Welcome to this report on Allianz Technology Trust PLC for the financial year ending 31 December 2023. 2023 was certainly another tumultuous year in terms of the geopolitical and economic backdrop. I am pleased to report that the Company once again won the Investment Week Investment Company of the Year Award in the ‘Specialist’ category, having previously done so from 2017 to 2021 inclusive. The award is based around our performance over 3 years, as well as other qualitative factors.
Technology stocks performed strongly in 2023 buoyed by a combination of optimism over the sector’s growth potential together with an increasing confidence that the peak in interest rates had finally been reached. Against this backdrop, it is a pleasure to also be able to report a strong absolute Net Asset Value ('NAV') Total Return of 46.4% for Allianz Technology Trust PLC and a share price return of 44.5%. The NAV return was slightly behind the 48.2% return of our benchmark, the Dow Jones World Technology Index (sterling adjusted, total return). This modest underperformance reflected our relatively smaller exposure to the very largest group of companies, the so-called ‘mega-caps’. Our portfolio manager focuses on the mid- and large-cap segments reflecting our belief that companies at an earlier stage of their development provide better opportunities for long-term earnings growth.
No dividend is proposed in the year ended 31 December 2023 (2022: nil). Given the nature of the Company’s investments and its stated objective to achieve long-term capital growth, the Board continues to consider it unlikely that any dividend will be declared in the near future.
The direction of global stock markets continued to be determined primarily by the course of inflation. Central banks have navigated a difficult path since inflation took off from historic lows, balancing the taming of rising prices with the desire to avoid recession and it wasn’t until toward the end of the year that definitive signs that inflation had peaked became apparent. Those signs were received well though and markets demonstrated renewed optimism in anticipation of easing of interest rates.
There was little economic growth to speak about around the world. Indeed, China which finally emerged from Covid restrictions achieved a lacklustre recovery. Geopolitics continued to astound and confound humanity. In February Ukraine passed its first anniversary of the Russian invasion and subsequent war and in October the Middle East was thrust into the limelight when Hamas terrorists launched a sudden attack in Israel with shocking civilian loss of life. Israel responded and an intense conflict has since raged throughout Gaza with a further terrible loss of life. As I write, in the Red Sea Houthi rebels are attacking commercial shipping. The disruption from this latest episode will have an impact on costs of shipped goods and is therefore a potential threat to inflation remaining on course to meet central bank targets. US/China and China/Taiwan tensions also remained present and of concern in 2023.
Despite the backdrop noted above, technology continued to excite and inspire. An obvious connected theme to the geopolitical storm is cybersecurity. As nation states, terrorist organisations and criminals have stepped up digital attacks, cybersecurity has become more and more important to maintaining the smooth functioning of companies, infrastructure and society. Of course, artificial intelligence (‘AI’) was the story of the year, raising appetites for technology once more, sending many technology stocks higher, notably Nvidia, a so-called ‘picks-and-shovels’ company as it provides the chips necessary to power cutting-edge AI applications.
Our portfolio manager is occasionally questioned as to whether the portfolio may be too US centric. The US weighting is certainly high at around 87% as at the end of December. The reality is that the US listed companies continue to dominate tech, a reflection of the depth of US intellectual and financial capital, together with a supportive listed market structure, although it should be kept in mind that many of our portfolio companies generate revenues all around the globe and just happen to be listed in the US.
Whilst China has been a source of tech growth in past years the path has not been smooth. Our portfolio manager was an early investor in the China tech story, however he also exited relatively early and for some years now has preferred not to invest there, being primarily concerned about the possibility of state interference in the activity of listed companies.
The Company traded at an average discount of 12.1% over the period (low of 8.7% and high of 15.7%) despite the positive absolute performance noted. In my view this reflects the interest rate uncertainty apparent for much of the year together with sentiment towards investment trusts in general. That latter point is evidenced by the average discount for investment trusts reaching levels not seen since the global financial crisis in 2008.
Our policy in respect of buying back shares remains unchanged. Currently we would consider buying back shares during periods where the discount is consistently over 7% and it is felt appropriate to do so given the prevailing market backdrop. In the financial year we bought back an aggregate 16,530,708 shares at an average discount of 12.1% and total cost of £40.2m. Since the end of the financial year, up to 12 March 2024 we have repurchased a further 3,271,401 shares at an average discount of 11.9% and total cost of £10.6m. All shares repurchased have been held in treasury rather than cancelled as this makes them readily available to be reissued if sufficient demand occurs in the future.
At the forthcoming AGM, the Board proposes both a renewal of the usual 10% authority to issue new shares and also a renewal of the authority to issue an additional 10% in order to avoid the cost of a further General Meeting should the 10% authority be exhausted as has happened previously when demand was high. The Board will also once again seek authority to buy back up to 14.99% of the shares in issue. The Board recommends that shareholders vote in favour of these resolutions.
Any new shares will only be issued at a premium to NAV and if the Board is satisfied that the issuance is in the best interests of existing shareholders. Similarly, any buy back of shares will only take place where we believe it to be beneficial to shareholders.
advances in generative AI in 2023 pushed it further into our consciousness than ever before. Whilst the main effect of this was to generate excitement – the same excitement that aided the performance of technology indices generally and a few companies specifically – it also raised some fear and trepidation.
AI is a rapidly moving frontier in many ways and will necessarily bring risk as well as opportunity as it develops and is implemented. On the one hand AI should have significant benefits to society, removing menial tasks from many roles and advancing the pace of new medical developments to name but two. On the flip side, there are concerns it might negatively affect humanity, for example via its impact on low-skill labour markets, particularly for certain sectors where AI, robotics and automation can readily replace human labour. It is also potentially subject to misuse and utilisation for negative and even criminal activity.
The Board is cognisant of such potential issues. We are keeping a watching brief and remain focused on the potential risk to the Company’s portfolio and operations. For example, we dedicated part of our 2023 strategy meeting to a discussion around AI-related risks and opportunities. Amongst other aspects, we discussed types of risk, how governments and authorities might respond, the trajectory of AI algorithm development and how we should best identify risks and opportunities as a Company going forward.
As you will be aware, the portfolio manager considers ESG as part of the stock analysis and investment management process. The Board remains cognisant of investors’ concerns and desire to understand better the broader impact of the investment choices that they make. The Board engages closely with Voya as the Investment Manager and AllianzGI UK as the AIFM on ESG policies and processes and further information can be found here and here.
I am pleased to report that Erik Swords has been appointed as Portfolio Manager alongside Mike Seidenberg, who will remain Lead Portfolio Manager, with effect from 1 March 2024. Erik is a managing director and Head of Global Technology at Voya and has 23 years of investment industry expertise. He already works closely with Mike in the San Francisco office.
Your Board has maintained its close attention to the costs of running the Company. The Company’s Ongoing Charges Figure (‘OCF’), which is calculated by dividing ongoing operating expenses by the average NAV, has remained the same as 2022 at 0.70%.
The OCF excludes any performance fee due to the Investment Manager. No performance fee has been earned in 2023. It should be noted that the underperformance recorded over the past three years will have to be made back, and the NAV will need to exceed the figure as at the end of 2020 (which set a new high watermark) before any future performance fee can be accrued.
Although I reported to shareholders as Chairman in the 2023 interim report, this is my first Annual Financial Report in this role. I would therefore like to reiterate my thanks to my predecessor, Robert Jeens, for his leadership of the Company over his tenure and for his help and support as I took on the role of Chairman. I hope that this next period in the Company’s history can prove as positive in respect of growth as the past one.
At the conclusion of the 2024 AGM, Humphrey Van der Klugt will step down from the Board, having served since 2015. We thank Humphrey for his significant contribution to the Company’s development over the past nine years and his part in its significant growth over that time.
Elisabeth Scott has served on the Board for nine years as at 1 February 2024 and to allow for orderly succession planning she will retire at the AGM in 2025.
As previously announced, with effect from 29 November 2023 Neeta Patel was appointed as Chairman of the Management Engagement Committee replacing me. Neeta will also become Senior Independent Director when Humphrey steps down. Katya Thomson will be appointed as Chairman of the Remuneration Committee at the conclusion of the 2024 AGM.
Although just outside of the reporting period, as previously announced, Simon (Sam) Davis was appointed a non-executive Director on 1 January 2024 and has also joined the Audit and Risk, Management Engagement, Remuneration and Nomination Committees. Sam is a non-executive director of The Baillie Gifford Japan Trust PLC. Sam brings a wealth of investment experience across global markets, and we are therefore delighted that he is joining the Board and we look forward to working with him.
This year’s AGM will be held on 24 April 2024 at 2.30pm. The full Notice of Meeting can be found on here. Full details of the special business to be considered at the AGM can be found here.
As with 2023, the AGM will be a hybrid meeting, meaning shareholders can either attend physically or online. We will not be providing online voting for the 2024 meeting. This is due to the relatively high cost to enable the service not having been matched by shareholder take up of the service over the past two years. Should there be reasonable demand emerging from shareholders in the future for online voting then we will look at a possible reintroduction. For this reason, we strongly encourage all shareholders to submit their votes using the proxy voting process by the deadline of 22 April 2024 as detailed in the Notice of Meeting here. Those shareholders attending virtually will be able to view the AGM and submit questions electronically.
The Board encourages shareholders to attend the AGM if possible. A presentation by the portfolio manager will be made at the start of the meeting. For those unable to attend either physically or virtually, a recording of the AGM will be posted to the Company’s website as soon as practicable after the event.
The Board looks forward to welcoming shareholders to this year’s event.
It is relatively difficult to make predictions for the year ahead in such an uncertain world. However, most indicators are suggesting a pivot in interest rates could well be on the cards which would certainly be positive for growth stocks, including many technology stocks. Even if this does not provide a tailwind, it should at least remove a headwind as the discount rate used to value future cashflows of companies reduces. With valuations of many technology companies having come back to more reasonable levels since the end of 2020, this could allow some further recovery in the sector.
Geopolitics remain a source of uncertainty. Whilst the fortunes of individual companies are often insulated from the direct impacts of world events, heightened uncertainty will impact on sentiment in general and affect factors such as consumer confidence. Certain companies could find themselves more directly affected by geopolitics depending on their location, but this is something our portfolio manager monitors closely as part of the portfolio management process. It will certainly be an interesting year in terms of the political arena, with elections in the US and almost certainly the UK.
We are not out of the woods in terms of fears around falling into recession, however the hope is that central banks have done their job well enough and we will instead see a ‘soft-landing’ – that is, a decline in inflation without a significant set back in economic growth.
What is in no doubt is that technology will continue to dominate our lives and re-shape the future. Such a ‘new frontier’ remains an extremely exciting place to invest, though of course also brings risks for investors. On your behalf, the Board in conjunction with the Investment Manager will remain focussed on providing a portfolio that we believe will capture the exciting growth available from investing in technology.
Tim ScholefieldChairman12 March 2024
