Allianz Technology Trust: April 2023 update

• The trust invests in companies that use innovative technology to gain a competitive advantage in their industry
• Michael Seidenberg took over as the trust's lead manager in July 2022
• Long term performance has been strong but more recently the trust has been under pressure

How it fits in a portfolio

Allianz Technology Trust aims to deliver long-term capital growth by investing in technology companies from around the world. The managers favour those that are innovating to gain a competitive advantage in their industry, addressing global trends or improving existing technology. They mainly invest in large and medium-sized technology companies but have the flexibility to invest in higher-risk smaller companies too.

Investing in the trust could help boost long-term growth potential but this is a specialist area so adds risk. We think funds and investment trusts investing in a specific sector, should usually only form a small part of a well-diversified investment portfolio. Investors in investment trusts should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

Michael Seidenberg became the lead manager of the trust in July 2022, having been a part of the Global Technology team for almost 15 years. He took over from Walter Price and Huachen Chen who announced their retirement last year. Seidenberg was recruited by Price in 2009, working with him closely ever since, so naturally fit the bill as successor.

Over his career, Seidenberg has gained a lot of experience across the technology industry. He began working in the software industry in 1996 and started his investing career with Citadel Investment Group in 2001. He's covered most technology sectors over his tenure.

With Price and Chen retiring, it undoubtably means the trust and wider technology team has lost a lot of experience. They worked together for over 30 years covering every aspect of technology over that time.

The team surrounding Seidenberg remains strong though. He continues to receive support from the wider team, including experienced portfolio manager Dunny Su and senior analyst Rich Gorman. He's also welcomed two new team members - Erik Swords and Justin Sumner. Swords brings with him nearly 23 years' experience and will head up the global technology team. He'll support Seidenberg on the trust as a senior portfolio manager. Sumner, who has worked with Swords for many years, boasts over 20 years' experience and will support Seidenberg as portfolio manager.

Process

Despite the changes in the team, Seidenberg continues to apply the same tried and tested investment approach. They scour the technology universe for high-quality companies they believe have the potential to ride major trends and be successful over the long term. This means they prefer companies with certain traits such as high-quality management teams and healthy balance sheets. Companies must also exhibit dominance in their respective industry, strong pricing power and sustainable earnings growth over time.

Placing an emphasis on these types of characteristics can offer opportunities in different market environments. Because of this the companies they invest in typically fit into three categories:

High growth innovators - emerging or transformative areas of tech, offering higher growth potential but higher risk.

GARP (growth at a reasonable price) - established companies that have potential to grow but aren't overpriced.

Cyclical growth - companies that are sensitive to economic conditions and could grow as the economy grows.

The trust currently invests a little over 85% of its assets in US technology companies. The team find a range of opportunities here but also invest in some of the largest US technology companies – Apple, Microsoft, Alphabet and Meta Platforms (previously Facebook).

Though, this means the trust is fairly concentrated in terms of sector and geographic allocations, which increases risk. As a result, the team look to diversify the rest of the trust across other countries, including the UK, parts of Europe and some higher risk emerging markets like Korea and Taiwan.

They also invest in an array of technology sectors, including consumer goods and services, industrials, financials and healthcare. Despite the changes to the team, the manager is continuing to run the trust using the same process, so the number of changes to the trust's investments has been limited. Over the last year, the team have slightly increased their exposure to interactive media companies including Meta (formally known as Facebook) and social media / online dating app Bumble. Although, portfolio diversification does not ensure against loss.

The managers have the flexibility to use gearing and derivatives which can magnify any gains or losses. Investors should be aware that if used, each increases risk. Although they have this flexibility, to date, the managers have not seen the need to take on the additional risk.

Culture

The trust was formed in December 1995 and was relaunched with a new team at the helm in 2007 by AllianzGI. The board appointed AllianzGI to oversee the trust based on their experience and in-depth expertise of investment trust management. The team has experience across the industry and is committed for the long term.

In July 2022, AllianzGI US investment operations was sold to Voya Investment Management. Seidenberg and the Allianz board members believe this is a positive partnership that will help bolster the available resources each team has access to. The culture is also similar to Allianz, so the transition has been relatively smooth so far.

As part of the partnership, Grassroots Research, which used to be a division within AllianzGI, is now owned by Voya. This remains an available resource for Seidenberg and his team to draw on for idea generation. Grassroots Research is a global network of journalists, field investigators and industry contacts that gather additional research. The network are able to talk to companies and industry experts, gaining valuable market insights for the team.

ESG integration

Environmental, social and governance (ESG) factors have become increasingly prominent in recent years and form an important part of Allianz's DNA. The main area of focus is governance within technology companies, specifically the strength and makeup of the board. They can hold management to account but also help influence and improve their behaviours, which they believe can lead to more sustainable long-term performance.

The team are still able to draw on what they need from Allianz, which means they continue to benefit from having a separate ESG research team and are less reliant on third party data. But they now benefit from an increase in available ESG resource following the partnership with Voya. Given how recent the change has been, it's comforting the team are still overlapping with parts of Allianz.

Cost

The ongoing charge, over the trust's financial year to 31 December 2022, was 0.70%. This is a very small increase from the previous year's charge of 0.69%. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% (capped at £200 p.a. for a SIPP and £45 for an ISA) per annum also applies. Our platform fee doesn't apply if held in a Fund and Share Account. As investment trusts trade like shares, both a buy and sell instruction will be subject to our share dealing charges within any HL account.

Performance

Since Seidenberg joined the team in 2009, the trust has outperformed its global benchmark. Over this period, the trust's net asset value, or NAV, has risen 904.69% and its share price has risen 852.48%*. Remember past performance is not a guide to the future. All investments fall and rise in value so you may get back less than you invest.

However, more recent performance hasn't been so smooth. It's been a very tough year for the technology sector and the trust hasn't managed to avoid the hurdles. Over the trust's financial year (to the end of December 2022), it's NAV fell 33.61% and its share price fell 40.43%. Wider economic events have played a part in the underperformance.

Stubbornly high inflation levels, coupled with rising interest rates is putting pressure on the industry. This has resulted in sharp increases in supply and labour costs, as well as increases in borrowing costs which has put technology companies under strain.

On top of this, the team's investment style has been largely out of favour over 2022. The team prefers to invest in the high growth, mid cap companies, believing it's a sweet spot for dynamic, long-term growth. However, this area was hit particularly hard as investors became wary of increased valuations and the impact coming from rising interest rates and inflation.

At a stock specific level, a number of the cyber security investments struggled. This came as quite a surprise as company management teams generally remain committed to cybersecurity spending. Despite this, Zscaler, CyberArk and Okta didn't hold up well and detracted from performance. Only Palo Alto Networks managed to buck this trend.

Semiconductor investment had a mixed year of performance. While global demand for semiconductors continues to rise, the sector is under pressure from things like supply chain issues and geopolitical tensions. That said, ON Semiconductor, a provider of semiconductor intelligent sensing and power solutions, managed to hold up well, despite wider challenges.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2023.

FIND OUT MORE ABOUT ALLIANZ TECHNOLOGY TRUST INCLUDING CHARGES

VIEW ALLIANZ TECHNOLOGY TRUST KEY INFORMATION DOCUMENT

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