The past year has been a particularly hard one for technology investors against a wide backdrop of economic and geopolitical difficulties. The Russian invasion of Ukraine has turned into a protracted conflict with a large human toll. Inflationary pressures had been building for some time but the war has set off dramatic increases in energy and food prices, fuelling inflation and depressing both consumer and business confidence.
Central banks have responded to rising inflation by raising interest rates. These rising rates had a direct impact on investments – money is no longer cheap or easy to raise as it had been for so long with interest rates at near-zero. Where, in the era of quantitative easing, investors had piled into growth stocks, keen to gain access to the best future returns, now there is much more scepticism about the reality of those returns and the discount rates have risen dramatically. As valuations have fallen, more money has moved away from such stocks as investors instead favoured nearer-term cashflows and reliable income streams.
Technology stocks have been at the epicentre of these valuation changes. As previously reported, in the first half of 2022 our strategic overweight positions in stocks with high growth potential were hardest hit by the market sell-off and hence the portfolio fell by more than the significant fall in its benchmark. More recently performance across technology stocks, whilst weak compared to the general market, has been more mixed. The Board remains satisfied that the differentiated strategy which the Investment Manager continues to follow should be the source of longer-term outperformance and that the current situation should not be a driver to make any wholesale change to that strategy.
Over the year, the Company’s Net Asset Value (‘NAV’) per share fell by 33.6%, whilst our benchmark index, the Dow Jones World Technology Index (sterling adjusted, total return) also fell, but by 26.4%. This resulted in underperformance of 7.2 percentage points with all of the underperformance occurring during the first half of the year.
The market price of the Company’s shares fell by 40.4% over the year, from 352.5p (31 December 2021) to 210.0p (31 December 2022) as the rating of the Company’s shares moved from a small premium at the end of 2021 to a discount of 9.1% at the end of 2022. The Board is disappointed to see this significant derating of the Company’s shares but notes that it is in line with rating movements implicit in the share prices of other larger investment companies focusing on high growth opportunities.
No dividend is proposed for the year ended 31 December 2022 (2021: 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.
Your Board continues to consider the use of borrowing and gearing. Although we have this flexibility, to date our assessment has been not to take on this additional risk.
In my reports last year I wrote about the transition of lead portfolio manager role from Walter Price to Mike Seidenberg with effect from 1 July 2022 and also provided details of the changes to the structuring of the investment management arrangements arising from the sale of Allianz Global Investors GmbH (‘AllianzGI’) US investment operations to Voya Investment Management Co LLC (‘Voya’) – see The Directors' Report here. The Board took careful steps to be satisfied that each of these changes was in the best interests of shareholders prior to granting its approval.
As you may be aware the Board has generally visited San Francisco every couple of years to spend time with the investment managers on their home ground. The pandemic interrupted this pattern but the delayed visit that took place last September proved very timely in the light of the significant changes referred to in the previous paragraph. The Board was able to spend time with all the members of Voya’s San Francisco based Global Technology Team and also meet with other Voya senior executives. These meetings provided further reassurance to the Board.
In summary I am pleased to report that both the lead portfolio manager and Investment Manager changes appear to have proceeded smoothly.
There is no doubt that lofty valuations of technology stocks have been challenged over the past year, however it is also true that many technology companies remain robust in terms of their day-to-day business, if not in the valuation of their equity. The main driving themes for technology most certainly persist: large scale movement of legacy IT systems to cloud architecture, cybersecurity in the face of criminals’ and nation states’ efforts to steal or disrupt, and labour shortages to name just a few. There are also many emerging technologies and themes as companies and innovators look to create the next disruptive technology.
As an example, can readers be sure that this year’s statement was written by me and not by an Artificial Intelligence (‘AI’) tool? In this instance I can assure you it was written by me, however there is currently much debate and coverage around tools such as ChatGPT and other AI applications. Citing this is not meant as any commentary on the potential of a company developing software as a future holding – and our investment manager is in a much better position to comment on the potential (or not) of such companies to be portfolio holdings in the future. What it does demonstrate though is the unstoppable development of technology and that it is unlikely to slow anytime soon. The possibility of such a tool writing this report is real given the right prompts into the tool. Indeed, some commentators postulate that these tools can answer university degree questions with some success and articles have already started to foretell a change in the way we will work in the future. Microsoft is certainly taking it seriously, investing $1bn in OpenAI, the developer, in 2019 to gain exclusivity over the product with the aim of bolstering its embedded search engine, Bing.
Microsoft believes that OpenAI’s artificial intelligence tools and platforms have the potential to significantly improve its search engine capabilities, offering more accurate and better-tailored search results. Microsoft also believes that OpenAI’s AI technology could help it create more efficient and powerful cloud-based services, enabling it to better serve its customers and reach new markets. Microsoft’s investment in OpenAI is an indication of how seriously the tech giant is taking AI, and how it wants to make sure it’s always at the cutting edge of the technology.
That last paragraph was generated by AI using GPT-3, but I promise you the rest was from the human mind!
As ever, my statement is not intended to substitute for the Review from the Investment Manager and I would urge you to read the in-depth explanations of the factors affecting performance from the team starting here.
As you will be aware, the Investment Manager considers ESG risks as part of the stock analysis and investment management process. The Board were able to see the process in action during their visit to San Francisco, including visiting a selection of investee companies and hearing how they are dealing with ESG issues from a business management perspective.
The Board remains cognisant of investors’ concerns and desire to understand better the broader impact of the investment choices that they make. Given the nature of the Company, the Board consequently engages closely with the related policies and processes of Voya as the Investment Manager and AllianzGI UK as the AIFM.
The Strategic Report found here contains full details of the comparative data that in the past we have included in this Statement. In summary the Company’s performance is very strong over longer time periods.
Your Board has maintained its close attention to the costs of running the Company. In a year in which NAV has fallen substantially, I am pleased to report that the Company’s Ongoing Charges Figure (‘OCF’), which is calculated by dividing ongoing operating expenses by the average NAV, has only risen very marginally from 0.69% to 0.70%. This follows a sustained reduction in OCF over previous years. The management fees payable in 2022 were moderated by being calculated on the market value of the Company and not the NAV.
The OCF excludes any performance fee due to the manager. Once again no performance fee has been earned in 2022 due to continued underperformance against the benchmark. It should be noted that the underperformance suffered over the past two years will have to be made back, as well as the NAV once again exceeding the level at the end of 2020 (which set a new high watermark) before any future performance fee can be accrued.
The Board is pleased to both issue shares when there is sufficient investor demand, and to consider buying back shares when the shares trade at a significant discount. 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. For significant periods of 2022 the discount has been in excess of that level and buybacks have been executed accordingly on a frequent basis.
Overall, market purchases of £39 million of shares were undertaken, at an average discount of 12.18%. All shares repurchased over the period have been held in treasury rather than cancelled as this makes them readily available to be reissued if sufficient demand occurs in the future. The repurchase of shares during the year enhanced the NAV by 44bps.
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 recommends that Shareholders vote in favour of both of the proposed resolutions.
The Board will continue to consider the issuance of new shares subject to shares only being 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 also be subject to the criteria set out above being met and where it is felt to be beneficial to shareholders.
As we had notified shareholders in 2022, our management contract with AllianzGI for investment management (delegated to Voya), accounting, company secretarial and administrative services as AIFM of the Company is due to transfer to Allianz Global Investors UK Limited (‘AllianzGI UK’) which is a new FCA authorised and regulated UK entity taking on all activities of the UK Branch of AllianzGI. This change is occurring as a result of the UK leaving the EU and is to take place once the legal set up is arranged to ensure compliance with the regulatory regime. The Board is assured that there will be no change to the portfolio management services (delegated to Voya) nor to the administration services received by the Company. There will be no increase in the management or administrative expenses of the Company as a consequence of this change. Details of the existing arrangement with the AIFM are in the Directors' Report here.
Despite the continuing challenges for the Company this year in performance terms, the Board was delighted to once again in 2022 be awarded “Best Report and Accounts (Specialist)” by the AIC, having previously won the same award in 2021, 2020 and 2018. The Board tries to continually evolve in terms of this key shareholder communication piece and this year you will see further, wider-ranging changes.
As previously announced Katya Thomson was appointed to the Board last July and has now succeeded Humphrey van der Klugt as Chairman of the Audit & Risk Committee with effect from 1 January 2023. I am pleased to confirm that Humphrey continues as a non-executive Director and Senior Independent Director.
I will be stepping down as Chairman and non-executive Director at the Company’s forthcoming AGM and therefore will not stand for re-election. The Board, overseen by Humphrey van der Klugt, the Senior Independent Director, has agreed that Tim Scholefield who has been a Director since December 2021, be appointed as Chairman at the conclusion of that meeting. Tim has already made a strong contribution to the Board, and I believe that shareholders should have full confidence in their Board going forward.
I confirm that the annual Board and Manager performance appraisal process, conducted internally this year, concluded that the Board has continued to work in an effective manner. In accordance with the AIC code, all Directors with the exception of me, are proposed for election/re-election.
This year’s AGM will be held on 26 April 2023 at 2.30pm. The full Notice of Meeting can be found here.
The AGM will be a hybrid meeting, meaning shareholders can either attend physically or online. However, after two years of trialling online voting, we will not be providing that service again for the 2023 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 by the proxy voting process by the deadline of 24 April 2023 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 Investment Manager will be made at the start of the meeting. For those unable to attend either physically or virtually, this 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.
We would like to take the opportunity to remind shareholders that you have the right to vote on important matters that affect your Company, such as the election of directors and the proposed renewal of share issuance authorities. We feel it is important that shareholders are encouraged to make their voices heard by voting on all business matters. Instructions on how to vote your shares can be found in the Notes to the Notice of Meeting here.
As the vast majority of individual shareholders hold their shares on an investment platform in a nominee account, we are pleased to see continuing action from some of the larger platforms to enable nominee shareholders to access relevant documentation and record their votes.
It is difficult, if not impossible, to predict what might happen with the geopolitical landscape as well as with the global economy as we move forward through 2023. As I write, the war in Ukraine continues, unfortunately with no obvious end in sight yet, and other significant geopolitical tensions also persist.
There is some evidence of inflationary pressures easing from a macro perspective, but whilst markets have already made some positive moves on expectation of possible easing interest rates, there is also conflicting rhetoric from many central banks which indicate the easing may not be as swift or widespread as some would hope.
Despite recent volatility the long-term secular growth story for technology investing remains intact and is powerful. Returns are likely to accrue disproportionately to a small number of ‘winners’ and this should reward an active, and probably patient, style of portfolio management. We have confidence in the Investment Manager’s ability to drive long-term relative performance through the team’s high conviction expertise as they continue to focus on identifying trends that have the potential to uncover tomorrow’s Apple or Microsoft.
Robert JeensChairman10 March 2023
