Polar Capital Technology Trust Regulatory News (PCT)

POLAR CAPITAL TECHNOLOGY TRUST PLC

UNAUDITED RESULTS ANNOUNCEMENT FOR THE SIX MONTHS TO 31 OCTOBER 2023

No interim dividend has been declared for the period ended 31 October 2023, nor were there for periods ended 31 October 2022 or 30 April 2023, and there is no intention to declare a dividend for the year ending 30 April 2024.

~See Alternative Performance Measure below.

^The financial information for the six-month periods ended 31 October 2023 and 31 October 2022 have not been audited. The figures and financial information above and in the following pages, for the year ended 30 April 2023 are an extract from the latest published Financial Statements and do not constitute statutory accounts for that year.

References throughout this document to "the Company" or "the Trust" relate to Polar Capital Technology Trust PLC while references to "the portfolio" relate to the assets managed on behalf of the Company.

INVESTMENT MANAGER'S REPORT

Market Review

The fiscal half year from 30 April to 31 October 2023 saw global markets continue to rebound from lows in March, to almost recover their December 2021 highs by the end of July. Investors were pulled back into the market as the US regional banking and Credit Suisse turmoil appeared contained and economic growth remained firm, supported by tight labour markets and a resilient consumer. However, the market recovery proved short-lived and gave back about half the gains by the end of October as financial conditions continued to tighten and geopolitical risks increased.

The US once again led global markets, in Sterling terms, as the S&P 500 Index returned +5%, ahead of Europe (Eurostoxx 600 -6.2%), Japan (TOPIX -3%) and Asia ex-Japan (MSCI All Country Asia ex-Japan Index -2.8%). Local currency returns ex-US were even weaker as the trade-weighted dollar (DXY) strengthened by 5.9%. Within the US, large caps continued to dominate returns as the Russell 1000 Index (large cap) returned +4.9% against the Russell 2000 Index's (small cap) -2%. In only one year since 1990 has there been a greater positive return spread between the S&P 500 cap-weighted (+10.2%) and equal-weighted (-2.8%) indices' returns year to date. The Russell 2000 Index broke 2022 lows, revisiting November 2020 levels when Pfizer's vaccine data first emerged. Breadth weakened through the period, as the percentage of companies outperforming the NYSE declined by 34.5% to just 20.7%, and the concentration of the largest seven (primarily technology) companies reached almost 30% of the S&P 500 by the end of October. This phenomenon has been felt in global indices: while the US accounts for 62.7% of the MSCI All Country World Index, it is only 45.6% if the so-called 'Magnificent Seven' companies are excluded.

Despite widespread pessimism at the start of the calendar year, global growth came in ahead of expectations, supported by resilient consumer spending and strong labour markets. Even as central banks hiked rates aggressively, inflation came down without triggering a recession or even an increase in the unemployment rate, which still sits below pre-pandemic levels in many countries. Decisive central bank tightening actions were important to ensure that price increases were not embedded in higher inflationary expectations. However, the drag on growth from monetary factors was offset by the post-Covid improvement in goods and labour supply and a sustained rebound in services demand. Central bank balance sheets contracted during the period but remain significantly larger than they were pre-Covid, which supported liquidity even as financial conditions tightened.

The US economy was particularly strong during the fiscal half year. Q1 US economic growth was revised up, with Q1 real GDP growth of +2.2% on a q/q (quarter-on-quarter) seasonally adjusted annual rate (SAAR) basis, which accelerated to +4.9% in Q3. The US economy added an average of 205,000 jobs each month during the fiscal half year, although the 'quits rate', (when an employee voluntarily leaves their job) nearly returned to pre-pandemic levels and average hourly earnings growth trended lower.

Inflation continued to trend down despite the stronger economy, albeit frustratingly slowly from a policymaker's perspective. US core PCE (personal consumer expenditure, which excludes volatile items such as food and energy and is the Fed's preferred measure) fell from 4.8% in April to 3.7% in September and core CPI (consumer price inflation) declined from 5.5% to 4.1% over the same period. This eased concerns about the need for more aggressive rate rises and longer-term measures of inflation expectations; both inflation swap markets and consumer surveys suggest these remain well anchored.

After a June pause, at its July meeting the Fed raised the benchmark interest rate by 25 basis points (bps) to a 5.25-5.5% target range, a 22-year high. Although the Fed did not raise the fed funds rate thereafter, financial conditions continued to tighten with the equivalent effect of a further 75bps of rate hikes as 10-year Treasury yields climbed to touch 5%, the highest point since 2007. The scale of the move in yields was highly significant and, by the end of September, Treasury yields had posted their largest quarterly rise since 1Q09 (bond yields move inversely to prices). This was driven by a number of factors, including increased Treasury issuance after the debt ceiling was raised, ongoing quantitative tightening (lower demand for government bonds from the Federal Reserve) and a US credit rating downgrade by Fitch Ratings, as well as concerns about China potentially offloading US Treasuries to bolster the yuan.

Commentary from some Federal Reserve board members suggested they expected interest rates to stay higher for longer, and the Fed's September meeting projections indicated the expectation for only 50bps of cuts in 2024 (down from 100bps in the June projections). Oil prices also increased during the period, surpassing $95 in late September and up from the low-$70s in June, which may have been responsible for an uptick in consumer inflation expectations given the importance of gas prices to this metric.

Markets were buffeted by elevated levels of political risk. The narrowly averted US government shutdown and downgrade by US rating agency Fitch focused investors' attention from monetary policymakers (central bankers) towards their fiscal counterparts (politicians). These included a hard-fought battle over raising the debt ceiling (the maximum amount of debt the US government can hold) which concluded in June and narrowly averted a government shutdown, and the ousting of the House Speaker for the first time in history. President Biden became the first sitting President to walk a picket line with the United Automobile Workers, and striking Hollywood writers only agreed to go back to work following a deal with the studios regarding working conditions and rules governing the adoption of artificial intelligence (AI).

Technology review

The technology sector outperformed the broader market during the fiscal half-year period as the Dow Jones Global Technology Index returned +12.8% against the FTSE World Index's +2.0%. The two major technology market themes during the period were the continued dominance of the largest technology companies and the proliferation, evolution and investment implications of AI.

Large-cap technology stocks once again significantly outperformed their small and mid-cap peers as the Russell 1000 Technology Index and Russell 2000 Technology Index delivered returns of +16.1% and +3.8% respectively. For the calendar year through to the end of October, the gap between the two extended to an extraordinary 40 percentage points (ppts) as the Russell 1000 Technology Index's +41.7% return has dwarfed the Russell 2000 Technology Index's +1.9%. Returns were led by the largest technology companies which in part explains why the S&P 500 Information Technology Sector saw its valuation premium to the S&P 500 Index expand to 1.36x from 1.21x at the start of the calendar year, against a 10-year average of 1.1x. However, this valuation expansion was not experienced beyond the US; the Dow Jones World ex-US Technology sector (W2TEC) which has no mega-cap constituents, significantly underperformed (+1.8%). In the US, all tech subsectors performed strongly: the Philadelphia Semiconductor Index (SOX) returned +11.9% while the NASDAQ Internet Index and Bloomberg Americas Software Index delivered +10.6% and 11.3% respectively.

AI dominated proceedings across most technology subsectors. Semiconductor investors focused on the AI-related semiconductor supply chain as cloud providers invest in advance of the anticipated scaling of AI workloads. NVIDIA returned +52.2% after an extraordinary April quarterly earnings report and next quarter revenue guide ($11bn versus $7.2bn expected), whereupon the stock added the largest single-day market-cap gain in US stock market history and touched a $1trn market cap. A number of smaller-cap semiconductor supply chain and semiconductor capital equipment stocks performed well as alternative ways to gain exposure to the AI/parallel computing trend. In the real world, strength in AI-related data centre spending 'crowded out' non-AI spending in areas such as CPU (central processing unit)/cloud servers, reinforcing the divergence in semiconductor stock price returns. Beyond AI/data centre, semiconductor fundamentals were mixed; communications infrastructure spending remained weak, PC and smartphone inventory cycles appeared to bottom while automotive and industrial end markets held up well (although this was challenged during Q3 earnings announcements in early November).

Given the strategic importance of AI, the US government took further steps to curtail China's ability to compete, including banning the export of some leading-edge semi-cap equipment (putting pressure on other governments to undertake similar actions) and preventing the sale of the most advanced AI chips to China. These rules will be updated every year as technology advances continue. Wafer fabrication equipment (WFE) spending is now expected to reach $80bn this year, up from previous expectations in the low $70bn range, with the incremental upside coming from China (perhaps in anticipation of tighter regulations). US government subsidy also played a major part; structures and investments related to the Inflation Reduction Act (IRA) and CHIPS Act have accounted for essentially all the growth in US non-residential fixed investment this year.

During the fiscal half year, aggregate public cloud revenue growth stabilised at c19% for the second quarter running after eight consecutive quarters of year-over-year (y/y) deceleration. Amazon Web Services (AWS) growth appeared to have bottomed, while AI-driven strength at Microsoft contrasted with some softness at Google. Customers continued to 'optimise' their spend across all cloud providers, but new initiatives began ramping up to help offset this. Ongoing optimisations weighed on 'cloud consumption' software models such as Snowflake and Datadog, which saw further downward resets to growth expectations.

In application software, larger enterprise-focused companies such as ServiceNow and Adobe continued to deliver steady results in a challenging environment while the demand backdrop for SMB (small and medium-sized business)-focused players such as HubSpot and Paycom Software appeared to deteriorate. Application software companies announced (and in some cases brought to market) a slew of 'AI-powered' products, although few appear to be given the full benefit of the doubt by investors (or customers) thus far. Revenue growth in the software sector overall has been decelerating for two years (since mid-2021), and the sector rallied from May lows as companies rerated on the hope of a growth inflection. However, higher rates and macro concerns soon reasserted themselves and companies have been reluctant to guide for a meaningful reacceleration while IT budgets remain under such tight scrutiny.

Cybersecurity was a bright spot as budgets remain strong and the increasingly sophisticated and ever-evolving nature of cyberattacks enabled by AI will require new tools and capabilities to defend against them. We have also seen the first movements on AI regulation. The European Union announced the AI Act in June 2023, which seeks to take a risk-based approach to AI regulation, including the banning of "unacceptable risk" activities such as cognitive manipulation of people, social scoring and facial recognition. President Biden issued an executive order at the end of the period which established new standards for safety and security, in an attempt to reduce risks posed by AI and establish a threshold for chip processing power above which there are disclosure requirements.

In the internet sector, the largest e-commerce players (Amazon and Shopify) continued to consolidate market share gains and deliver strong results as the online consumer remained resilient while a higher cost of capital has decimated smaller peers (a dynamic which helped other 'vertical leaders' such as Uber Technologies). Similarly, the largest advertising networks (Meta Platforms (Facebook)), Alphabet (Google) benefited from easy year-over-year comparators and the ongoing impact of their AI investments, for example in ad targeting and campaign optimisation. Profitability also notably improved for the larger players as the effect of earlier workforce reductions and tighter cost management had a positive impact on margins. Smaller players struggled, especially those with weaker balance sheets or aggressive online Chinese competition, such as Match.com and Etsy. Travel spending was robust as the post-Covid boom showed little sign of subsiding during the summer months, although both Booking.com and Expedia Group called out some weakness in travel trends in early October.

Interest rate-sensitive subsectors such as fintech were most challenged during the half year. The Global X Fintech ETF declined -7% as both cyclical factors (higher rates; credit cycle concerns) and structural questions (elevated competitive intensity; sustainability of growth) weighed on the sector.

The IPO market tentatively reopened during the half-year period, as the high profile ARM IPO raised c$5.2bn. There was a smattering of other noteworthy technology IPOs (Instacart; Klaviyo; Kokusai Electric) but capital markets activity remained fairly subdued overall. Venture capital funding is trending to be c40% down y/y in 2023, although AI-based venture funding has been robust.

Portfolio performance

The Trust modestly underperformed its benchmark, with the net asset value (NAV) per share increasing by +12.1% during the first half versus +12.8% for the sterling-adjusted Dow Jones Global Technology Index. While growth outperformed value during the period, this largely reflected the remarkable performance of a select group of US mega-cap stocks which delivered strong positive returns in contrast with moribund or even negative returns in other geographies and market-cap tiers. Although the Trust benefited from large absolute positions in a number of these stocks, it remains structurally underweight in large-caps in favour of growthier small and mid-caps. We were pleased the Trust delivered top quartile performance versus our Lipper peer group for the fiscal half year and calendar year to date, although this undoubtedly speaks to a challenging environment for most active managers against a cap-weighted benchmark firing on most cylinders. Beyond the divergence in large and small-cap stocks, the most significant detractor to relative performance was our average cash position of 5.5% and NDX (NASDAQ 100) put options which cost 56bps and 24bps respectively. However, stock selection was positive in both the US and Europe - helped by significant exposure to AI-related names - despite pronounced outperformance of mega-cap stocks. The Trust's share price advanced by 10.6%, reflecting the 12.1% higher NAV, offset by the discount widening from -13.4% to -14.5% during the period. We continue to monitor the discount and the Trust bought back 3.04 million shares during the period.

The half year proved an active one for the portfolio as we rotated decisively towards AI as a primary investment theme. This was mainly focused within the semiconductor subsector where we initiated new positions in memory-related assets (such as Micron Technology and Rambus), advanced packaging (BE Semiconductor Industries), testing (Advantest; Camtek) and EDA software (Cadence Design Systems; Synopsys). We also made a series of investments in smaller Asian component and materials companies that we believe have a more significant role to play in AI chip and server manufacturing than they did during the cloud era. In addition, we recalibrated our software exposure towards companies which appear able to monetise AI within their existing offerings (Adobe; Monday.com) as well as adding several data-related assets (Datadog; Teradata) that should benefit from the growth in AI-related workloads and the need for better data. We also initiated positions in several idiosyncratic longer-duration assets with an AI angle (Evotec; Oxford Nanopore Technologies) following significant share price weakness largely related to higher risk-free rates.

In contrast with AI-related assets, where demand for servers, chips and related components increased significantly, sharply higher interest rates and a disappointing Chinese post-Covid recovery trajectory began to negatively impact demand in a number of other subsectors. As a result, we significantly reduced our exposure to interest rate-sensitive areas such as fintech (exited Adyen, GMO Payment Gateway), and alternative energy (sold Enphase Energy, SolarEdge Technologies). We also reduced our exposure to electric vehicle (EV) and related assets as higher interest rates began to negatively impact EV demand via increased financing costs. We exited Chinese EV maker BYD and several auto-exposed semiconductor suppliers (Infineon Technologies; ON Semiconductor). The faltering Chinese economic recovery resulted in us also exiting Alibaba Group Holding as well as reducing our exposure to robotics-related companies (Cognex; Nabtesco). We also exited a number of software application companies (Freshworks; Paycom Software; Smartsheet) due to nascent concerns that AI might pose a meaningful risk to so-called 'point solutions' relative to larger platforms. Towards the period's end, conflict in the Middle East and some concerns around the health of the US consumer led us to reduce travel-related names including Airbnb.

At the stock level, our zero-weight position in Broadcom* (+39%) proved the most significant detractor to relative performance as we opted for alternative ways to gain exposure to AI-related semiconductors. Likewise, our underweight position in Adobe (+46%) dragged on performance following the introduction of its Firefly AI image generation offering. Strong absolute performances from other mega-cap holdings weighed on relative performance too, with the combination of Alphabet (+20%), Meta Platforms (Facebook) (+30%) and Microsoft (+14%) dragging by a combined 43bps. The combination of increased cyclical headwinds and a crowding out of non AI-related spending (as budgets were reallocated) resulted in weakness at a number of semiconductor and component companies including Lattice Semiconductor (-28%) and Unimicron Technology (-3%). The same dynamic, together with faltering Chinese demand, also impacted robotics and automation stocks such as Keyence (-11%) and Harmonic Drive Systems (-27%). Higher risk-free rates weighed on alternative energy holdings such as First Solar (-19%) and Ceres Power Holdings (-43%) as yields associated with solar and hydrogen projects became relatively less attractive. However, weakness associated with this dramatic change of fortunes for clean tech companies was mitigated by timely reductions and complete exits of related holdings. Likewise, interest rate-related weakness in fintech companies including Adyen (-57%) and GMO Payment Gateway (-48%) was ameliorated by timely sales, although both Visa (+5%) and Mastercard (+2%) both dragged on relative performance. As ever, there were also a few genuine disappointments at the likes of Cognex and Ceres Power Holdings, although these were largely contained to the portfolio tail.

Although the significant outperformance of mega-cap stocks during the period represented a meaningful headwind to our growth-centric investment approach, the Trust benefited from positive stock selection and an overweight exposure to the AI theme that rightly dominated returns and investment discourse during the period. Our 6.9% average position in GPU (graphics processing unit) chipmaker NVIDIA (+52%) versus a benchmark weighting of 6.4% delivered a remarkable 240bps of absolute performance during the half year. However, other AI-related assets delivered greater relative performance as the likes of Disco (+58%) and Fabrinet (+69%) benefited from new processes and products required by AI-related chips and modules. The portfolio also benefited from companies exposed to AI-related data centre spending such as Arista Networks (+29%) and Pure Storage (+53%). Cybersecurity also proved a relative bright spot within software as budgets proved relatively robust amid several high-profile breaches and concerns that AI is already increasing the so-called 'attack surface' available to cyber-criminals. This, together with some valuation recovery, resulted in strong performance contributions from a number of cybersecurity holdings including CrowdStrike Holdings (+52%), CyberArk Software (+36%) and Palo Alto Networks (+38%). Likewise, stabilisation of cloud workload optimisation together with strong fundamentals and the potential for future AI-related demand saw both MongoDB (+49%) and Amazon (+31%) deliver strong positive returns. Finally, relative performance benefited from a rare period of underperformance from Apple (+4%) as iPhone fell short of expectations, largely a function of a particularly weak smartphone market.

Market outlook

Recent months have offered investors an environment where economic growth and index level returns have been strong but there has been a great deal of volatility and even outright weakness beneath the surface. While the range of macroeconomic outcomes has likely narrowed as risks around inflation and higher rates have been (somewhat) assuaged by the decisive actions of central bankers, political and company-specific risk have moved higher. We have seen this clearly in third-quarter numbers where negative surprises have been punished to the harshest degree in the past five years.

The bearish case for the market outlook has multiple strands. The most important aspect is the potential for a recession in 2024 as the lagged impact of aggressive central bank tightening finally weighs on consumers and companies. The duration and nature of the 'long and variable lag' with which monetary policy is thought to act is hotly debated. There has only been one occasion since the mid-1950s where a recession began within 18 months of a Fed tightening cycle, the most recent of which started on 17 March 2022. A recession before this point would be historically early - especially as fiscal expansion, excess consumer savings and unusual post-Covid employment dynamics have provided significant support to growth. The next six months are empirically the most likely recessionary period, according to Deutsche Bank. Viewed through another lens, the difference between six-month and 10-year US government bond yields turned negative (an 'inverted' yield curve) in July 2022, which, on a median basis, has historically signalled a recession 11 months ahead.

The impact of the most aggressive rate hike cycle for a generation and quantitative tightening (the shrinking of the Fed's balance sheet) is weighing on a wide range of forward-looking economic indicators. The Conference Board Leading Economic Indicators have moved into recession territory and year-over-year money supply growth (M2) is still firmly negative. Lending standards as measured by the Fed's Senior Loan Office Opinion Survey are still at levels typically only seen when a recession is imminent and junk bond yields have touched 9%. As funding costs remain high, marginal investments become less attractive and nominal growth will be slower. At the time of writing, the Fed futures market is pricing in -c100bps of rate cuts in 2024 as the Fed cuts rates in response to softening incoming data to stave off or at least limit the severity of a recession.

Geopolitical risk represents another potential headwind to market sentiment as the Russia/Ukraine and Israel/Hamas conflicts are unlikely to be resolved quickly. The Covid experience laid bare the fragility of global supply chains and the Ukraine war reminded policymakers and market participants alike of the economy's sensitivity to higher energy prices. As much as 17% of global oil production and 19% of global liquid natural gas flows through the Strait of Hormuz between Iran and Oman, so a broadening of conflict in the Middle East could have significant ramifications. China/US relations remain under strain, especially regarding the availability of leading-edge AI technology. Disappointing Chinese economic recovery post-reopening and a highly levered property market bring further political and economic fragility.

Expanding fiscal deficits (partly due to higher interest servicing costs) could continue to put upward pressure on rates globally and downward pressure on sovereign bonds. Goldman Sachs estimates US federal interest expense will increase from 2% of GDP in 2022 to 3% in 2024 and 4% by 2030, and (unlike when interest costs rose in the 1980s and early 1990s), there is little appetite to reduce the primary (ex-interest) deficit given congressional gridlock and other policy priorities mainly at odds with balanced budgets. At current prices, 2023 would be the first time in the history of the US republic that the value of US Treasuries has fallen for three consecutive years. Indeed, the US government deficit was 8% of GDP in 3Q23, the largest in history outside periods of war or recession, and the debt-to-GDP ratio is the same as at the end of World War Two. The US is also going into an election year (as are countries covering 80% of the global equity market cap), which have not been that supportive of equity returns in recent decades: since 1984, US election year returns have averaged 4%, with technology the worst performing sector.

Significantly higher risk-free rates have also begun to challenge business models built on the availability of cheap debt. This has already been reflected in the equity market, as high quality, low leverage and low volatility factors have led under the surface. Higher rates have also created greater competition to equity that were less appealing during the recent low interest rate era, including cash on deposit, money market funds and financial instruments sitting higher up the capital structure, such as corporate debt and convertible bonds.

Nor are equities particularly cheap, with the S&P 500 trading at 17.8x forward earnings estimates versus the 10-year average of 17.5x. This might be the higher end of the future range if we are entering a period of structurally higher interest rates, which is possible given structurally higher fiscal deficits, structurally higher investment levels (reshoring; balkanisation of supply chains; clean energy transition) and aging populations (potentially lower savings rates; higher social and healthcare costs).The equity market may also be overearning given cycle-high operating margins and debt refinancing rates are now more than double the coupon of debt that has already been issued.

However, all is not lost. To date, the Fed has so far been able to rebalance the labour market without driving up unemployment significantly or sending the economy into recession, strengthening the case for so-called 'immaculate disinflation'. For example, the 'jobs/workers gap' (the difference between the number of job openings in the previous month and unemployed workers in the current month) has declined to reach c2.6 million from c5 million at the start of the calendar year and is trending towards the roughly two million level consistent with 2% inflation, as estimated by Goldman Sachs. US wage growth has fallen by more than 1.5pts to 4.2% annualised. Softer October payrolls also helped as headline jobs missed and the number of industries seeing employment decline stepped up to 44% from 32% in September.

There is also limited evidence of significant distress brought on by the lagged impact of rate rises on corporate balance sheets, even if delinquencies and defaults are ticking higher. This may reflect the fact that three-quarters of S&P 500 debt is long-term fixed (almost double pre-Global financial crisis levels), as are 85% of US mortgages, suggesting the lag from rate rises to real world impact may have extended or become less direct. Borrowing costs, defaults and the percentage of companies rated BBB or lower by Moody's are rising, but from extremely low levels, while less than $150bn of the $3trn junk bond and leveraged loan market needs to be refinanced in the next two years.

Sentiment remains supportive too, with the most recent Bank of America's Global Fund Manager Survey indicating that average cash levels remain above 5%, which has historically been a good contrarian 'buy' signal. Negative sentiment is not limited to professional investors. The American Association of Individual Investors (AAII) bull/bear ratio sits below 0.5, which has historically presaged average returns of +8.3% and +13% for the S&P 500 for the following six and 12-month periods respectively.

It would also be remiss of us not to mention some potential early signs that technology adoption is having a positive impact on macroeconomic prospects. Third-quarter productivity (a measure of output per labour hour) positively surprised for the second consecutive quarter. Strong economic growth is not inflationary if it is driven by productivity and trend productivity growth of 1.5-2% means a target of 3.5-4% wage growth would be consistent with the Fed's 2% inflation target. Goldman Sachs has estimated generative AI will affect productivity sufficiently within their 10-year forecast horizon to bring a potential boost of 10-15% to global GDP cumulatively. A combination of the advent of AI and structural labour shortages as developed economy populations age might be sufficient to stimulate a productivity boom and produce disinflationary economic growth - a supportive backdrop for equities.

More importantly, whether there is a recession or not and what equity markets do over the next six to 12 months perhaps misses the point. Astounding new innovations such as AI and the advances brought by GLP-1 drugs augur well for a longer-term innovation-led growth and prosperity cycle. Perhaps the post-WW2 period provides a helpful analogy. At that time, there was a period of economic rebalancing including a shallow recession in 1948-49 as the US economy transitioned from a wartime economy to a peacetime one. The slowdown was brief and mild, and there was a significant shift to a new rates regime as long-term bonds - capped during wartime - were allowed to trade freely from 1951. However, the combination of economic rebalancing and a shift to a higher rate environment in the context of a US government debt-to-GDP peak in 1946 at 118%, did not preclude strong equity market returns over the next five (+55%) and 10 years (+203%). This was a time of rapid technological and social change, and a transition to a structurally higher rate environment, but 1949-1956 and 1957-1961 delivered two strong equity bull markets. Longer term, there is a good case that the same will prove true of the post-Covid period.

Technology outlook

A more uncertain economic environment and the stronger US dollar are exerting downward pressure on worldwide IT spending this year, which is now expected to grow 3.5% in 2023, in dollar terms, compared to 5.5% anticipated in April. This moderating outlook has been evident in recent corporate results with the S&P technology sector now expected to deliver revenue and earnings growth of 2% and 3.5% in 2023. However, early forecasts for 2024 look significantly more encouraging with current expectations for IT spending (+8%) commensurate with S&P 500 technology revenue and earnings forecasts of 8.8% and 15.8% respectively. While these expectations are likely to remain macroeconomic-sensitive, AI spending should prove more resilient given 70% of CIOs believe (as we do) that generative AI (GenAI) is a game-changing technology, with 55% of them planning to deploy it over the next two years compared to only 9% today. Net profit margins are likely to remain a key focus for earnings as they remain above long-term averages, while recent dollar strength represents a potential headwind for technology estimates given the sector's international exposure of 58% (the highest of any sector) versus 40% for the market.

The outperformance of technology and excitement around GenAI has seen the forward P/E of the technology sector meaningfully expand from c20x at the start of the calendar year to c24x at the end of October - ahead of both five (23x)) and 10-year (20x) averages. The premium enjoyed by the sector has also expanded, with technology stocks today trading at 1.4x the market multiple, slightly above the post-bubble range of between 0.9-1.4x. While this may suggest less valuation upside in the near term, relative downside risk may also prove limited in a post-ChatGPT world with market setbacks bought by investors later to this important investment theme. In addition to AI as a driver, the technology sector remains exceptionally well capitalised which, in a challenging rate environment, should insulate it against refinancing and/or bankruptcy risk. It is also worth noting that despite the excitement around GenAI, we remain far from valuations levels seen during the dot.com bubble, when the technology sector traded at more than twice the S&P 500 multiple.

We are also encouraged by the remarkable valuation retracement of next-generation technology stocks that has characterised the post-pandemic, post-Fed pivot world. Within software, the average EV/NTM (enterprise value/next 12-month) sales multiple of above 30% revenue growth companies has fallen back to 6.7x, down from a peak of 34.5x and below both pre-Covid five and 10-year averages of 8.6x and 8.1x respectively. With the overall software market trading at c5.5x EV/NTM sales, the c20% premium for this much faster growing group of companies is significantly below the five and 10-year pre-Covid average premium of 53% and 68% respectively. While we are excited about the longer-term opportunity presented by this valuation convergence, it also reflects today's more hostile market environment which has shortened investment duration and recalibrated investor preference towards profits over revenue growth. This is apparent when looking at the subset of unprofitable software companies which today trade at just 3.2x EV/NTM sales - a c40% discount to overall software valuations, a stark contrast to the large premium they enjoyed during 2020-21 when interest rates were near zero. We are also mindful of the risk posed by AI to 'point solution' companies relative to incumbents/platform companies that look better placed to absorb the costs and get monetisable AI products to market. This unusual dynamic (empirically, unencumbered newer companies have tended to benefit most from technology change) might explain the unusual absence of strategic M&A despite the material valuation correction.

AI continues to dominate technology performance at both headline and stock level. While it is still early days, we are seeing encouraging signs for the adoption of AI and the impact of the AI transformation on companies up and down the supply chain. AI services accounted for 3pts of Microsoft Azure's y/y growth, compared to just 1pt last quarter, indicating a $1.5bn revenue run-rate. Microsoft Azure-OpenAI customers increased to 18,000 from 11,000 last quarter, and 40% of the Fortune 100 are trialling the M365 Copilot product (which launched on 1 November). Meta Platforms spoke to a mid-single digit increase in time spent on their main platforms due to AI-powered recommendation improvements. Meanwhile Alphabet said generative AI projects on its AI Vertex platform were up 7x from last quarter.

This is unsurprising to us given early productivity gains across a range of tasks and applications (estimated at between 30-50%) and broad GenAI applicability since a majority of jobs in advanced economies are knowledge workers. Despite this, there has been a healthy tempering of expectations for some of the leading suppliers into the AI infrastructure buildout after earlier exuberance. While tighter US export restrictions may have played a part in this, we anticipate continued strong demand and as such see this as a buying opportunity given the build out of the new AI computing stack remains in its infancy. According to Gartner, 73% of CIOs plan to increase AI investments in 2024.

During Q3 earnings season, we moved to a slightly more fully invested position (c.4% cash at the end of November). Given elevated levels of geopolitical risk and the fact that our portfolio beta is naturally higher than the benchmark due to our growth-focused investment approach, we continue to hold NASDAQ Index put options (to help bring the beta of the portfolio closer to the benchmark in the event of a sharp drawdown, rather than to hedge absolute downside risk). However, our overarching focus remains on positioning the portfolio in favour of companies that should prove important AI enablers and beneficiaries. At the time of writing, we believe that more than three-quarters of the portfolio is explained by AI enablers and beneficiaries.

Technology risks 

In addition to market-related risks already highlighted, there are other risks to our constructive medium-term view. As in previous years, there are downside risks to technology spending in the event of weaker macroeconomic trends or should CEO confidence meaningfully deteriorate. Likewise, earnings estimates are likely to remain subject to macroeconomic turbulence with margins potentially at risk given their recent recovery following earlier cost-cutting. A weaker macroeconomic environment and/or higher interest rates could extend the current semiconductor downturn, particularly within rate-sensitive areas such as automotive. It might also challenge cloud spending growth that has finally begun to stabilise following multiple quarters of post-pandemic optimisation.

Valuation remains a key risk too, particularly following the rerating in technology stocks this year, while higher risk-free rates are likely to constrain the magnitude of any recovery in longer-duration stocks. As in previous years, regulation remains a risk, with the current antitrust case brought against Alphabet by the Department of Justice (DoJ) potentially an important moment for both Apple and Alphabet, as well as having implications for other natural monopolies within our sector. We remain hopeful that worst-case outcomes will continue to be averted, reflecting a divided Congress and the fact that US technology companies represent the vanguard in the emerging AI battleground with China. Instead, deteriorating US/Sino relations may represent a more significant risk, coalescing around the supply of AI chips to China. We are hopeful this remains contained, but Taiwan - responsible for producing c90% of leading-edge semiconductors - represents a critical geopolitical fault line and could potentially impact a significant portion of our portfolio.

Finally, we should highlight the risk associated with disappointing AI adoption given its centrality to technology performance during 2023. This could come in the form of regulation designed to stymie change associated with generative AI or, more likely, in the event that AI monetisation at Microsoft, Adobe and other software companies proves disappointing. Although a monetisation delay is unlikely to derail the AI story, it would represent a significant setback and would likely dampen excitement around the timing, if not the ultimate size, of the AI opportunity.

Concentration risk 

In our last Annual Report, we reminded our shareholders of the concentration risk both within the Trust and the market-cap-weighted index around which we construct the portfolio. After another period of pronounced large-cap outperformance, this risk has not diminished. At the half year, our three largest holdings - Apple, Microsoft, and Alphabet - represent c28% and c42% of our NAV and benchmark respectively, while our top five holdings (which includes NVIDIA and Meta Platforms (Facebook)) represent c39% and c53% of our NAV and benchmark respectively. As a large team with a growth-centric investment approach, we would welcome the opportunity to move materially underweight positions in the largest index constituents should we become concerned about their growth prospects, or if we believe there are more attractive risk/reward profiles elsewhere. However, concentration does not appear to be entirely driven by ebullient valuations; the Magnificent Seven represents 29% of the S&P 500 market cap but account for 18.7% of 2023 consensus EPS and 20% of 2024 consensus EPS. Likewise, according to Bloomberg, the 'Magnificent Seven' Index trades at 27.5x 2024 P/E ratio, which does not seem excessive for c20% earnings growth CAGR.

The past six months support our earlier view that AI plays well into mega-caps given their significant scale advantages. That said, we still find it very difficult to argue for holding much above 10% in any individual stock as we struggle with the idea that we are reducing risk by making the portfolio evermore concentrated. Instead, we continue to believe that a diversified portfolio of growth stocks and themes capable of outperformance, and constructed to withstand investment setbacks, will deliver superior returns over the medium to long term, particularly on a risk-adjusted basis.

Conclusion

Twelve months ago, we argued that the current inflationary period might not represent a change in investment regime as others were arguing at the time. Instead, we suggested it might be akin to the immediate post-WW2 years - a Covid rather than war-related disequilibrium resolvable with time and enough policymaker 'medicine'. With inflation heading lower without yet taking the global economy with it, the case for 'immaculate disinflation' looks stronger than it did last year. While debate remains about whether the rate tightening cycle is complete, the proverbial 'wall of worry' has shifted towards geopolitics and primary fiscal deficits, both of which could delimit policymaker latitude to deliver the monetary adjustments necessary to avoid a hard landing. We are hopeful that decisive US action in the eastern Mediterranean will prevent the Israel/Hamas conflict from broadening, while the Saudi/Iran divide makes a 1973 rerun meaningfully less likely.

The case for renewed disinflation has also received a significant boost in the form of generative AI. We believe that after years of impressive gains in narrow fields, the recent advent of the transformer model is likely to prove the 'Bessemer moment' for AI. If so, we are likely to experience remarkable productivity gains over the coming years which may exert significant downward pressure on prices. Following the advent of cheap steel, thanks to Henry Bessemer, US prices fell on average by 4% per annum during the 1870s, a period known as the Great Deflation. However, what followed was a pronounced and prolonged rise in real wages so profound that it "gave birth to the middle class". Today, policymakers are focused on stubbornly tight labour markets just as AI threatens to disrupt as many as 300 million jobs. While this could yet take the form of dystopic science fiction and even civilisational decline, remarkable early gains from GenAI and the broad applicability of this nascent GPT (general purpose technology) suggests to us that we might instead be on the cusp of the "best decade ever" for productivity growth.

Ben Rogoff & Ali Unwin

11 December 2023

PORTFOLIO BREAKDOWN

% of Net Assets as at

* % of Net Assets, totals do not add up to 100 due to the exclusion of other net assets.

Classification of Investments as at 31 October 2023**

* * Classifications derived from Benchmark as far as possible. The categorisation of each investment is shown in the portfolio available on the Company's website. Not all sectors of the Benchmark are shown, only those in which the Company has an investment at the period end or in the comparative period.

PORTFOLIO OF INVESTMENTS

Note: Asia Pacific includes Middle East and North America includes Latin America.

*Refer to Balance Sheet below for more details.

CORPORATE MATTERS

THE BOARD

There have been no changes to the membership of the Board in the six months ended 31 October 2023.

As noted in the Company's Annual Report for the year ended 30 April 2023, Charlotta Ginman stepped down as Audit Chair of the Company on 31 October 2023 and was succeeded by Jane Pearce as part of a smooth and orderly transition. Charlotta remains on the Board as a non-executive Director of the Company and will step down from the Board following nine years' service at the AGM in September 2024.

Biographical details of all Directors are available on the Company's website and are provided in the Company's latest Annual Report for the year ending 30 April 2023.

GEARING

As at 31 October 2023, the Company had two, two-year fixed rate, term loans with ING Bank N.V expiring in September 2024 (JPY 3.8bn and USD36m). The JPY loan has been fixed at an all-in rate of 1.13% pa and the USD loan has been fixed at an all-in rate of 5.43% pa. The prior loans were repaid in full at expiry.

SHARE BUY-BACKS

As described in the full year report and accounts for the year ending 30 April 2023, the Board continually monitors the discount at which the Company's ordinary shares trade in relation to the Company's underlying NAV. Discounts across the whole of the investment trust sector continue to widen due to the challenging market conditions and, unfortunately, the discount of the Company has also been impacted. The Board discusses the market factors giving rise to any discount or premium, the long or short-term nature of those factors and the overall benefit to Shareholders of any actions. The Company does not have an absolute target discount level at which it buys back shares but will continue to buy back shares when deemed appropriate.

In the six months to 31 October 2023, the Company has repurchased a total of 3,036,287 shares into treasury representing 2.2% of the total issued capital. Since the period end to 8 December 2023, we have bought back a further 589,658 shares. The number of repurchased shares now in treasury is 14,655,401 representing 10.7% of issued share capital.

AUDITOR

KPMG LLP were re-appointed as the Company's external auditor at the AGM held on 7 September 2023.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors consider that the principal risks and uncertainties faced by the Company for the remaining six months of the financial year, which could have a material impact on performance, remain consistent with those outlined in the Annual Report for the year ended 30 April 2023. A detailed explanation of the Company's principal risks and uncertainties, and how they are managed through mitigation and controls, can be found on pages 62 to 65 of the Annual Report for the year ended 30 April 2023. The Company has a risk management framework that provides a structured process for identifying, assessing and managing the risks associated with the Company's business.

We continue to consider the impact of the Russian war on Ukraine as well as the effects of the Middle East crisis which has created further market volatility. Geopolitical events such as these are captured within the Company's risk map and will be periodically assessed by the Board in light of how they may affect the Company's portfolio and the economic and geopolitical environment in which the Company operates. 

The investment portfolio is diversified by geography which mitigates risk but is focused on the technology sector and has a high proportion of non-Sterling investments. Further detail on the Company's performance and portfolio can be found in the Investment Managers' Review.

RELATED PARTY TRANSACTIONS

In accordance with DTR 4.2.8R there have been no new related party transactions during the six-month period to 31 October 2023 and therefore nothing to report on any material effect by such transactions on the financial position or performance of the Company during that period. There have therefore been no changes in any related party transaction described in the last Annual Report that could have a material effect on the financial position or performance of the Company in the first six months of the current financial year or to the date of this report.

GOING CONCERN

As detailed in the notes to the financial statements and in the Annual Report for the year ended 30 April 2023, the Board periodically monitors the financial position of the Company and has considered for the six months ending 31 October 2023 a detailed assessment of the Company's ability to meet its liabilities as they fall due. The review also included consideration of the level of readily realisable investments and current cash and debt ratios of the Company and the ability to repay the outstanding bank facilities. Repayment of the bank facility would equate to approximately 20.4% of the total cash and cash equivalents readily available to the Company as at 31 October 2023.

In light of the results of these tests on the Company's cash balances and liquidity position, the Directors consider that the Company has adequate financial resources to enable it to continue in operational existence for at least 12 months. Having carried out the assessment, the Directors are satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial results of the Company. The Directors have not identified any material uncertainties or events that might cast significant doubt upon the Company's ability to continue as a going concern.

The assets of the Company comprise mainly of securities that are readily realisable and accordingly, the Company has adequate financial resources to meet its liabilities as and when they fall due and to continue in operational existence for the foreseeable future.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors of Polar Capital Technology Trust plc, which are listed in the Directors and Contacts Section, confirm to the best of their knowledge that:

· The condensed set of financial statements has been prepared in accordance with UK-adopted International Accounting Standard 34, and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company as at 31 October 2023;

The Interim Management Report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and 

b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

The Half Year Report for the six-month period to 31 October 2023 has not been audited or reviewed by the Company's Auditor. The Half Year Report for the six-month period to 31 October 2023 was approved by the Board on 11 December 2023.

On behalf of the Board 

Catherine Cripps

Chair

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 31 October 2023

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with UK-adopted International Accounting Standards.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies (AIC).

All items in the above statement derive from continuing operations.

The Company does not have any other comprehensive income.

BALANCE SHEET

as at 31 October 2023

*As detailed within the Corporate Matters Section - see paragraph on Gearing.

Approved and authorised by the Board of Directors on 11 December 2023.

Catherine Cripps

Chair

STATEMENT OF CHANGES IN EQUITY

for the six months ended 31 October 2023

Note - Share capital, Capital redemption reserve, Share premium and Special non-distributable reserve are all non-distributable. Realised distributable capital reserve and Revenue reserve are distributable.

CASH FLOW STATEMENT

for the six months ended 31 October 2023

* The finance costs paid which was previously included in the cash flows from operating activities for the six months ended 31 October 2022 has been re-presented as a cash flow from financing activities to align with the current period and prior year end presentation.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 31 October 2023

1. GENERAL INFORMATION

The Financial Statements comprise the unaudited results for Polar Capital Technology Trust Plc for the six-month period to 31 October 2023.

The unaudited Financial Statements to 31 October 2023 have been prepared in accordance with UK-adopted International Accounting Standard 34 "Interim Financial Reporting" and the accounting policies set out in the statutory annual Financial Statements of the Company for the year ended 30 April 2023.

Where presentational guidance set out in the Statement of Recommend Practice ("the SORP") for investment trusts issued by the Association of Investment Companies in July 2022 is consistent with the requirements of UK-adopted International Accounting Standard ("UK-adopted IAS"), the accounts have been prepared on a basis compliant with the recommendations of the SORP.

The financial information in this Half Year Report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the six-month periods ended 31 October 2023 and 31 October 2022 has not been audited. The figures and financial information for the year ended 30 April 2023 are an extract from the latest published Financial Statements and do not constitute statutory accounts for that year. Full statutory accounts for the year ended 30 April 2023, prepared under UK-adopted IAS, including the report of the auditors which was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 of the Companies Act 2006, have been delivered to the Registrar of Companies.

The accounting policies have not varied from those described in the Annual Report for the year ended 30 April 2023.

The Directors believe it is appropriate to adopt the going concern basis in preparing the Financial Statements. As at 31 October 2023 the Company's total assets exceeded its total liabilities by a multiple of over 30. The Board continually monitors the financial position of the Company. The Directors have considered a detailed assessment of the Company's ability to meets its liabilities as they fall due. The assessment took account of the Company's current financial position, the ability to repay outstanding bank facilities which fall due for repayment on 30 September 2024, its cash flows and its liquidity position. In addition to the assessment the Company carried out stress testing which used a variety of falling parameters to demonstrate the effects in the Company's share price and net asset value. In light of the results of these tests, the Company's cash balances, and the liquidity position, the Directors consider that the Company has adequate financial resources to enable them to continue in operational existence for at least 12 months. Accordingly, the Directors are satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial results of the Company.

There were no new UK-adopted IAS or amendments to UK-adopted IAS applicable to the current year which had any significant impact on the Company's Financial Statements.

The following new or amended standards became effective for the current annual reporting period and the adoption of the standards and interpretations have not had a material impact on the Financial Statements of the Company.

i) At the date of authorisation of the Company's Financial Statements, the following new or amended standard that potentially impact the Company are in issue but are not yet effective and have not been applied in the Financial Statements:

The Directors expect that the adoption of the standards listed above will have either no impact or that any impact will not be material on the Financial Statements of the Company in future periods.

The Financial Statements are presented in Pounds Sterling and all values are rounded to the nearest thousand pounds (£'000), except where otherwise stated.

The majority of the Company's investments are in US Dollars, the level of which varies from time to time. The Board considers the functional currency to be Sterling. In arriving at this conclusion, the Board considered that Sterling is the most relevant to the majority of the Company's shareholders and creditors and the currency in which the majority of the Company's operating expense are paid.

2. INCOME