The Trust’s NAV returned 1.1% , outperforming the Dow Jones World Technology Index return of -0.8% GBP. During the month, stock selection contributed to relative performance, and industry allocation had no effect.
Our overweight position in semiconductor testing equipment maker Teradyne was a top contributor in April. Shares rallied after the company posted strong quarterly financial results and provided very positive outlook commentary. The strength is driven principally by the semiconductor test business as chipmakers add incremental capacity to deal with rising volume and complexity of new application processors. The semiconductor test business is benefiting from share gains as well as broadening demand from other chipmakers in analog, microcontroller, and memory. In addition, the industrial automation segment (Universal Robots) posted strong results with a strengthening outlook heading into the balance of fiscal year 2017.
Our overweight position in UK-based cyber security company Sophos Group was also a top contributor after pre-announcing that billings, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), and free cashflow would be ahead of analysts’ expectations. Sophos is a leading supplier of corporate endpoint and network security to a global midmarket customer base. Sophos has strong recurring billings, global reach, and a solid cash EBITDA margin that allows for reinvestment. We see opportunities for Sophos to continue to grow faster than the market over the medium to long-term, with incremental additions from the recent acquisition of malware protection firm Invincea. We believe security spending will be an ongoing requirement and should remain a top priority for companies because of persistent security threats that are continuously evolving.
Other top active contributors included overweight positions in Yandex and Tesla and not owning IBM.
Our underweight position in Alphabet (parent of Google) was the top detractor in April after shares rose on positive quarterly results driven by strong advertising revenue growth. Despite the recent controversy around YouTube related ad placements, Google delivered solid results. The company’s advertising system placed ads near objectionable content that upset advertising partners. We believe its AI (Artificial Intelligence) driven ad system “learned” how to place ads that drove short-term results, such as “ad completion”, but was not in the long-term interests of its advertising partners. In response, the company has announced new safeguards for advertisers, which include updated ad policies and enforcement, new default settings around where ads can appear, and improved controls for advertisers. We believe the risk of these problems occurring in the future is lower, but we maintain an underweight position in Google. We expect online/mobile advertising spending to decelerate in 2017 relative to the robust spending in 2016 due to the Olympics and US election.
Our position in memory chip manufacturer Micron Technology was also one of the top detractors during the period. After shares surged in March following the release of strong quarterly earnings and better-than-expected guidance, shares pulled back slightly in April. Underlying the constructive guidance outlook was tightness in the supply of memory chips and lean channel inventories. Over the course of several years, consolidation in the memory chip industry has helped Micron and others rationalise supply and more effectively preserve profitability through the ups-and-downs of the demand environment. We see the reported and forecasted results as evidence of the improvement in this industry structure.
Other top active detractors included an overweight position in Flex Ltd. and underweight positions in Tencent Holdings and Microsoft.
We believe the policy changes the Trump administration is proposing should be good for the economy and business, which should lead to higher economic growth. We expect the technology sector to benefit from a better US economy and the stocks should generally participate in the rising stock market.
Despite high valuations for some cloud and internet companies, we continue to see massive addressable markets much larger than the revenue today. However, we have consolidated our exposure to these areas in select companies having the most compelling solutions and whose business models demonstrate a discernible path to deliver strong earnings and cash flow growth over the next few years.
We are also finding excellent investment opportunities among more attractively valued areas of technology. In particular, certain technology incumbents are making compelling progress on their “as-a-service” offerings.
Artificial intelligence (AI) is also becoming a significant trend. From consumer goods, such as the Amazon Echo, to autonomous driving, practical applications of AI are emerging. We expect AI will increasingly be used to make our lives more convenient.
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