Annual report and accounts. for the year ended 30 April Polar Capital Technology Trust PLC - PDF

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Annual report and accounts for the year ended 30 April 2009 Polar Capital Technology Trust PLC Polar Capital Technology Trust Plc ProfilE Polar Capital Technology Trust PLC was launched on 16 December
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Annual report and accounts for the year ended 30 April 2009 Polar Capital Technology Trust PLC Polar Capital Technology Trust Plc ProfilE Polar Capital Technology Trust PLC was launched on 16 December 1996 under the name Henderson Technology Trust PLC, with the issue of ordinary shares plus one warrant attached to every five shares. The original subscription price for each share was 1. On 30 September 2005 the warrants reached their final exercise date and were converted into ordinary shares of the Company. In 2005, the shareholders voted to continue the life of the Company and they will have in 2010 and every five years thereafter the right to approve, or otherwise, the continued existence of the Company. OBJECTIVE The investment objective is to maximise long-term capital growth for our shareholders through investing in a diversified portfolio of technology companies around the world. The investment policy is set out in full in the Directors Report. BENCHMARK The Company has a benchmark of the Dow Jones World Technology Index (total return, sterling adjusted) against which NAV performance is measured for the purpose of assessing performance fees. RATIONALE Over the last two 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. INVESTMENT APPROACH Stocks are selected for their potential for shareholder returns, not on the basis of technology for its own sake. The investment manager believes in rigorous fundamental analysis and focus on: management quality the identification of new growth markets the globalisation of major technology trends and exploiting international valuation anomalies and sector volatility MANAGEMENT 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 Mr Craig Mercer is deputy fund manager and along with Mr Ben Rogoff is supported by a team of technology specialists. FEES The Company pays both a basic management fee as well as a performance fee if performance is above a predetermined level. Further details are given in the Directors Report. Information on the Company can be accessed at: and further shareholder information is given at the back of this report. Investors should be aware that the value of the Company s shares may reflect the greater relative volatility of technology shares. Technology shares are subject to the risks of developing technologies, competitive pressures and other factors including the acceptance by business and consumers of new technologies. Many companies in the technology sector are smaller companies and are therefore also subject to the risks attendant on investing in smaller capitalisation businesses. Shareholder s attention is drawn to the warning given on Page 60 to Boiler Room Scams. Polar Capital Technology Trust PLC Contents ABOUT YOUR COMPANY INSIDE FRONT COVER Profile 2 Highlights 3 Chairman s Report PORTFOLIO ANALYSIS 5 Investment Manager s Report 14 Fund Distribution by Market Capitalisation/ Classification of Investments 15 Largest Investments / Top Twenty DIRECTORS REPORT 20 Directors 21 Business Review and The Report on Corporate Governance 34 Directors Remuneration Report FINANCIAL STATEMENTS 36 Statement of Directors Responsibilities in respect of the Annual Report, Director s Remuneration Report and accounts 37 Independent Auditors Report 38 Consolidated Income Statement 39 Consolidated and Company Statements of Changes in Equity 40 Consolidated and Company Balance Sheets 41 Consolidated and Company Cash Flow Statements 42 Notes to the Accounts SHAREHOLDER AND INVESTOR INFORMATION 61 Capital Gains Tax and Other Information 64 Historic Performance INVESTING INSIDE BACK COVER Share Savings Scheme Information Certain statements included in this Annual Report and Accounts contain forward-looking information concerning the Company s strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which the Company operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Company s control or can be predicted by the Company. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the principal risks and uncertainties included in the Business Review on pages 21 to 24 of this Annual Report and Accounts. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Polar Capital Technology Trust plc or any other entity, and must not be relied upon in any way in connection with any investment decision. The Company undertakes no obligation to update any forward-looking statements. ANNUAL REPORT AND ACCOUNTS Highlights FINANCIAL Year ended Year ended Movement 30 April April 2008 % Net assets per ordinary share p p (4.4%) Price per ordinary share p p (4.1%) Total net assets 274,179, ,425,000 (8.7%) Shares in issue 126,497, ,508,914 (4.5%) INDEX CHANGES over the year ended 30 April 2009 (Total Return) Local Sterling Currency % Adjusted % Benchmark Dow Jones World Technology (29.3) (5.5) Technology Indices: NYSE Arca Technology 100 (23.3) 2.5 FTSE Techmark 100 (13.8) Tecdax (30.3) (20.7) Tokyo SE Electronics (39.8) (14.5) MSCI AC Asia Pacific ex Japan Information Technology (35.8) (14.2) Market Indices: FTSE World (18.2) S&P 500 Composite (35.3) (13.5) FTSE All-Share (26.9) FTSE World Europe (ex UK) (26.3) Tokyo SE (Topix) (36.9) (10.5) FTSE World Pacific Basin (ex Japan) (20.5) EXCHANGE RATES 30 April April 2008 US$ to Japanese Yen to Euro to Polar Capital Technology Trust PLC Chairman s report Review of the year Most equity investors suffered heavy losses during the last financial year. What appeared at first to be a crisis of liquidity rapidly deteriorated into one where the solvency of much of the financial system came into question. Despite exceptional and coordinated intervention around the world, the global economy plunged into a recession which, in many countries, has been unprecedented in the scale and speed of the collapse in economic activity. Indeed, so rapid and intense has been the deterioration in the business climate that many companies have found it impossible to adjust their operating costs rapidly enough to avoid a dramatic decline in earnings. For most of our financial year, investors were in disorderly retreat and, at times most notably following the collapse of Lehman Brothers there has been little faith in the security of any investment and, unsurprisingly, none at all in the moral rectitude of the banking industry popularly perceived to have led the world into this crisis. Rather than add to the voluminous commentary on the origins and development of this economic disaster, I will confine myself to the observation that no amount of creativity on the part of financial engineers can indefinitely prolong a state of affairs where consumption materially exceeds income. The negligence of the political elites in the developed world in encouraging their electorates to believe otherwise has provided an opportunity for a rapacious but highly imaginative body of professional financiers to extend this fundamental disequilibrium far beyond reason. We are now paying for the consequences. The United Kingdom has been one of the most profligate players in this folly and it is a testament to the esteem in which our government is held by international investors that Sterling should have been one of the weakest major currencies over the last twelve months. Fortunately, the decision by our fund managers to reduce greatly our exposure to the UK over recent years has meant that currency gains have helped to ameliorate the very material losses that our portfolio has experienced in local currency terms. Over the financial year, Sterling fell by 25% against the US dollar and by 30% against the Japanese Yen. The other positive influence in a very difficult year has been the strong relative performance of the technology sector. While the demand for technology based products and services has been hard hit by the onset of recession, the sector has benefited from two factors. First, technology companies tend to be cash rich and have been restrained in their use of leverage to enhance returns. Secondly, the industry has demonstrated tight cost management and is correctly perceived to be an early beneficiary of any improvement in demand that may be generated by the aggressive monetary and fiscal expansion now underway. Over our financial year, technology shares strongly outperformed the broad market in both the USA and Europe. Your Company s net asset value per share fell by 4.4% which outperformed both the Dow Jones World Technology Index and the FTSE World Index which fell 5.5% and 18.2% in Sterling terms respectively. Our NAV performance over this difficult period also compares favourably with most technology and all major market indices. This result was helped by our increased US weighting, by our limited exposure to European and Japanese smaller companies and by retaining some cash in the portfolio during the second half of our financial year. There was also an uplift of ANNUAL REPORT AND ACCOUNTS Chairman s report (continued) 1.6p per share to NAV as a result of our repurchase of just over six million shares at discounts to NAV ranging from 14% to 28% and the Company also benefited from a VAT refund of nearly 1.3m (including interest) for the period , equivalent to 1 p per share in NAV terms. Equity markets have bounced back from their early March lows which were reached amidst widespread gloom and fears that the recession could spiral downwards into a prolonged depression. According to a number of surveys, investor sentiment at that time reached levels of pessimism that exceeded any recorded in the last twenty years. There has been much debate about the sustainability of the rally in share prices since the March lows. Where the bulls see the green shoots of recovery, the bears see a toxic mountain of debt that will stifle any but the most modest economic progress. As the current economic environment has few precedents, the debate promises to rage for some time. We believe that March marked a sentiment low and that the deceleration in the pace of economic deterioration may yet evolve into a cyclical upturn albeit one of questionable strength and duration. The global economy has received an unprecedented stimulus from government actions although undoubtedly the degree of leverage that preceded it necessitated dramatic action. It would be surprising if we were not to see some degree of economic stabilisation but the medium term outlook remains very unclear and the question of whether the politicians have simply postponed (yet again) a greater day of reckoning remains unanswered. The markets ahead are going to be very challenging and we need to be even more alert than usual. Outlook Difficult though the conditions ahead may be, we take some comfort from our investment specialisation. In a world where sustainable economic and earnings growth may be materially less than over the last two decades, genuine growth stocks a category in which technology shares are well represented should fare relatively well, reflecting their superior relative earnings growth. Moreover, technology is and will remain a key factor in tackling many of our world s greatest challenges: the need for increased productivity in a slower growing economy; the needs of the aging population of the developed world; climate change and resource shortages; and the growing challenges of personal and public security. Moreover the technology industry will be addressing those opportunities from a position of exceptional financial strength and with many valuable lessons learned during the hard years that followed the end of the internet boom. We are encouraged by the sector s performance over the last year and, while short term sentiment towards the industry suggests a period of more subdued relative performance, we are optimistic about the longer-term outlook for our chosen specialist area. The Board has decided that in view of developments in the technology market it would be desirable to enhance the Company s geographical investment flexibility. Consequently, within the overall maximum exposure limit of 100% of the portfolio to any one market, we have adjusted the market parameters guidance to allow for up to 85% (hitherto 75%) of the portfolio to be in North America. AGM The Company s annual general meeting will be held on 29 July and as last year it will be at the Royal Automobile Club. I hope that shareholders will take the opportunity to attend and hear our investment manager s presentation and meet the Board. Richard Wakeling 11 June Polar Capital Technology Trust PLC investment Manager s Report US / WORLD OVERVIEW The past year has been a tumultuous one that witnessed one of the most devastating financial crises and economic declines in modern history. Whilst global equities have rallied sharply from their recent lows, it was insufficient to redeem a year that still saw most equity markets lose more than one third of their value in local terms. However, pronounced Sterling weakness (which fell 25% and 30% against the Dollar and Yen respectively) significantly ameliorated these losses. Stocks began our financial year on a positive note, but in June the exponential rise of commodity prices (oil reaching $145) presaged one of the sharpest monthly declines experienced since September 2002 as it essentially shifted the central banks focus from growth towards inflation containment. However, it was the combination of AIG s collapse, the nationalisation of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers in September that set in motion a massive intensification of the crisis with credit markets essentially seizing up. Equities collapsed under the weight of hedge fund redemptions and forced de-leveraging. Whilst far from obvious at the time, the post-lehman intensification was probably a pre-requisite for any future recovery as it rendered so-called moral hazard irrelevant. Faced with a potential systemic collapse, central banks attempted to counter the de-leveraging by bailing-out the banks whilst reducing interest rates to record low levels. At the same time, policy makers introduced legislation that extended sovereign guarantees to a plethora of instruments and markets that had become dysfunctional. However, heightened mistrust required a more systematic approach; in late September Ireland got the ball rolling when the government moved to essentially guarantee the banking system, rather than elements thereof. Similar guarantees soon followed around the world which helped reduce the tempo of de-leveraging, whilst the introduction of the $700bn Troubled Asset Relief Programme ( TARP ) by the US administration in October was the first of several gargantuan efforts designed to help improve the liquidity of mispriced assets. By the end of October stocks had become comprehensively oversold and cheap for instance, Japanese stocks traded below book value for the first time since records began. At this point, sentiment was at such a low ebb that it had become fashionable to suggest that capitalism itself was on the ropes. Although equities staged a very respectable calendar year end rally, early in 2009 the real economy began to feel the full force of the financial crisis, leading to one of the worst ever starts to a calendar year for equity markets. A slew of negative macroeconomic data in January confirmed that the current downturn had become the most precipitous experienced in the post-war period. A lukewarm reception to US Treasury Secretary Geithner s Financial Stability Plan provided the catalyst for an equity slump that saw most markets breach their November lows. Creeping nationalisation of the UK and US banking systems together with some spectacularly weak data added further fuel to the fire. At their mid-march lows, global equities had fallen an incredible 59% in US Dollar terms (i.e. without the mollifying impact of Sterling s pronounced weakness) from the October 2007 highs whilst investor sentiment had plunged to levels not seen since the dark days of October Thus the stage was set for a rally that began as a short-squeeze, but subsequently broadened and extended following Geithner s follow-up proposals that better detailed a way to rid banks of bad assets. Amid rebounding sentiment, a clear change of focus meant the discovery of green shoots everywhere investors cared to look. Rare positive data points were lauded whilst poor ones (US unemployment at 8.1%, advanced reading of US Q1 GDP of -6.1%) were dismissed as lagging indicators or symptomatic of a trough. In short, stocks were no longer falling on bad news. Supportive rhetoric at both the G20 summit in London and the April Federal Open Market Committee (FOMC) meeting added to the sense that the ANNUAL REPORT AND ACCOUNTS investment Manager s Report (continued) worst had already passed, reinforced by easing of mark-to-market accounting rules for banks and encouraging preliminary results of the Treasury stress tests. A significant improvement in US consumer confidence and market resilience following the outbreak of swine flu towards month-end added weight to the view that bear market lows had already been made. TECHNOLOGY OVERVIEW The technology sector delivered its best relative fiscal year performance since the heady days of 2000, the Dow Jones World Technology index falling just 5.5% in Sterling terms over the period. Outperformance was initially driven by what the sector did not have namely exposure to financial leverage, emerging markets and commodity prices the same attributes that helped ensure its muted participation during the last cycle. However, by the first quarter of 2009 the technology sector began to outperform based on what it had to offer, rather than on what it did not. In the first instance, the severity of the Q4/Q1 downturn saw stocks with early-cycle characteristics (such as semiconductor / component companies) outperform as investors began to discount the trough, looking instead at ways to gain exposure to the socalled second derivative trade without the balance sheet risk associated with financials. A predictably tough Q4 technology earning season was not only better than that posted by the broader market, but the magnitude of cost-cutting efforts was a genuine surprise and served to reduce the scale of downward revisions to 2009 forecasts. Most importantly, the sector had so significantly de-rated that US technology stocks traded at just 0.9x the market multiple based on forward estimates one of the few times that the sector has traded at a discount. The positive news that followed a better than feared Q1 earnings season, inventory replenishment, firming component prices and corporate M&A resulted in a re-rating (from 0.9x to 1.1x at period end) which drove material stock outperformance. OUR PERFORMANCE The Trust s NAV fell 4.4% as compared to the 5.5% decline registered by the Dow Jones World Technology index in Sterling terms. Once again, US technology stocks materially outperformed; our decision to increase our US exposure at the expense o
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