Annual Report & Financial Statements 2014
Registered Office 4 Matthew Parker Street London SW1H 9NP Tel: 020 7227 2700 Fax: 020 7227 2799 www.polarcapitaltechnologytrust.co.uk Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA www.shareview.co.uk
THE NEW TECHNOLOGY CYCLE:
Redefining knowledge, reimagining industries Annual Report & Financial Statements for the year ended 30 April 2014
Trinity College library, Dublin, Ireland
1 2 3 About Your Company
Strategic Report Section
Directors’ Report
02 About your Company
06 Chairman’s Statement
46 Directors
04 Financial Highlights
08 Manager’s Report
48 Investment Team
28 Portfolio Review
50 Directors’ Report
36 Strategic Review
53 Corporate Governance Report 61 Audit Committee Report 64 Remuneration Committee Report 68 Responsibilities Statement
Trinity College library, Dublin, Ireland
Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
4 5 6
Independent Auditors’ Report 70 Independent Auditors’ Report
Financial Statements
74 Statement of Comprehensive Income 75 Statement of Changes in Equity
Shareholder Information
104 Portfolio 109 Contacts 110 Other Information 111 Capital Gains Tax
76 Balance Sheet 77 Cash Flow Statement 78 Notes to the Financial Statements
112 Subscription Shares 113 Investing 114 Warning to Shareholders 116 Glossary
Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
01
1
About Your Company
Objective
Investment Approach
The investment objective is to maximise long-term capital growth through investing in a diversified portfolio of technology companies around the world.
Stocks 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:
The investment policy is set out in full in the Strategic Report.
Rationale Over the last three decades the technology industry has been one of the most vibrant, dynamic and rapidly growing segments of the global economy. Technology companies offer the potential for substantially faster earnings growth than the broad market, reflecting the long-term secular uptrend in technology spending. 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 will be focused on technology 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 and renewable energy, as well as the more obvious applications such as computing and associated industries.
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Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
• management quality; • the identification of new growth markets; • the globalisation of major technology trends; • exploiting international valuation anomalies; and • sector volatility.
Benchmark The Company has a benchmark of the Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of withholding taxes) against which NAV performance is measured for the purpose of assessing performance fees.
Management The Company is led by an experienced Board of directors with extensive knowledge of investment matters and the regulatory framework in which such activity is undertaken. The Directors are all non-executive and have appointed various third party suppliers to provide a range of services including investment management, custody and administrative services to the Company. The role of the Board is to provide oversight of the Company’s activities and to ensure the appropriate financial resources and controls are in place to deliver the investment objective. Details of the Directors are given on page 46. Polar Capital LLP has been the appointed Investment Manager throughout the year. Mr Ben Rogoff, the appointed fund manager, has been responsible for the Company’s portfolio since 1 May 2006 and is supported by a team of technology specialists. Details of the investment team are given on page 48. As at 30 June 2014 Polar Capital LLP managed $13.6bn across a range of funds and strategies including three investment trusts. Polar Capital LLP is authorised and regulated by the Financial Conduct Authority.
Fees The Company pays both a basic management fee of 1% of total assets as well as a performance fee if performance is above a predetermined level. Further details are given in the Strategic Report.
Share Price and Net Asset Value Information on the Company including the Net Asset Value (NAV) and share price can be found on the Company’s website at www.polarcapitaltechnologytrust.co.uk
The mid-market price of the ordinary shares is published daily in the Financial Times in the Companies and Markets section under the heading ‘Investment Companies’. Share price information is also available from The London Stock Exchange Website www.londonstockexchange.co.uk (PCT), Bloomberg (PCT.LN), Datastream (PCT), Lipper (71000395) and Reuters (PCT.L). The SEDOL code for the ordinary shares is 0422002 and the ISIN is GB004220025.
Portfolio Details Portfolio information is provided to the AIC for its monthly statistical information service (www.theaic.co.uk) and monthly fact sheets, as well as previous copies of annual report and financial statements, are available on the Company’s website www.polarcapitaltechnologytrust.co.uk A full portfolio listing is given in the annual, half year and interim management reports.
Gearing The Company uses gearing in the form of bank loans which are used on a tactical basis by the Investment Manager, when considered appropriate. The overall level of net gearing is controlled by the Board and all bank facilities are subject to Board approval. Any Net borrowings over 15% of the Company’s net assets at the time of draw down will only be made after approval of the Board. The investment manager’s use of derivatives is controlled 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.
The Company’s Net Asset Value (‘NAV’), is released daily, on the next working day, following the calculation date, to the London Stock Exchange.
Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
03
1
About Your Company
Financial highlights
Net assets per ordinary share
Price per ordinary share
458.40p
442.00p
+11.2%
+10.9%
Total net assets
Benchmark over the year to 30 April 2014
2013: 412.41p
2013: 398.5p
£606,633,000 2013: £528,845,000
Dow Jones World Technology Index, total return Sterling adjusted with withholding taxes removed
+14.7%
+13.1%
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Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
Financial Summary and Key Data As at 30 April 2014
As at 30 April 2013
Movement %
£606,633,000
£528,845,000
14.7%
458.40p
412.41p
11.2%
Ordinary shares in issue
132,336,159
128,231,742
3.2%
Price per ordinary share
442.00p
398.50p
10.9%
Subscription shares in issue (Note 1)
–
24,774,460
–
Price per subscription share
–
7.88p
–
As at 30 April 2014
As at 30 April 2013
US$ to £
1.6886
1.5564
Japanese Yen to £
172.49
151.61
Euro to £
1.2178
1.1805
Total net assets Net assets per ordinary share
Note 1: The subscription shares ceased to exist following the final conversion date of 31 March 2014
Key data Exchange rates
For the year to 30 April 2014
2013
Ongoing charges ratio (see page 40)
1.15%
1.19%
Ongoing charges ratio including performance fee
1.15%
1.19%
For the year to 30 April 2014 Benchmark Change over the year to 30 April 2014 Dow Jones World Technology Index total return sterling adjusted, with withholding taxes removed
Local currency %
Sterling adjusted %
22.7
13.1
–
6.8
–
10.5
20.4
11.0
Other Indices over the year to 30 April 2014 (total return) FTSE World FTSE All-share S&P 500 composite
Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
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2
Strategic Report Section
Chairman’s Statement Michael Moule
Results
Regulation
For most of our financial year global technology has been one of the leading sectors in a good year for developed equity markets. However a very promising performance was curtailed by a rapid reversal for the sector in the last six weeks of our financial year when US investors switched from growth to value stocks. In sterling terms the Dow Jones World Technology Index still managed a 13.1% return versus 6.8% for the FTSE World Index, and 11.0% for the S&P 500. The manager’s policy of investing in faster growing mid and smaller sized companies helped build a significant performance above the benchmark, but this cushion was completely eroded by the painful setback in late March and April. I am relieved to report a return of 11.2% in Net Asset Value per share and a rise of 10.9% for our share price, in a bittersweet year for shareholders.
You will notice a few changes to the annual report as we are now obliged to provide a strategic report with certain prescribed content under an edict called the “Narrative Reporting Framework”. We seem to be world class within the EU at introducing new regulations, good news for lawyers and accountants, but will it always help and protect shareholders? We are now well advanced to complying with the “post Madoff” stable door policy introduced by the EU called the AIFMD. The Board decided that the most practicable and cost effective AIFM (Alternative Investment Fund Manager) was to appoint Polar Capital rather than a third party or the Board itself. A sub-committee of the Board spent time meeting the few viable candidates willing to act as Depositaries. They soon ascertained that separation of the depository function from the role of safe custody was inefficient. We concluded that consolidating both roles at HSBC was the best result as we could benefit from a cheaper bulk rate negotiated for all the Polar Capital trusts. We are on course to comply with the July 2014 deadline for both appointments.
Perhaps the most surprising feature was the contrast between geographical regions. The debt laden, growth challenged equity markets of the USA, Europe and the UK provided the best returns in a very broad based upturn which favoured mid and small companies. By contrast most Asian and Emerging markets have suffered modest declines, unsettled by fears of US tapering, Chinese growth and debt fears, territorial disputes, and currency instability. Japan lost momentum later in the year with doubts about the longer term benefits of President Abe’s experimental economic policy. A detailed analysis of our results in all markets and the currency headwinds we endured can be found in the manager’s report on pages 8 to 27.
The US tax authorities are very keen to keep tabs on overseas income received by US citizens wherever they reside. We have very few, if any individual US shareholders, however to avoid a doubling of withholding tax from 15% to 30% on dividends we receive from our US investments we have now registered with the IRS under the unfortunate sounding FATCA (Foreign Account Tax Compliance Act).
Subscription Shares
Directors
The late March decline in US tech stocks was unsettling for subscription shareholders as the premium of the share price and NAV over the 478p subscription price was whittled away to zero by the final acceptance date on 31 March 2014. A total of 3.988 million new shares were issued over the three year life of the sub-shares, 15.7% of the total. There was minimal dilution and the total number of issued ordinary shares increased by 3.1% as a result of the sub-share conversions over the three years.
We have a duty to manage succession which involves finding the right blend of experience and diversity to challenge the manager and look after shareholders’ interests. David Gamble who joined the Board in 2002 has indicated his intention to retire from the Board in September 2015, and we expect to appoint a new director in the first half of 2015. Rupert Montagu and I both joined the Board in January 2007 and after 2016 we hope to manage our succession as smoothly as possible, but for continuity we will not leave the Board in the same year.
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Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
We conducted an internal review of the Board and the chairman in March 2014. We have five independent directors which we feel is the right number for an investment trust of this size and we are almost unique in having the benefit of the former fund manager as an unpaid Board member. He is willing to stand down at any time but the situation works well for the Board and shareholders as our current manager does not feel in any way inhibited by his presence and we all benefit from his long experience with all types of past technology cycles. We all stand for annual re-election and I would ask shareholders to vote in favour of each re-election despite two directors having served more than nine years.
AGM and Shareholder Information The AGM will be held at 12 noon on 4 September 2014 at the RAC Club , Pall Mall , London. This is always a lively event and the formal business will be preceded by a presentation by the manager. We are probably several years away from providing a live AGM webcast, instant electronic voting and twitter feed, however if you cannot attend the AGM I would urge you to look at our new website. The site seems turbocharged, so even for me in “rustic band” Sussex all information and documents appear very quickly, and the AGM presentation and proxy votes will be posted on the site after the AGM.
leaves little appetite for a material increase in interest rates. Thus equities may remain the asset of choice for longer than usual with a rare, but possible “euphoria” leg to ensue. Fortunately the global technology sector has a cycle of its own making with the internet seemingly unstoppable in its voracious inroads into the everyday life of business and individuals. There is consequently no shortage of exciting new companies for our managers to assess but product life cycles and patent protection appear to get shorter, and sifting the few winners from the myriad of losers is no easy task. Finally I would like to thank our management team for all their hard work and dedication on our behalf, and to congratulate Ben and Neil for winning the AIC award for best annual report in the specialist trust category.
Michael Moule Chairman
Outlook In developed equity markets calendar year 2013 produced very little earnings growth but a big increase in the valuation of the average company. Further upward progress in equity markets is heavily reliant on evidence of sustainable sales and earnings growth, leading to increased individual price risk if this is not forthcoming. For both top down strategists and bottom up stock pickers the five year old bull market is showing signs of maturity reflected in new issues volumes, hostile takeovers and sector rotation. Globalisation, the internet, and flexible labour markets are helping keep inflation low, and the slow speed of economic recovery in the USA and Europe
Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
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Strategic Report Section
Manager’s Report Ben Rogoff
6.8% FTSE World Index total return over the year
The relative absence of systemic threats and growing recognition that policymakers would “do whatever it takes” allowed equity valuations to expand further, driving the majority of returns
Developed markets led the running with both European and US equities rising in sterling terms…(while) emerging markets were weak… impacted by sharply higher sovereign rates… driven by fear (and then the reality) of tapering
In contrast with sentiment-driven equity returns, the global economy continued to undershoot expectations, registering 3% growth during 2013 (2012: 3.1%) versus early expectations of between 3.3–3.5%
08
Market Review Equity markets added to their post financial crisis gains during the fiscal year as improved risk appetite and PE expansion outweighed downward revisions to global growth. Although investors continued to climb the proverbial ‘wall of worry’ (this time taking the form of tapering fear), the relative absence of systemic threats and growing recognition that policymakers would “do whatever it takes” allowed equity valuations to expand further, driving the majority of returns. Unfortunately, pronounced sterling strength (the UK economy performing well ahead of expectations) stymied returns, the FTSE World total return index gaining just 6.8% during the year as the currency appreciated 8.5% and 13.8% against the US Dollar and Japanese Yen respectively. Developed markets led the running with both European and US equities rising in sterling terms, although concerns about “Abenomics” and further Yen weakness saw Japanese stocks give back nearly half of their prior year gains. Emerging markets (EM) were also weak during the fiscal year, impacted by sharply higher sovereign rates (US ten year Treasury yields rising from 1.68% to 2.65%) driven by fear (and then the reality) of tapering, the gradual reduction of asset purchases otherwise known as Quantitative Easing (QE). Tighter resulting monetary conditions, adverse financial flows and significant downward revisions to growth saw Asian ex Japan equities fall 8.5% in sterling terms.
Polar Capital Technology Trust plc/ Annual Report & Financial Statements for the year ended 30 April 2014
In contrast with sentiment-driven equity returns, the global economy continued to undershoot expectations, registering 3% growth during 2013 (2012: 3.1%) versus early expectations of between 3.3–3.5%. Although global growth was once again led by developing economies (+4.7%) and China in particular (+7.7%), tighter financial conditions and slower growth took their toll on a number of emerging markets during the second half of the fiscal year. Fortunately, the recovery ‘baton’ was taken up by developed economies (+1.3%) that – adjusting for the impact of greater fiscal tightening in the US during the year – performed ahead of expectations. In the US, Treasury yields moved sharply higher, as investors digested better economic data that raised the prospect of earlier than expected tapering. Despite a brief wobble in October – a partial federal government shutdown raising the spectre of an (unlikely) default – US rates peaked in December at a little over 3%, the same month that the FOMC commenced tapering (reducing their asset purchases by $10bn per month). In Europe, the process of normalisation allowed further real economic progress to be made, particularly in the periphery where large current account deficits were eliminated and financing needs substantially addressed while the ECB’s balance sheet contracted significantly due to early LTRO repayments. Against all odds, the EU area climbed out of recession in the second quarter while Ireland, Portugal and Spain each returned to growth during the year. The Japanese economy also performed well as the Bank of Japan expanded its balance sheet from
