What now for Allianz Technology Trust?

Fund firms have grown so adept at succession planning that it’s now rare for the loss of an investment manager to cause much of a stink. Such is the case with the impending departure of Allianz Technology Trust (ATT) lead portfolio manager Walter Price. Having worked on the fund since 2007, he will hand the reins over to Mike Seidenberg in July and continue to work alongside him for the remainder of 2022. As the trust’s board noted in its recently published annual report, Seidenberg joined the team in 2009 and has taken “an increasingly active role” in the management of the fund in recent years. The board expects no change in how the team runs the fund.

If that provides some reassurance, current and prospective shareholders will still be hoping for a change in fortunes. After a strong start to the pandemic, the trust has recently hit the buffers amid inflation concerns and the market rotation away from technology shares that began in earnest last year. The pain has been especially notable in recent months, with losses of nearly 30 per cent so far in 2022. With the shares having moved to a wider discount to net asset value (NAV), those deciding whether to back the trust would do well to understand the drivers of performance.

Eye of the storm

From an eye-watering 80 per cent share price total return in 2020 to recent difficulties, some might argue that the trust’s fortunes are easily explained by its sector of choice. Having benefited from the rapid digital shift of the early pandemic, surely any tech-heavy portfolio should now be vulnerable to rising rates and a flight away from growth stocks?

If some truth lies in this argument, there is also a degree of oversimplification. Focusing instead on how the trust differs from its benchmark, the Dow Jones World Technology index, and from its best-known direct rival, Polar Capital Technology Trust (PCT), can give us a fuller explanation of recent performance.

Allianz Technology Trust has fared worse than both Polar Capital Technology and the Dow Jones Technology index in the past year, in part because of the composition of that benchmark, which has substantial allocations to mega-cap tech companies including Microsoft (US:MSFT) and Apple (US:AAPL). As Price notes in Allianz Technology Trust’s financial report for 2021: “While we hold both these companies, they appear in the index in far higher weights. In Apple, for example, we had a 2.4 per cent average weighting, but this is an 11 per cent underweight compared with our benchmark index. Microsoft was up 54 per cent over the year, and we had an 8 per cent underweight while still holding an average 4.5 per cent position over the year.”

Allianz Technology Trust also struggled due to an underweight position in Alphabet (US:GOOGL), which rose 67 per cent over the period on the back of its ability to beat earnings expectations, among other factors. Elsewhere, the trust’s position in Amazon (US:AMZN), which is not included in the technology index, provided some fairly anaemic returns. More broadly, the trust has an overweight in “the highest growth technology companies” – a subsector that was hit especially hard by the prospect of monetary tightening, with the mega-cap names proving to be the only exception to the trend.

The trust's notable underweights in some of these larger tech stocks stands in contrast to Polar Capital Technology, which tends to pay more attention to the benchmark and had double-digit allocations to both Apple and Microsoft at the end of January. This difference has big implications for both performance and how each trust might fit into a portfolio.

Forging its own path

As Price notes, the Allianz trust still has a focus on big tech: its biggest 10 positions at the end of 2021 included a 6.1 per cent weighting to Microsoft and positions in Apple and Alphabet, both of which appeared to have grown even larger as of the end of January. But the trust also backs less high-profile names, including some mid-caps. Other top holdings from the end of last year include electric carmaker and prominent S&P 500 constituent Tesla (US:TSLA) and emerging market favourite Taiwan Semiconductor Manufacturing (TAI:2330). But the trust also holds less prominent names such as cloud security business Zscaler (US:ZS) and semiconductor play Micron Technology (US:MU).

What’s also notable is that the trust provides a concentrated enough exposure to more niche parts of the tech sector, with just 65 holdings at the end of January. That compares with Polar Capital Technology Trust's 112 stocks. As Mick Gilligan, Killik & Co's head of managed portfolio services, notes, Polar Capital Technology Trust “has larger positions in the big index stocks but a long tail of small holdings”. He adds that Allianz Technology Trust had a 26 per cent weighting to mid and small-caps in its latest disclosure versus 19 per cent for Polar Capital Technology Trust.

Investors in the Allianz trust can feel the impact of individual share price moves acutely at times. Gilligan notes that the trust has outperformed the MSCI World Information Technology index by some 81 per cent in the five years to the end of 2021, whereas Polar Capital Technology Trust has performed “broadly in line” with that index. But what’s more interesting is how heavily weighted the outperformance can be to a few names. Gilligan notes that 22 per cent of the 81 per cent outperformance came from the huge gains made by Tesla, with 15 per cent of the outperformance coming from even larger gains for Zscaler.

He adds: “If we look at five-year attribution, Allianz Technology Trust has nine stocks that each have contributed more than 10 per cent to total portfolio performance versus six for Polar Capital Technology Trust. However, Allianz Technology Trust also has seven stocks that have each cost more than 1 per cent of total performance whereas Polar Capital Technology Trust has none.”

A good spread

In other respects, Allianz Technology Trust has a good level of intra-sector diversification, both in terms of its spread of sector exposures and its lesser reliance on the likes of the Faang stocks. In a profile of the trust published in February, Kepler Partners analyst David Johnson argued that a thematic approach to stock selection had clearly played a role in the trust's strong longer-term performance. But he added: “What is arguably more of an advantage is the team’s commitment to diversification, as it allows Allianz Technology Trust to offer investors a truly diversified portfolio of global technology stocks. This attribute, along with Allianz Technology Trust’s allocation to mid-cap stocks, differentiates the trust from wider global and technology indices, which are increasingly dominated by mega-cap tech.”

As noted, the trust's investment team can take a thematic approach and turn to specific subsectors. While the fund’s literature doesn’t tend to break out the actual subsector allocations, Kepler has outlined these from both the end of 2020 and a year later in its February note, in a chart we have replicated.

As the chart shows, the team upped its allocation to semiconductor businesses over the course of last year. Price explains this in the trust's latest annual report: “We have shifted our positioning on cyclical companies, increasing our exposure to semiconductors. There are some attractive fundamentals for this part of the market. The industry is more consolidated, prices are higher and there is still huge demand for semiconductor content across a broader range of industries. As such, it is benefiting from stronger fundamentals and a cyclical rotation.”

What’s less obvious from the subsector breakdown is a continued focus on cybersecurity names, cloud computing and artificial intelligence. That shows how sector definitions don't always capture the type of companies in which a trust invests. The team has also turned its attention to collaboration software, involving functions such as task management for remote workers.

One argument the team has made in a bid to reassure investors is that many of these trends have a long way to run, suggesting more good performance is yet to come. Speaking on an update video from 8 February, manager Mike Seidenberg described cyber security threats as “a problem whose relevance is only increasing, not decreasing”, adding: “I see that as a theme that has legs to it.”

Regarding a broader digital transformation in the corporate space, he is not alone in arguing that the pandemic served as a wake-up call on the need for companies to adopt more digital ways of working. He makes the case that this shift can be “a multi-year journey” once a company has committed to making a change.

The tech sell-off has meant the trust's shares have moved to a seemingly cheaper valuation, trading on an 8.3 per cent discount to NAV on 14 March versus a 12-month average of 5.2 per cent. As with other tech and growth-heavy portfolios, a problem for investors is not knowing how much risk has been priced in, given we still lack a clear idea of how monetary tightening will play out and the extent to which growth shares will sell off further in response.

It must be stressed that those willing to invest in Allianz Technology Trust should be able to handle a good level of volatility, and accept that it may underperform at a time when the tech mega-cap stocks are outperforming their peers. In terms of portfolio construction, however, the fact that the trust focuses less on stocks that appear prominently in all manner of other popular US, global and tech funds could appeal.

Finally, two structural features are worth noting. Charles Stanley chief analyst Rob Morgan points out that the trust's board continues to consider buying back shares at discounts wider than 7 per cent, something that can stop the discount ballooning out too aggressively when this mechanism is put to use.

On the other hand: “A less attractive feature is the performance fee, although there has been a recent reduction in the rate of accrual for outperformance from 12.5 per cent to 10 per cent,” Morgan explains.