Buybacks and good management beat innovation, argues Allianz Tech manager

Mr Price, a self-confessed "growth junkie", last year piled high-growth names including Amazon (AMZN:NSQ) and a range of cyber security stocks into the trust's portfolio. But it was the older semiconductor companies that shot up, leaving Allianz Technology Trust trailing behind.

"I wish I'd had my whole portfolio in semiconductors last year - I'd be a hero," says Mr Price. "I should have had a lot more in that area."

He has since doubled his weighting in that area. But the missed opportunity weighs on performance. The trust returned 27 per cent over the 2016 calendar year while Dow Jones GL World Technology index returned 34.8 per cent. The Association of Investment Companies (AIC) technology, media and telecoms sector returned 31.1 per cent.

Mr Price says nervous investors last year flocked into dividend-paying technology names, and away from growth stocks perceived as higher risk in the data analytics, software as a service and cyber security sectors.

"Last year the higher the dividend, the better the stock performed," he says. "Meanwhile some of our growth stocks in the software as a service sector actually declined. Companies such as Avago (US:AVGO) and Micron Technology (US:MU) are memory manufacturers growing at rates below 10 per cent. But they are growing their share prices by buying back stock, merging with other companies and borrowing at low interest rates to invest in and improve their companies. We had stocks such as Facebook (US:FB), Google (GOOGL:NSQ) and (cyber security company) Palo Alto Networks (US:PANW) which were growing between 40 and 50 per cent, but their shares went down while the semiconductor sector was up 20 per cent."

He has reluctantly had to concede that the technology industry is slowing down, which means he has shifted the portfolio away from stocks with organic growth towards value stocks growing through management efficiency.

"A lot of the technology sector has gone into a low-growth phase," he explains. "Really only 15 per cent of the universe is growing at over 20 per cent a year now. I love growth companies, but the world has changed. Industries have matured and companies have come up with strategies to improve their stock prices - whether through acquisition, optimising their portfolios or being more aggressive on capital return."

Allianz Technology's portfolio used to be split evenly between high-growth innovative stocks, value stocks paying dividends and growth at a reasonable price (Garp) stocks with slower growth profiles but steady dividends, like Microsoft (MSFT:NSQ). But Mr Price says the "philosophical debate" within his team on growth versus value has resulted in a chance of tack. Value and growth stocks will both make up between 30 and 40 per cent of the trust's assets, while the Garp stocks will be reduced due to toppy valuations.

He expects the trust's earnings to be generated next year from stocks such as Samsung Electronics (005930:KS). "They are having record earnings even though they had a disaster with the [Galaxy Note 7] phones catching fire, and semiconductors makes up three-quarters of its earnings," he explains.

And despite being too late to the semiconductor scene last year, he says there will be further earnings growth here.

He also continues to invest in growth stocks and says the exciting stories will be companies that harness cloud computing and artificial intelligence. Although software as a service company Workday (WDAY:NYQ) has been "going nowhere for three years and the share price has been flat", he adds that "they've been growing sales at over 40 per cent per year" and expects the shares to perform well in 2017. Software as a service companies were heavily sold off in 2016, but Mr Price believes cloud computing will be a key disrupter in the coming years.

Despite not owning Tesla (TSLA) for much of last year he has bought it back to benefit from the launch of the company's Model 3 electric car later this year. But he has cut back the trust's position in Google by 75 per cent, believing that competition from Amazon on web searches and slower growth make it less appealing.

So far this year the trust is performing well, following a 180 degree shift in investor sentiment towards growth stocks. "This year is like a mirror image of last year," says Mr Price.

The trust's share price performance has picked up so that it outperforms Dow Jones GL World Technology index over one year, and its discount has narrowed from 14 per cent at the start of July 2016 to less than 3 per cent now.

Allianz Technology Trust remains more exposed to smaller companies than its benchmark according to broker Winterflood, with these accounting for 16 per cent of its portfolio - double the amount in Dow Jones World Technology Index. It also remains underweight mega-cap stocks relative to its benchmark - 29 per cent against 42 per cent, and overweight mid-caps - 41 per cent compared with 21 per cent.

Source: *Allianz Global Investors, **AIC

Performance (% total share price return)

Source: FE Analytics, as at 16.02.17

Top 10 holdings as at 31 January 2016 (%)

Geographic exposure (%)

Source: Allianz Global Investors