to Company communications and enable those shareholders to
cast their votes on shareholder resolutions; the Company however
has no responsibility over such platforms. The Board therefore
encourage shareholders invested via the platforms to regularly
visit the Company's website or to make contact with the Company
directly to obtain copies of shareholder communications.
The Company has also made
arrangements with its registrar for shareholders, who own their
shares directly rather than through a nominee or share scheme, to
view their account online at www.shareview.co.uk. Other services
are also available via this service.
Outcomes and strategic decisions during the
year
AGM
This year the Board will hold a
physical AGM. However, in order to provide those shareholders who
are unable to attend the AGM physically with an opportunity to view
the AGM, the Board will make a zoom link available to enable
shareholders to watch the proceedings of the AGM live via Zoom
Conference. Details of how to access the online link are provided
in the Notice of AGM.
Buybacks
Further to shareholder authority
being granted, the Company has the facility to conduct share buy
backs when, in normal market conditions, it is in the best
interests of shareholders to do so. The Company bought back a total
of 5,663,975 shares during the year under review. Subsequent to the
year end and to close of business 11 July 2024, the Company bought
back a further 946,346 shares.
Gearing
The Company is aware of the
positive effect that leverage can have in increasing the return to
shareholders when utilised. The Company has term loans with ING
Bank NV, which expire in September 2024. Consideration of the
future level of borrowings required by the portfolio manager is
currently under review.
Continuation Vote
The Company has within its
corporate structure the requirement to hold a continuation vote
every five years; ahead of each vote the Board, Investment Manager
and Corporate Broker seek the feedback of shareholders including
any concerns, and an indication of whether they were likely to vote
in favour of the Company's continuation. The last continuation vote
was held in September 2020, for which 100% of the votes cast were
in favour, and the next continuation vote will be held at the AGM
in September 2025.
Share Split
As reported in the Chair's
statement, the market price of the Company's existing ordinary
shares has increased in recent years. Whilst this is positive for
the Company and its Shareholders, the Board recognises that a
higher share price could be a barrier to investment for certain
investors including regular savers who may wish to invest smaller
amounts per transaction on a regular basis. In order to ensure the
Company remains accessible to all, the Directors are proposing a 10
for 1 share split at the AGM taking place in September 2024.
Detailed explanations of the resolutions to be proposed at the AGM
are contained within the Shareholder Information of the Annual
Report and Accounts and within the Notice of AGM.
Directors Remuneration
The remuneration of Directors is
reviewed regularly and was increased with effect from 1 May 2023
and again from 1 May 2024, to reflect the rise in inflation and
bring the fees of the Directors more in line with the wider market.
Further details are provided in the Report of the Remuneration
Committee in the annual report.
THE INVESTMENT MANAGER
Engagement
Through the Board meeting cycle,
regular updates and the work of the Management Engagement Committee
reviewing the services of the Investment Manager twice yearly, the
Board is able to safeguard shareholder interests by:
· Ensuring adherence to the Investment Management Policy and
reviewing the agreed management and performance fees;
· Ensuring excessive risk is not undertaken in the pursuit of
investment performance;
· Reviewing the Investment Manager's decision making and
consistency in investment process;
· Ensuring compliance with statutory legal requirements,
regulations and other advisory guidance such as consumer duty and
aspects of operational resilience; and
· Considering the succession plans for the Technology Team in
ensuring the continued provision of portfolio management
services.
Maintaining a close and
constructive working relationship with the Manager is crucial as
the Board and the Investment Manager both aim to continue to
achieve consistent, long-term returns in line with the Investment
Objective. The culture which the Board maintains to ensure this
involves encouraging open discussion with the Investment Manager;
recognising that the interests of shareholders and the Investment
Manager are aligned, providing constructive challenge and making
Directors' experience available to support the Investment Manager.
This culture is aligned with the collegiate and meritocratic
culture which Polar Capital has developed and
maintains.
Outcomes and strategic decisions during the
year
ESG
The Board continued to engage with
the Investment manager to understand how ESG has been integrated
into the overall house style, the technology team investment
approach and decision making as well as the methodology behind
this. The Board also receives information on how ESG affects Polar
Capital as a business and the technology team in
particular.
Consumer Duty
The Board has worked with the
Investment Manager to ensure the obligations of the new Consumer
Duty regulations are appropriately applied to the Company. All
communications including the website, fact sheets and other
published documentation, have been reviewed to ensure they are
appropriate for all end users.
Management
The Management Engagement
Committee has recommended the continued appointment of the
Investment Manager on the terms agreed within the Investment
Management Agreement.
INVESTEE COMPANIES
Stewardship
The Board has instructed the
Investment Manager to take into account the published corporate
governance policies of the companies in which it
invests.
The Board 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 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).
The Technology Investment Team
also use the services of ISS to assist with their own evaluation of
companies' proposals or reporting ahead of casting votes on behalf
of the Company at their general meetings. In the event that an
investee company has share blocking in place, the default position
is to refrain from voting to ensure the ability to trade these
stocks if required.
During the year ended 30 April
2024, votes were cast at 98% of investee company general meetings
held. At 52% of those meetings a vote was either cast against
management recommendation, withheld or abstained from. Further
information on how the Investment Manager considers ESG in its
engagement with investee companies can be found in the ESG
Report.
Outcomes and strategic decisions during the
year
During the year the Board
discussed the impact of ESG and other market factors and how the
Investment Manager factors these into its strategy, investment and
decision-making process. The Board receives information on the
ratings of investee companies and is able to use this as tool to
inform discussions with the Manager during Board
meetings.
SERVICE PROVIDERS
Engagement
The Directors have frequent
engagement with the Company's other key service providers through
the annual cycle of reporting, site visits and due diligence
meetings. This engagement is completed with the aim of having
effective oversight of delegated services, seeking to improve the
processes for the benefit of the Company and to understand the
needs and views of the Company's service providers, as stakeholders
in the Company. Further information on the Board's engagement with
service providers is included in the Corporate Governance Statement
and the Report of the Audit Committee. During the year under
review, due diligence meetings have been undertaken by the
Investment Manager and where possible, service providers have
joined meetings to present their reports directly to the Board or
the Audit Committee as appropriate.
Outcomes and strategic decisions during the
year
The reviews of the Company's
service providers have been positive and the Directors believe
their continued appointment is in the best interests of the
shareholders and the Company as a whole. The accounting and
administration services of HSBC Securities Services (HSS) are
contracted through Polar Capital and provided to the Company under
the terms of the IMA. The Board, through due diligence undertaken
by the Company Secretary and the Polar Capital Compliance team, is
satisfied that the service received continues to be of a high
standard.
PROXY ADVISORS
Engagement
The support of proxy adviser
agencies is important to the Directors, as the Company seeks to
retain a reputation for high standards of corporate governance,
which the Directors believe contributes to the long-term
sustainable success of the Company. The Directors consider the
recommendations of these various proxy voting agencies when
contemplating decisions that will affect shareholders and also when
reporting to shareholders through the Half Year and Annual
Reports.
Recognising the principles of
stewardship, as promoted by the UK Stewardship Code, the Board
welcomes engagement with all of its investors. The Board recognises
that the views, questions from, and recommendations of many
institutional investors and proxy adviser agencies provide
a
valuable feedback mechanism and
play a part in highlighting evolving shareholders' expectations and
concerns.
Outcomes and strategic decisions during this
year
Where possible the Chair and other
representatives of the Company have engaged with the stewardship
teams of some larger investors to understand and address their
expectations in terms of board governance, recruitment and
diversity. Prior to the Company's AGMs, the Company engages with
agencies including PIRC and ISS to fact check their advisory
reports and clarify any areas or topics contained within the
report. This ensures that whilst the proxy advisory reports
provided to shareholders are objective and independent, the
Company's actions and intentions are represented as clearly as
possible to assist with shareholders' decision making when
considering the resolutions proposed at the AGM.
THE AIC
Engagement
The Company is a member of the AIC
and has supported lobbying activities. Representatives of the
Manager sit on a variety of forums run by the AIC which aids
development and understanding of new policies and procedures. The
Directors may cast votes in the AIC Board Elections each year and
regularly
attend AIC events.
Approved by the Board on 16 July
2024
By order of the Board
Jumoke Kupoluyi, ACG
Polar Capital Secretarial Services
Limited
Company Secretary
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for
preparing the Annual Report and the 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 have elected to prepare the financial statements in
accordance with UK-adopted international accounting standards and
applicable law.
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, relevant and
reliable;
· state
whether they have been prepared in accordance with UK-adopted
international accounting standards;
· 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 REPORT AND FINANCIAL STATEMENTS
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
accounts, 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.
Catherine Cripps
Chair
16 July 2024
Status of
announcement
The figures and financial
information contained in this announcement are extracted from the
Audited Annual Report for the year ended 30 April 2024 and do not
constitute statutory accounts for the year. The Annual Report and
Financial Statements include the Report of the Independent Auditors
which is unqualified and does not contain a statement under either
section 498(2) or Section 498(3) of the Companies Act
2006.
The Annual Report and
Financial Statements for the year ended 30 April 2024 have not
yet been delivered to the Registrar of Companies. The figures and
financial information for the year ended 30 April 2023 are
extracted from the published Annual Report and Financial Statements
for the year ended 30 April 2023 and do not constitute the
statutory accounts for that year. The Annual Report and Financial
Statements for the year ended 30 April 2023 have been delivered to
the Registrar of Companies and included the Report of the
Independent Auditors which was unqualified and did not contain a
statement under either section 498(2) or Section 498(3) of the
Companies Act 2006.
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 April
2024
|
Notes
|
Year ended
30 April
2024
|
Year ended
30 April
2023
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
return
£'000
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
return
£'000
|
Investment income
|
3
|
15,471
|
-
|
15,471
|
16,160
|
42
|
16,202
|
Other operating income
|
4
|
6,438
|
-
|
6,438
|
3,820
|
-
|
3,820
|
Gains/(losses) on investments held
at fair value
|
5
|
-
|
1,147,978
|
1,147,978
|
-
|
(106,807)
|
(106,807)
|
(Losses)/gains on
derivatives
|
6
|
-
|
(22,030)
|
(22,030)
|
-
|
34
|
34
|
Other currency
(losses)/gains
|
7
|
-
|
(1,292)
|
(1,292)
|
-
|
8,409
|
8,409
|
Total income
|
21,909
|
1,124,656
|
1,146,565
|
19,980
|
(98,322)
|
(78,342)
|
Expenses
|
|
|
Investment
management
fee
|
8
|
(25,919)
|
-
|
(25,919)
|
(21,918)
|
-
|
(21,918)
|
Other
administrative
expenses
|
9
|
(1,393)
|
-
|
(1,393)
|
(1,176)
|
-
|
(1,176)
|
Total expenses
|
(27,312)
|
-
|
(27,312)
|
(23,094)
|
-
|
(23,094)
|
Gain/(loss) before finance costs and tax
|
(5,403)
|
1,124,656
|
1,119,253
|
(3,114)
|
(98,322)
|
(101,436)
|
Finance costs
|
10
|
(1,874)
|
-
|
(1,874)
|
(1,598)
|
-
|
(1,598)
|
Profit/loss) before tax
|
(7,277)
|
1,124,656
|
1,117,379
|
(4,712)
|
(98,322)
|
(103,034)
|
Tax
|
11
|
(1,942)
|
-
|
(1,942)
|
(2,148)
|
-
|
(2,148)
|
Net profit/( loss) for the year and total comprehensive
income/(expense)
|
(9,219)
|
1,124,656
|
1,115,437
|
(6,860)
|
(98,322)
|
(105,182)
|
Earnings/(losses) per share (basic and diluted)
(pence)
|
12
|
(7.47)
|
911.68
|
904.21
|
(5.30)
|
(75.98)
|
(81.28)
|
The total column of this statement
represents the Company's Statement of Comprehensive Income,
prepared in accordance with UK-adopted International Accounting
Standards.
The revenue return and capital
return columns are supplementary to this and are prepared under
guidance published by the AIC.
All items in the above statement
derive from continuing operations.
The Company does not have any
other comprehensive income.
The notes below form part of these
Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 April
2024
|
|
Share capital
|
Capital redemption reserve
|
Share premium
|
Special
non- distributable reserve
|
Capital reserves
|
Revenue
reserve
|
Total
|
|
Notes
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Total equity at 30 April 2022
|
|
34,329
|
12,802
|
223,374
|
7,536
|
2,899,743
|
(126,799)
|
3,050,985
|
Total comprehensive (expense):
|
|
|
|
|
|
|
|
|
Loss for the year to 30 April
2023
|
|
-
|
-
|
-
|
-
|
(98,322)
|
(6,860)
|
(105,182)
|
Transactions with owners, recorded directly to
equity:
|
|
|
|
|
|
|
|
|
Ordinary shares repurchased into
treasury
|
15
|
-
|
-
|
-
|
-
|
(117,662)
|
-
|
(117,662)
|
|
|
|
|
|
|
|
|
|
Total equity at
30 April 2023
|
|
34,329
|
12,802
|
223,374
|
7,536
|
2,683,759
|
(133,659)
|
2,828,141
|
Total comprehensive income/(expense):
|
|
|
|
|
|
|
|
|
Profit/(loss) for the year to 30
April 2024
|
|
-
|
-
|
-
|
-
|
1,124,656
|
(9,219)
|
1,115,437
|
Transactions with owners, recorded directly to
equity:
|
|
|
|
|
|
|
|
|
Ordinary shares repurchased into
treasury
|
15
|
-
|
-
|
-
|
-
|
(139,045)
|
-
|
(139,045)
|
Total equity
at 30 April
2024
|
|
34,329
|
12,802
|
223,374
|
7,536
|
3,669,370
|
(142,878)
|
3,804,533
|
The notes below form part of these
Financial Statements.
BALANCE SHEET
as at 30 April 2024
|
Notes
|
30 April 2024
£'000
|
30 April 2023
£'000
|
Non current assets
|
|
|
Investments held at fair
value through profit or loss
|
13
|
3,713,758
|
2,640,177
|
Current
assets
|
|
|
Receivables
|
|
37,607
|
20,605
|
Overseas tax recoverable
|
346
|
379
|
Cash and
cash equivalents
|
14
|
103,033
|
239,096
|
Derivative
financial instruments
|
13
|
9,557
|
2,571
|
|
150,543
|
262,651
|
Total assets
|
3,864,301
|
2,902,828
|
Current liabilities
|
|
|
Payables
|
|
(11,295)
|
(23,842)
|
Bank loans
|
|
(48,036)
|
-
|
Bank overdraft
|
13
|
(437)
|
-
|
|
|
(59,768)
|
(23,842)
|
Non current liabilities
|
|
|
|
Bank loans
|
|
-
|
(50,845)
|
Net assets
|
3,804,533
|
2,828,141
|
Equity attributable to equity Shareholders
|
|
|
Share
capital
|
15
|
34,329
|
34,329
|
Capital
redemption reserve
|
|
12,802
|
12,802
|
Share premium
|
|
223,374
|
223,374
|
Special non-distributable
reserve
|
|
7,536
|
7,536
|
Capital reserves
|
|
3,669,370
|
2,683,759
|
Revenue reserve
|
|
(142,878)
|
(133,659)
|
Total equity
|
3,804,533
|
2,828,141
|
Net asset value per ordinary share (pence)
|
|
3,154.11
|
2,239.48
|
The Financial Statements, were
approved and authorised for issue by the Board of Directors on xx
July 2024 and signed on its behalf by:
Catherine Cripps
Chair
The notes below form part of these
Financial Statements.
Registered number
3224867
CASH FLOW STATEMENT
for the year ended 30 April
2024
|
Notes
|
2024
£'000
|
2023
£'000
|
Cash flows from operating activities
|
|
|
|
Profit/(loss) before tax
|
|
1,117,379
|
(103,034)
|
Adjustments
|
|
|
|
(Gains)/losses on investments held
at fair value through profit or loss
|
5
|
(1,147,978)
|
106,807
|
Losses/(gains) on derivative
financial instruments
|
6
|
22,030
|
(34)
|
Proceeds of disposal on investments
|
|
2,857,451
|
2,311,861
|
Purchases of investments
|
|
(2,811,714)
|
(2,266,936)
|
Proceeds on disposal
of derivative
financial instruments
|
13
|
21,743
|
46,536
|
Purchases of
derivative financial instruments
|
13
|
(50,759)
|
(42,594)
|
Increase in receivables
|
|
(742)
|
(472)
|
Increase/(decrease) in
payables
|
|
641
|
(4,580)
|
Finance
Costs
|
|
1,874
|
1,598
|
Overseas
tax
|
|
(1,909)
|
(2,241)
|
Foreign exchange
losses/(gains)
|
7
|
1,292
|
(8,409)
|
Net cash generated from operating activities
|
|
9,308
|
38,502
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Finance costs paid
|
|
(1,871)
|
(1,539)
|
Ordinary shares repurchased into
treasury
|
|
(139,836)
|
(116,449)
|
|
|
|
|
Net cash used in financing activities
|
|
(141,707)
|
(117,988)
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(132,399)
|
(79,486)
|
|
|
|
|
Cash and
cash equivalents
at the beginning of the year
|
|
239,096
|
311,363
|
Effect
of movement
in foreign exchange rates on cash held
|
7
|
(4,101)
|
7,219
|
|
|
|
|
Cash and cash equivalents at the end of the
year
|
14
|
102,596
|
239,096
|
|
|
|
|
|
Notes
|
2024
£'000
|
2023
£'000
|
Reconciliation of cash and cash equivalents
to the Balance Sheet is as follows:
|
|
|
|
Cash held at bank and derivative
clearing houses
|
14
|
69,581
|
148,682
|
BlackRock's Institutional Cash
Series plc
(US Treasury Fund), money market fund
|
14
|
33,015
|
90,414
|
|
|
|
|
Cash and cash equivalents at the end of the
year
|
14
|
102,596
|
239,096
|
The notes below form part of these
Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 April
2024
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 Company financial statements
have been prepared and approved by the Directors in accordance with
international accounting standards in accordance with UK-adopted
international accounting standards ("UK-adopted IAS").
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
July 2022 is consistent with the requirements of UK-adopted IAS,
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 2024 is shown in the balance sheet above. As
at 30 April 2024 the Company's total assets exceeded its total
liabilities by a multiple of over 64. The assets of the Company
consist mainly of securities that are held in accordance with the
Company's Investment Policy, as set out in the Annual Report and
these securities are readily realisable. The Company has two,
two-year fixed rate term loans with ING Bank N.V. both of which
fall due for repayment on 30 September 2024. The Directors have
considered a detailed assessment of the Company's ability to meet
its liabilities as they fall due. The assessment took account of
the Company's current financial position, its cash flows and its
liquidity position. In addition, the Company's cash flows were
stressed tested for base case and reasonable worse case scenarios
such as higher inflation and interest rate increases. In light of
the results of these tests, the Company's cash balances, and the
liquidity position, the Directors consider that the Company has
adequate financial resources to enable it to continue in
operational existence for at least 12 months. Accordingly, the
Directors believe that it is appropriate to continue to adopt the
going concern basis in preparing the Company's Financial
Statements.
(B)
PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME
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.
(C)
INCOME
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, money market fund
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.
(E)
TAXATION
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 Tax 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 UK-adopted IAS.
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.
FRS 13 defines fair value as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date.
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.
(G)
RECEIVABLES
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 maturity of three
months or less, highly liquid investments that are readily
convertible to known amounts of cash.
The Company's investment in
BlackRock's Institutional Cash Series plc - US Treasury Fund of
£33,015,000 (2023: ££90,414,000) is managed as part of the
Company's cash and cash equivalents as defined under IAS
7.
In the Balance Sheet bank
overdrafts are shown within current liabilities.
(I)
PAYABLES
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 UK-adopted IAS. 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)
REPURCHASE OF ORDINARY SHARES (INCLUDING THOSE HELD IN
TREASURY)
Where applicable, the costs of
repurchasing ordinary shares including related stamp duty and
transaction costs are taken directly to equity and reported through
the Statement of Changes in Equity as a charge on the capital
reserve. Share repurchase transactions are accounted for on a trade
date basis.
The nominal value of ordinary
share capital repurchased and cancelled is transferred out of
called up share capital and into the capital redemption
reserve.
Where shares are repurchased and
held in treasury, the transfer to capital redemption reserve is
made if and when such shares are subsequently cancelled.
(P)
SHARE ISSUE COSTS
Costs incurred directly in
relation to the issue of new shares together with additional share
listing costs have been deducted from the share premium
reserve.
(Q)
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
26.
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.
(R)
KEY ESTIMATES, JUDGMENTS AND ASSUMPTIONS
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, the level of which varies from time
to time. The Board considers the functional and reporting 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 and the Company's
shares are denominated in Sterling.
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 2(f). At the year
end, there was no unquoted investments (2023: same).
(S)
NEW AND REVISED ACCOUNTING
STANDARDS
There were no new UK-adopted IAS
or amendments to UK-adopted IAS applicable to the current year
which had any significant impact on the Company's Financial
Statements.
i) The following new or amended
standards became effective for the current annual reporting period
and
the adoption of the standards and
interpretations have not had a material impact on the Financial
Statements
of the Company.
Standards & Interpretations
|
Effective for periods commencing on or
after
|
Disclosure of Accounting Policies
(Amendments to IAS 1 and IFRS Practice Statement 2)
|
Requirement amended to disclose
material accounting policies instead of significant accounting
policies and provided guidance in making materiality judgements to
accounting policy disclosure.
|
1 January 2023
|
Definition of Accounting Estimates
(amendments to IAS 8)
|
Introduced the definition of
accounting estimates and included other amendments to IAS 8 to help
entities distinguish changes in accounting estimates from changes
in accounting policy.
|
1 January 2023
|
International Tax Reform - Pillar
Two Model Rules (Amendments to IAS 12)
|
A mandatory temporary exception to
the accounting for deferred taxes arising from the jurisdictional
implementation of the Pillar Two model rules; and disclosure
requirements for affected entities to help users of the financial
statements better understand an entity's exposure to Pillar Two
income taxes arising from that legislation, particularly before its
effective date.
|
1 January 2023
|
ii) At the date of authorisation
of the Company's Financial Statements, the following relevant
standards that potentially impact the Company are in issue but are
not yet effective and have not been applied in the Financial
Statements.
Standards & Interpretations
|
Effective for periods commencing on or
after
|
Amendments to IAS 1 Presentation
of Financial Statements
- Non-current liabilities with
Covenants
- Deferral of Effective Date
Amendment (published 15 July 2020)
Classification of Liabilities as
Current or Non-Current (Amendments to IAS 1) (publicised 23 January
2020)
|
The amendments clarify that only
covenants with which an entity must comply on or before the
reporting date will affect a liability's classification as current
or non-current and the disclosure requirement in the financial
statements for the risk that non-current liabilities with covenant
could become repayable within twelve months.
|
1 January 2024
|
Supplier Finance Arrangements
(Amendments to IAS 7 and IFRS 7)
|
The amendments address the
disclosure requirements to enhance the transparency of supplier
finance arrangements and their effects on a company's liabilities,
cash flows and exposure to liquidity risk.
|
1 January 2024
|
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
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April
2023
£'000
|
Revenue:
|
|
|
Overseas Dividend
income
|
15,471
|
16,160
|
|
15,471
|
16,160
|
Capital:
|
|
|
Special dividends allocated to
capital
|
-
|
42
|
All investment income is derived
from listed investments.
There was no special dividends
classified as revenue or Capital in accordance with note 2 (c)
(2023: £350,000 Income and £42,000 Capital).
4.
OTHER OPERATING INCOME
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
Bank interest
|
2,529
|
1,478
|
Money market fund
interest
|
3,909
|
2,342
|
|
6,438
|
3,820
|
5.
GAINS/(LOSSES) ON INVESTMENTS HELD AT FAIR VALUE
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
Net gains/(losses) on disposal of
investments at historic cost
|
476,684
|
(130,861)
|
Transfer on disposal of
investments
|
(151,853)
|
(59,647)
|
Gains/(losses) on disposal of
investments based on carrying value at previous balance sheet
date
|
324,831
|
(190,508)
|
Valuation gains on investments held
during the year
|
823,147
|
83,701
|
|
1,147,978
|
(106,807)
|
6.
(LOSSES)/GAINS ON DERIVATIVES
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
(Losses)/gains on disposal of
derivatives held
|
(21,716)
|
5,019
|
Losses on revaluation of
derivatives held
|
(314)
|
(4,985)
|
|
(22,030)
|
34
|
The derivative financial
instruments represent the call and put options, which are used for
the purpose of efficient portfolio management. Refer to Note 13
below for further
details.
7.
OTHER CURRENCY (LOSSES)/GAINS
|
Year ended
30 April 2024
£'000
|
Year
ended
30 April 2023
£'000
|
Exchange (losses)/gains on currency
balances
|
(4,101)
|
7,219
|
Exchange losses on settlement of
loan balances
|
-
|
(507)
|
Exchange gains on translation of
loan balances
|
2,809
|
1,697
|
|
(1,292)
|
8,409
|
8.
INVESTMENT MANAGEMENT AND PERFORMANCE FEE
|
Year ended
30 April
2024
£'000
|
Year
ended
30
April 2023
£'000
|
Investment
management
fee payable
to Polar Capital
(charged wholly to
revenue)
|
25,919
|
21,918
|
Performance fee paid to Polar
Capital (charged wholly to capital)
|
-
|
-
|
There was no performance fee
payable in respect of the year nor outstanding at the year end
(2023: same).
The basis for calculating the
investment management and performance fees are set out in the
Strategic Report above and details of all amounts payable to the
Manager are given in Note 16 below.
9.
OTHER ADMINISTRATIVE EXPENSES
|
Year ended
30 April 2024
£'000
|
Year
ended 30 April 2023
£'000
|
Directors' fees and
expenses1
|
253
|
247
|
National insurance
contributions
|
27
|
26
|
Depositary
fee2
|
227
|
192
|
Registrar fee
|
57
|
54
|
Custody and other bank
charges3
|
359
|
267
|
UKLA and LSE listing
fees4
|
208
|
204
|
Legal & professional fees and
other financial services
|
3
|
16
|
AIC fees
|
21
|
21
|
Auditors' remuneration - for audit
of the financial Statements
|
80
|
63
|
Directors' and officers' liability
insurance
|
56
|
38
|
AGM expenses
|
6
|
6
|
Corporate brokers'
fee5
|
-
|
-
|
Shareholder
communications6
|
63
|
38
|
Other
expenses7
|
33
|
4
|
|
1,393
|
1,176
|
1. Full disclosure
is given in the Directors' Remuneration Report in the Annual
Report.
2. Depositary fee
is based on the value of the net assets. The daily average net
asset value rose by 21% compared to the previous year.
3. Custody fees are
based on the value of the assets and geographical activity and
determined on the pre-approved rate card with HSBC.
4. Fees are based
on the market capitalisation of the Company which has risen over
the last invoice period.
5. 2023/2024 annual
fee was offset by the commission credit on shares
repurchases.
6. Includes Bespoke
promotional marketing cost.
7. Includes
Non-executive Directors' search fee.
10.
FINANCE COSTS
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
Interest on loans and
overdrafts
|
1,874
|
1,514
|
Loan arrangement and facility
fees
|
-
|
84
|
|
1,874
|
1,598
|
11.
TAXATION
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
(a) Analysis of tax charge for the year:
|
|
|
Overseas tax
|
1,942
|
2,148
|
Total tax for the year (see Note 11b)
|
1,942
|
2,148
|
(b) Factors affecting tax charge for the
year:
The charge for the year can be
reconciled to the gains/(losses) per the Statement of Comprehensive
Income as follows:
Gain/(loss) before tax
|
1,117,379
|
(103,034)
|
Tax at the UK corporation tax rate
of 25% (2023: 19.5%)
|
279,345
|
(20,092)
|
Tax effect of non-taxable
dividends
|
(3,868)
|
(3,159)
|
Tax effect of (gains)/losses on
investments that are not taxable
|
(281,164)
|
19,181
|
Unrelieved current year expenses
and deficits
|
5,687
|
4,070
|
Overseas tax suffered
|
1,942
|
2,148
|
Total tax for the year (see Note 11a)
|
1,942
|
2,148
|
(c) Factors that may affect future tax
charges:
There is an unrecognised deferred
tax asset comprising:
Unrelieved management
expenses
|
72,685
|
66,998
|
|
Non-trading loan relationship
deficits
|
1,807
|
1,807
|
|
|
74,492
|
68,805
|
|
The deferred tax asset is based on
a corporation tax rate of 25% (2023:
25%).
The Company has an unrecognised
deferred tax asset of £72,685,000 (2023: £66,998,000) arising from
surplus
management expenses of
£290,740,000 (2023: £267,992,000) and unrecognised deferred tax
asset of £1,807,000 (2023: £1,807,000) arising from non-trade loan
relationship deficits of £7,227,000 (2023: £7,227,000) based on a
corporation tax rate of 25% (2023: 25%). Given the composition of
the Company's portfolio, it is not likely that these assets will be
utilised in the foreseeable future and therefore no deferred tax
asset has been recognised in the accounts.
Due to the Company's tax status as
an investment trust and the intention to continue meeting the
conditions required to maintain 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.
EARNING/(LOSS) PER ORDINARY SHARE
|
Year ended
30 April
2024
|
Year ended
30 April
2023
|
|
Revenue
return
|
Capital return
|
Total
return
|
Revenue return
|
Capital return
|
Total
return
|
The calculation of basic
earning/loss per share is based on the following data:
|
|
|
|
|
|
|
Net gain/(loss) for the year
(£'000)
|
(9,219)
|
1,124,656
|
1,115,437
|
(6,860)
|
(98,322)
|
(105,182)
|
Weighted
average
ordinary shares
in issue
during the year
|
123,361,430
|
123,361,430
|
123,361,430
|
129,409,889
|
129,409,889
|
129,409,889
|
From
continuing operations
|
|
|
|
|
|
|
Basic - earning/(loss) per ordinary
share (pence)
|
(7.47)
|
911.68
|
904.21
|
(5.30)
|
(75.98)
|
(81.28)
|
As at 30 April 2024 there are no
potentially dilutive shares in issue and the earnings per share
therefore equate to those shown above (2023: there was no
dilution).
13. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR
LOSS
(i)
Investments held at fair value through profit or
loss
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
Opening book cost
|
2,058,477
|
2,253,434
|
Opening investment holding
gains
|
581,700
|
557,646
|
Opening fair value
|
2,640,177
|
2,811,080
|
Analysis of transactions made during the
year
|
|
|
Purchases at cost
|
2,799,314
|
2,236,802
|
Sales proceeds received
|
(2,873,711)
|
(2,300,898)
|
Gains/(losses) on investments held
at fair value
|
1,147,978
|
(106,807)
|
Closing fair value
|
3,713,758
|
2,640,177
|
Closing book cost
|
2,460,764
|
2,058,477
|
Closing investment holding
gains
|
1,252,994
|
581,700
|
Closing fair value
|
3,713,758
|
2,640,177
|
Of which:
|
|
|
Listed on a recognised Stock
Exchange
|
3,713,758
|
2,640,177
|
The Company received
£2,873,711,000 (2023: £2,300,898,000) from disposal of investments
in the year. The book cost of these investments when they were
purchased was £2,397,027,000 (2023: £2,431,759,000). These
investments have been revalued over time and until they were sold
any unrealised gains/losses were included in the fair value of the
investments.
Included in additions at cost are
purchase costs of £1,550,000 (2022: £1,055,000). Included in
proceeds of disposals are sales costs of £1,726,000 (2022:
£1,231,000). These costs primarily comprise commission.
(ii)
Changes in
derivative financial instruments
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
Valuation at 1 May
|
2,571
|
6,479
|
Additions at cost
|
50,759
|
42,594
|
Proceeds of disposal
|
(21,743)
|
(46,536)
|
(Losses)/gains on
disposal
|
(21,716)
|
5,019
|
Valuation losses
|
(314)
|
(4,985)
|
Valuation at 30 April
|
9,557
|
2,571
|
The derivative financial
instruments represent the call and put options, which are used for
the purpose of efficient portfolio management. As at 30 April 2024,
the Company held NASDAQ 100 Stock Index put option and the market
value of these open put option position was £7,192,000 (2023:
NASDAQ 100 Stock Index put option with a market value of
£1,559,000). The Company also held Microsoft Corp call options and
Apple Inc call option, the market value of these open call option
position were £403,000 and £1,962,000 respectively (2023: Microsoft
Corp call options with a market value of £1,012,000).
(iii)
Classification under Fair Value Hierarchy:
The table below sets out the fair
value measurements using the IFRS 13 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
above.
|
Year ended
30 April
2024
£'000
|
Year
ended
30 April 2023
£'000
|
Equity Investments and derivative
financial instruments
|
|
|
Level 1
|
3,717,533
|
2,641,189
|
Level 2
|
5,782
|
1,559
|
Level 3
|
-
|
-
|
|
3,723,315
|
2,642,748
|
As at the year ended 30 April
2024, £5,782,000 (30 April 2023: NASDAQ 100 Stock Index put options
with a market value of £1,559,000) of NASDAQ 100 Stock Index put
options held by the Company have been classified as level 2 due to
the absence of regular trading activity levels closer to the
measurement date. All other options held at the current and prior
year end have been classified as level 1.
There has been no transfer between
Levels 1, 2 and 3 during the year ended 30 April 2024.
(iv)
Unquoted investments
As at 30 April 2024, the portfolio
comprised no unquoted investment (30 April 2023: same).
14.
CASH AND CASH EQUIVALENTS
|
30 April 2024
£'000
|
30 April 2023
£'000
|
Cash at
bank
|
69,964
|
148,682
|
Cash held at derivative clearing
houses
|
54
|
-
|
Money market funds
|
33,015
|
90,414
|
Cash and cash
equivalents
|
103,033
|
239,096
|
Bank overdraft
|
(437)
|
-
|
|
102,596
|
239,096
|
As at 30 April 2024, the Company
held BlackRock's Institutional Cash Series plc - US Treasury Fund
with a market value of £33,015,000 (30 April 2023: £90,414,000),
which is managed as part of the Company's cash and cash equivalents
as defined under IAS 7.
15.
SHARE CAPITAL
|
30 April
2024
£'000
|
30 April
2023
£'000
|
Allotted, Called up and Fully
paid:
|
|
|
Ordinary shares of 25p
each
|
|
|
Opening balance of 126,285,544
(2023: 132,356,426)
|
31,571
|
33,089
|
Repurchase of 5,663,975 (2023:
6,070,882) ordinary shares into treasury
|
(1,416)
|
(1,518)
|
Allotted, called up and fully paid:
120,621,569 (2023: 126,285,544)
ordinary shares
of 25p ordinary shares of
25p
|
30,155
|
31,571
|
ordinary shares of 25p
of 25p
|
|
|
16,693,431 (2023: 11,029,456)
ordinary shares held in treasury
|
4,174
|
2,758
|
At 30 April 2024
|
34,329
|
34,329
|
During the year, there were no
ordinary shares issued to the market (2023: same). A total of
5,663,975 (2023: 6,070,882) ordinary shares were repurchased into
treasury at a cost of £138,355,000 (2023: £117,078,000).
Subsequent to the year end, and to
close of business on 11 July 2024 (latest practicable date),
964,346 ordinary shares were repurchased into treasury at an
average price of 3,149.86 per share.
16. 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 2024 were £25,919,000
(2023: £21,918,000) of which £2,386,000 (2023: £1,827,000) was
outstanding at the year end.
There was no performance fee
payable in respect of the year nor outstanding at the year end
(2023: same).
In addition, the research costs
and the first £200,000 of marketing costs per annum are borne by
the Manager.
(B) RELATED PARTY
TRANSACTIONS
The compensation payable to key
management personnel in respect of short term employee benefits is
£253,000 (2023: £247,000) which comprises £253,000 (2023: £247,000)
paid by the Company to the Directors.
Refer to Company's 2024 Annual
Report for the Directors' Remuneration Report including Directors'
shareholdings and movements within the year.
17. NET
ASSET VALUE PER ORDINARY SHARE
|
Net asset
value per share
|
|
30 April
2024
|
30 April
2023
|
Undiluted:
|
|
|
Net
assets attributable to ordinary Shareholders (£'000)
|
3,804,533
|
2,828,141
|
Ordinary shares
in issue
at end of year
|
120,621,569
|
126,285,544
|
Net
asset value per ordinary share (pence)
|
3,154.11
|
2,239.48
|
As at 30 April 2024, there were no
potentially dilutive shares in issue (2023: there was no
dilution)
18.
POST BALANCE SHEET
EVENT
Subsequent to the year end, and to
close of business on 11 July 2024, 964,346 ordinary shares were
repurchased and placed into Treasury at an average price 3,149.86 p
per share.
There are no other significant
events that have occurred after the end of the reporting period to
the date of this report which require disclosure.