Final Results

RNS Number : 2086D

Polar Capital Technology Trust PLC

05 July 2016

POLAR CAPITAL TECHNOLOGY TRUST PLC

UNAUDITED PRELIMINARY RESULTS ANNOUNCEMENT FOR THE FINANCIAL YEAR TO 30 APRIL 2016

5 July 2016

Financial Highlights	As at 30 April 2016	As at 30 April 2015	Movement %
Total net assets	£801,307,000	£793,019,000	1.0
Net assets per ordinary share	605.51p	599.25p	1.0
Benchmark (see below)			-0.1
Price per ordinary share	566.00p	592.00p	-4.4

Discount of ordinary share price to the net asset value per ordinary share	6.5%	1.2%

Ordinary shares in issue	132,336,159	132,336,159	-
Key Data	For the year to 30 April 2016
	Local currency %	Sterling adjusted %
Benchmark Change
Dow Jones World Technology Index (total return, Sterling adjusted with the removal of relevant withholding taxes)	-4.8	-0.1
Other Indices (total return)
FTSE World	-4.3	0.4
FTSE All-share	-	-5.7
S&P 500 composite	1.2	6.1
Nikkei 225	-13.0	0.9
Eurostoxx 600	-10.9	-4.7

Exchange rates	As at 30 April 2016	As at 30 April 2015
US$ to £	1.4649	1.5368
Japanese Yen to £	156.74	183.90
Euro to £	1.2790	1.3714
	For the year to 30 April
	2016	2015
Ongoing charges ratio	1.10%	1.08%
Ongoing charges ratio incl. performance fee	1.10%	1.08%

For further information please contact:
Ben Rogoff	Ed Gascoigne-Pees
Polar Capital Technology Trust PLC	Camarco
Tel: 020 7227 2700	Tel: 020 3757 4984

Chairman's Statement

Results

It has been a frustrating year in world equity markets, with a protracted sideways movement punctured by severe setbacks of a similar magnitude and duration in both July 2015 and January 2016; a full explanation behind the market movements can be found at the start of the manager's report. The global technology sector performed better than the broader indices for most of our financial year but finished in line with the FTSE World Index after a sharp decline in several of the leading technology stocks in April. Our investment team led by Ben Rogoff had a challenging year, but I am pleased to report a 1% increase in Net Asset Value (NAV) versus a decline of 0.1% in our benchmark. In local currency terms most markets were down slightly over our financial year, but a 4.7% decline in Sterling versus the US Dollar provided us with a fortuitous tailwind. The seemingly pedestrian performance of the past year should be viewed against the 30.7% increase in our NAV the year before, and our longer term performance versus the benchmark is positive over all periods in the last 6 years.

Regulation

Staff at the regulators must enjoy acronyms as we now have a new one to add to AIFM, FATCA, MAD and MiFID 1 and 2. After long consultations since 2011 the latest model to roll off the EU production line is MAR: Market Abuse Regulation which came into effect on 3 July 2016. MAR replaces MAD (Market Abuse Directive) and introduces greater regulation regarding insider dealing, the definition and disclosure of insider information, and stricter rules and regulations of PDMRs (Persons Discharging Managerial Responsibility). Fortunately our management company has kept us up to date with how to comply with this increased regulation. MiFID 2 has been postponed for a year, and is now expected to be enacted in January 2018, although it is already having an effect on the quality and quantity of research provided by stockbrokers.

Directors

Every three years we engage an outside consultant to assess the board of directors, the Chairman, and the work and effectiveness of the committees. We hired Lintstock to carry out this task, which involved a very detailed online questionnaire and personal interviews of all board members by Oliver Ziehn, the senior partner of Lintstock. We have received a positive report in most areas but there is still room for improvement.

Rupert Montagu and I both joined the board in January 2007 and Rupert has decided to retire at our forthcoming AGM in September. With his venture capital background he has (in his words) found some of the increased corporate governance tedious, but he has made a huge contribution to our investment debates and we will miss his sage advice. He and his family are moving to Northern California and on behalf of the whole board we all wish them well for this next chapter in their lives. Peter Hames has accepted the Board's invitation to become the Senior Independent Director following Rupert's retirement.

As a FTSE 250 company we are mindful of board tenure, succession planning, and particularly diversity, in age, experience, gender and background, and we will be looking to appoint an additional director. As I have reported to shareholders previously the Directors consider that having Brian Ashford-Russell on the Board is helpful given his long experience of technology investing and market cycles despite his length of service and his connection with our Investment Manager. Brian has always indicated to me his willingness to step down from the Board at any time should his co-directors wish.

Manager Presentation and AGM

The AGM will again take place in the elegant surroundings of the Royal Automobile Club, Pall Mall, London at 2.30pm on 9 September followed by tea, and I urge shareholders not to miss this event. As usual our manager, Ben Rogoff, will give shareholders a presentation which provides a fascinating insight into the development and impact of new technologies and allows shareholders to ask Ben questions as well as meet him and his team after the meeting. A video of the presentation will be placed on the company's website shortly after the AGM. The formal business of the AGM is contained in a separate circular and also on our website, along with my explanation of the resolutions. I would like to thank all shareholders who voted for the continuation of the company at last year's AGM, where 99% of the votes cast were in favour, a record level and we look forward to the future with confidence.

Outlook

The overblown promise and excitement of how technology would transform our lives during the turn of the century TMT boom is now turning into reality 16 years later. Without an online offering few businesses can survive, and the disruption to well established industries by the rapid roll-outs from Silicon Valley are self-evident. Undoubtedly the spread of smart phone technology and its many applications is a huge benefit to young price conscious consumers but for investors there are many more losers than winners. Similar to the formation of oil, railroads, and telephone companies it is apparent that we are in the middle of a massive winner takes all land grab that John D Rockefeller would approve of, so the likes of Google, Amazon and Facebook have managed to acquire or crush all opposition. The increased efficiency of putting all records and transactions online for both businesses and individuals has sadly given rise to cybercrime where huge losses, both financial and reputational, can take years to recover.

Looking at the performance of developed equity markets I have been amazed at how well companies have adapted to change during a period of internet driven deflation and oversupply of goods and services. We are now over 7 years into this stretched bull market, mainly supported by Central Bank largesse rather than rising GDP growth. There has been no shortage of uncertainty for markets to climb the proverbial wall of worry but the unexpected referendum result adds a new dimension particularly for the UK and Europe. The increased level of volatility in both currency and equity markets may endure for some time given the current political and economic uncertainty, combined with a potentially lengthy and bitter divorce from the EU, and a possible break up of the United Kingdom. For your Trust, the near term consequences are less serious as our exposure to UK and European technology stocks is very small and the circa 10% fall in Sterling versus the Dollar has tended to compensate for the decline in the prices of US tech stocks. Investment trust discounts tend to widen with investment anxiety and the Board will monitor events closely. Our management team have a good record in difficult markets in the past and so feel confident they can ride out any storms that lie ahead.

My thanks to my fellow directors for their patience and support, to Ben and all the talented members of his tech team, and the whole support team at Polar for steering us through a difficult year where there appeared to be more snakes than ladders.

Michael Moule

Chairman

4 July 2016

Investment Manager's Report

Market Review

Equity markets consolidated earlier gains during the fiscal year amid downward revisions to global growth, pronounced commodity price weakness and Chinese economic deceleration. However, the FTSE World index gained 0.4% in GBP terms as Sterling weakness (-5% / -7% / -15% against the Dollar, Euro and Yen respectively) proved a key contributor to overall returns. Developed markets continued to perform relatively well, particularly the US (+6.1% in Sterling terms) where robust economic data and further labour market improvement were in stark contrast to downward revisions to economic growth elsewhere. US corporate news flow also remained supportive with share buy backs and record M&A augmenting respectable earnings progress (ex. oil and gas). However, the combination of Dollar strength and dramatic oil price weakness began to show up in US data during the final third of the financial year presaging a full-blown 'growth scare' in early 2016. Policymakers (once again) stepped in to shore up confidence via additional measures while rumours of a 1984-style Plaza Accord at the Shanghai G20 in February saw the Dollar reverse sharply into year-end. Although Europe (-4.7%) proved an economic bright spot, returns were hampered by fears of a Greek default and/or Euro exit, the emissions scandal at VW and financial sector travails. Japanese stocks (0.9%) were particularly weak in local currency terms due to the China slowdown and Yen strength that (while reversing our losses) unwound much of the QE-related progress in weakening the currency.

Modest profit taking in most developed markets was in stark contrast to sustained selling pressure in emerging ones due to the combination of weak Chinese data, plunging commodity prices and associated adverse foreign exchange movements as investors considered the likelihood of a US rate hike (delivered in December) and the surprising decision by the Chinese to float the Renminbi (RMB) in August. Plunging oil prices (-27% during the period) weighed on energy exporters such as Russia who also had to contend with a 20% depreciation in the Ruble against the Dollar. After a remarkably strong prior year, Chinese stocks bore the brunt of 'hard landing' fears, increased margin requirements and the RMB devaluation with the Hang Seng and Shanghai Composite indices down 19% and 33% respectively. Taiwanese stocks also fell sharply (-12%) due to sustained PC weakness and fears of intensifying Chinese competition while weakness in Korea (-6%) reflected miasma from the Renminbi float and continuing travails at Samsung.

The financial year began with equities shrugging off volatility elsewhere driven by fears of a potential Greek default and concern about when the US Federal Reserve would begin to tighten interest rates. However, concern spread into equity markets when Greece missed an IMF payment and announced a referendum on whether to accept bailout conditions. Chinese equities fell sharply following an increase in margin requirement that resulted in the Shanghai Composite index falling more than 30% from its mid-June highs. Increasingly disorderly markets led to the Chinese authorities buying equities, suspending new listings and - at one point- more than 50% of 'A-share' stocks were halted from trading. Deterioration in Chinese economic data saw oil (-21%) suffer its largest monthly decline since October 2008, an unexpected 'no' vote in the Greek referendum adding to investor consternation. Although equity markets recovered once Greece submitted a bailout request, the rally proved short lived as focus shifted back to China following weak data and the unexpected decision by the People's Bank of China (PBoC) to float the RMB. While bulls spun this surprising development as another step towards financial liberation, bears portrayed the move as defensive reflecting rapidly deteriorating economic trends. While the truth was likely somewhere in-between, bears won the day - the Shanghai Composite Index shedding more than 12% during August.

Financial market volatility, increased risk aversion and weakening emerging market currencies resulted in a 'flash crash' during August which saw the Dow Jones Industrial Index fall an incredible 1000 points intraday. Although markets managed to rally from the lows, the S&P 500 still ended the month down 6.3% in local currency, its largest monthly decline in more than three years. Although concerns over China's economic health remained in focus during September, US economic data was reassuring while the Fed left interest rates unchanged given the more uncertain global outlook. Biotechnology stocks struggled after Hillary Clinton tweeted a proposal to control drug prices, wiping $40bn in market value from the sector. The automotive sector also suffered after German car giant Volkswagen admitted deliberately cheating emissions tests in the US. Fortunately our half-year ended on a positive note with equity markets rebounding sharply in October following a Chinese interest rate cut and ECB President Mario Draghi hinting at further intervention. An encouraging start to the third-quarter earnings season also played a part which, together with outsized M&A activity, helped US stocks register their best monthly returns since October 2011.

The second half of our financial year was dominated by many of the same macroeconomic issues that stymied earlier progress - China, oil and the spectre of a US interest rate hike. In addition, investors had to contend with heightened political risk following a number of acts of terrorism, offset by policymaker intervention and Sterling weakness as the UK's referendum on EU membership came into greater focus. Robust US economic data in November that saw unemployment fall below 5% remained in stark contrast with continued weakness in China, mixed Eurozone data and a return to technical recession in Japan following a contraction in preliminary first-quarter GDP. Suicide attacks in Beirut and Paris, together with the downing of a Russian jet by Turkey in Syria added to the gloom with oil falling 12% during the month and ten-year US Treasury yields falling to just 2.2% despite the increased likelihood of policy normalisation.

Risk appetite deteriorated sharply in December, although negative returns were countered by Sterling weakness. The month was unusually eventful with three major central banks deciding on policy action. The European Central Bank (ECB) was first and disappointed the market, while the US Federal Reserve delivered its first rate hike since 2006 carefully accompanied by a dovish statement supporting the notion of a gradual tightening cycle. The Bank of Japan (BoJ) opted to maintain its pace of monetary expansion with some small additional measures, but, as in Europe, this proved insufficient to excite equity markets. Instead, focus remained firmly focused on China where ongoing devaluation of the RMB versus the Dollar was interpreted as evidence of further economic weakness and on oil prices that fell a dramatic 18% during the month following OPEC's decision to keep output unchanged. Pronounced oil price weakness was transmitted into other markets including high yield (HY) debt where wider spreads spilled into investment grade paper, accentuated by a high profile HY credit fund suspending redemptions.

Macroeconomic concerns developed into a full blown 'growth scare' in early 2016 with RMB weakness in January forcing the PBOC to intervene and outline its new exchange rate policy in greater detail, targeting a "relatively stable" Renminbi against a trade-weighted basket. Unfortunately weak Chinese data (the services PMI falling to its lowest level in a decade) did little to assuage fears that the new policy was just a thinly veiled competitive devaluation. February saw further equity market weakness (offset by US Dollar strength/Sterling weakness) and the BoJ introduce negative interest rates (NIRP) on excess reserves held by financial institutions which drove Japanese Government Bond yields below zero. US economic data also became more mixed with a weaker manufacturing PMI offset by low unemployment, strong auto sales and housing market strength. Sterling fell sharply against a basket of currencies after Boris Johnson joined the "Brexit" campaign.

The final two months of our financial year saw a sharp rebound in risk assets, led by commodities and emerging markets, precipitated by central bank intervention and Dollar weakness. Policymakers reminded investors in March that they remained alive to the risks associated with a waning global economy, the ECB reiterating its 'whatever it takes' stance while the Federal Reserve struck a surprisingly dovish tone with its 'dot plot' indicating two rate hikes for 2016, rather than four as previously articulated. This, together with mixed US economic data and better news elsewhere saw the Dollar fall 3.7% on a trade-weighted basis with weakness extending into April, the currency concluding the year at its lowest level against the Yen in eighteen months.

Technology Review

The technology sector modestly underperformed the broader market during the fiscal year, the Dow Jones World Technology Index declining 0.1% in Sterling terms. Having outperformed for much of the year the sector gave back all of its relative gain during April. Much of this outperformance was passive (reflecting the sector's disproportionate exposure to the US, the US Dollar and relatively limited exposure to emerging markets). While macroeconomic uncertainty and US Dollar strength played a role, weak earnings performances from a number of incumbent companies, particularly during the Q1'16 reporting season, appeared to support our long-held view that the new technology cycle has entered a more pernicious phase. Although IT budgets increased 2.4% in constant currency during 2015, worldwide IT spending actually declined 5.8% in US Dollar terms. Moribund overall growth, combined with accelerating Cloud adoption took its toll on a number of traditional segments such as the PC market, which experienced its worst year on record in 2015 as sales declined by 10% year on year (y/y). Smartphone-related stocks also struggled with high global penetration, resulting in a sharp unit growth deceleration. Having previously shrugged off market weakness, growth at Apple also began to falter during the second half of the financial year as iPhone sales fell short of expectations.

In contrast, Internet companies were among the biggest winners during the year although returns were monopolised by a handful of mega-caps - Facebook (+57%), Google (+35%) and Amazon (+64%) all of which delivered strong growth and improved profitability. The remarkable performance of these companies, together with that of Netflix (not held) was in stark contrast to peers such as LinkedIn (-48%) and Twitter (-61%) and resulted in the FANG (Facebook, Amazon, Netflix, Google) acronym. However, other next generation companies fared less well as 2015 saw the continuation of the post Q114 trend of valuation compression that almost entirely offset fundamental progress. This adverse trend accelerated sharply in early 2016 as the oil price-induced 'growth scare' and a handful of high-profile earnings disappointments saw next-generation valuations plunge to levels rarely seen since 2009 before rebounding sharply during the final months of the year as (more) normal service resumed in the broader market. M&A also continued to play a supportive role during the year with a number of records broken. While transactions were mostly financial in nature, the hiatus in markets and the collapse of next-generation valuations saw the return of strategic M&A towards year end.

The year began with a robust conclusion to the first quarter earnings season and the largest semiconductor merger ever after Avago announced it would acquire fellow chipmaker Broadcom for $37bn. This was followed a few days later by news that Intel was buying Altera for $17bn and talk that Microsoft had floated a proposed $55bn bid for Salesforce.com. Unfortunately gains in May proved short-lived with broader market weakness, poor PC shipment data and a very disappointing quarter from memory supplier Micron Technology weighing on the technology sector during June. Off-quarter results from Oracle did little to lift the gloom with revenues falling 5% year over year due to an accelerating transition to the Cloud. A positive start to the second-quarter earnings season allowed the sector to regain some lost ground during July, although returns were unevenly distributed. Weaker demand trends saw a number of semiconductor companies deliver sub-par earnings and/or guidance while technology incumbents such as Microsoft, SAP and Yahoo all traded lower on lacklustre results. While IBM predictably recorded its 13th straight year over year decline in quarterly revenue, Apple ended up as a rare loser with iPhone sales disappointing. In contrast, Internet stocks were clear winners following a significant 'beat and raise' quarter at Amazon while Google delivered a solid quarter accompanied by encouraging rhetoric from new CFO Ruth Porat about expense discipline, improved disclosure and potential capital return. Early excitement was borne out in August when the company unveiled a surprise corporate restructuring and a new name - 'Alphabet' - for its public holding company. A number of other next-generation companies including Arista Networks and Salesforce.com also delivered strong second-quarter results during the month although stock performance remained somewhat divorced from fundamentals resulting in further compression of next generation valuations.

September proved a relatively eventful month with both Palo Alto Networks and Red Hat reporting strong quarters while Oracle once again blamed a revenue and licence shortfall on its Cloud transition. Semiconductor M&A returned to the fore as Dialog Semiconductor bid $4.6bn for Atmel while Chinese state-backed Tsinghua Holdings expressed an interest in acquiring a 15% stake in Western Digital. September also saw Apple release its long-awaited iPhone 6S/+ phone upgrade. The third-quarter earnings season dictated proceedings during October with some of the strongest results found within the Internet subsector with both Amazon and Google delivering almost faultless reports. Beyond the Internet, earnings were more mixed with a number of enterprise incumbents including IBM continuing to feel the impact of Cloud migration. In addition, Dell and Silver Lake announced their intention to buy EMC for $67bn, the largest technology deal ever while the semiconductor sector embarked on another round of frenzied M&A activity during the month with Western Digital acquiring SanDisk for $19bn and semiconductor capital equipment suppliers Lam Research and KLA-Tencor agreeing to merge. In contrast with a number of other legacy incumbents, both Apple and Microsoft reported solid third-quarter results.

Facebook made an all-time high in November following a strong earnings release (advertising revenue growth accelerating to 57% y/y in constant currency terms), which helped the sector outperform during the month. Positive e-commerce trends were also in the spotlight after the Thanksgiving and Cyber Monday holiday period saw online sales increase 21% y/y while in China, Alibaba's Singles Day gross merchandise volume (GMV) grew 60% y/y, well ahead of expectations. Beyond the Internet, two other next generation 'poster-children' reported strong quarters with SaaS leader Salesforce.com beating analysts' estimates (billings maintained at 25% growth and margins expanded above expectations), while data analytics software vendor Splunk grew billings 46% and raised its revenue outlook for 2016. In contrast, November proved a difficult month for legacy incumbents. Qualcomm stock hit a 52-week low after lowering guidance, Cisco issued disappointing guidance and after 76 years, Hewlett Packard formally separated into two companies in order to compete more effectively. The divergence between new cycle 'winners' and 'losers' remained in focus during December with solid results from both Adobe and Red Hat at odds with a mixed report from Oracle who scaled back growth expectations for its Cloud offerings. Smartphone-related stocks were also weak as supply chain data suggested that both Apple and Samsung had significantly reduced component orders for first-quarter delivery.

The oil-induced 'growth scare' and heightened risk aversion resulted in pronounced weakness of long duration stocks during early 2016. A slightly disappointing quarter from ServiceNow saw other high growth names come under sustained selling pressure. In contrast, 'safe' incumbents outperformed despite fundamental progress that remained mixed with IBM missing revenue expectations, Intel blaming weak server sales on China while Apple reported a lacklustre quarter and guidance. Microsoft bucked the trend as its public cloud (Azure) business grew 140% y/y in constant currency, a dynamic that also helped Amazon although operating profits disappointed due to increased investment. Facebook posted yet another stellar quarter as its daily active users (DAU) surpassed 1bn for the first time. Our investment style continued to face significant headwinds during February as next generation companies significantly underperformed. Unfortunately, investor focus remained firmly on next generation mishaps following weak guidance at both LinkedIn and Tableau (each blaming macroeconomic uncertainty) while Twitter reported a sequential decline in users. However, most of our next generation holdings continued to deliver robust results with each of Criteo, CyberArk, HubSpot and Zendesk reporting more than 40% revenue / billings growth while our favourite names - Palo Alto Networks, Salesforce.com and Splunk - all delivered exceptional quarters with no evidence of any macroeconomic weakness. Alphabet (aka Google) also reported strong numbers with 24% revenue growth, remarkable for a company with estimated revenues of c.$70bn this year.

Our belief that demand was better than implied by equity market volatility was supported during March with each of Adobe, Accenture (not held), Oracle (not held) and Red Hat delivering better than expected off-quarter reports. Apple released its new low-end iPhone (SE) during the month, although this was overshadowed in April by poor results and weak guidance resulting in its largest weekly share price decline since 2013. Unfortunately Apple was in good company as a plethora of incumbents including Ericsson, IBM, Intel, Microsoft, Qualcomm and SAP reported disappointing earnings. A few 'next generation' companies also made the list with soft quarters or guidance from Alphabet, Netflix and Twitter. As a result of what proved a disappointing earnings season for market-cap weighted indices, the technology sector gave up almost all of its fiscal year outperformance during the final month of the year. However, with Cloud adoption gathering pace, we think we are finally seeing a divergence of fortunes consistent with our view that the new cycle has entered a more pernicious phase. Fortunately two of our largest holdings bucked the weak earnings trend - Facebook reported y/y revenue growth of +58% while Amazon achieved its highest ever quarterly profit ($513m) with AWS growing 64% y/y. Elsewhere, results across our portfolio were pleasing in spite of the 'macro' slowdown that larger companies are experiencing. The portfolio also benefited from two strategic M&A transactions during the month, with Ruckus Wireless acquired by Brocade while Cvent was snapped up by private equity for premiums of 45% and 68% respectively. In addition, Oracle made two small public market Software-as-a-Service (SaaS) acquisitions making it clear that strategic M&A was very much back on the agenda.

Our Performance

Our total return performance came in ahead of our benchmark, our own net asset value per share rising 1.0% during the year versus a 0.1% decline in the sterling adjusted benchmark. In the US the most significant positive contributor to performance was Amazon (+64%) which delivered strong growth and improved profitability in both e-commerce and public cloud computing. The portfolio also benefited from its off-benchmark exposure to computer gaming companies including Activision Blizzard (+60%), Electronic Arts (+12%) and Ubisoft (+65%) that benefited from strong console sales and growing digital delivery of content. Outside of the US, we managed to add value in all major regions with the exception of Japan where performance modestly trailed the benchmark. Relative performance was also positively impacted by underweight positions in a number of large index constituents that delivered disappointing returns during the year, including Apple, Ericsson, Hewlett Packard, IBM and Qualcomm. The Trust also benefited from its underweight PC exposure as waning demand weighed on key suppliers such as Micron, Seagate and Western Digital. M&A also contributed positively to performance with two of our holdings - Cvent and Ruckus Wireless - acquired during the year at healthy premiums. Our decision to retain some liquidity also added value, in part due to pronounced Sterling weakness. In terms of negatives, relative underperformance was generated by our underweight position in Microsoft (+10%) where cloud growth more than offset sluggish PC trends. The Trust was also negatively impacted by sharp share price declines at LinkedIn, Nimble Storage and Twitter following earnings disappointments while broader compression of next generation valuations saw holdings such as Demandware, Netsuite and Splunk generate negative returns despite delivering strong fundamental growth during the year.

Economic Outlook

After another year where economic growth fell shy of expectations and in the light of the recent episode of pronounced asset volatility, forecasts for 2016 have been subjected to further downward revision reflecting loss of momentum in advanced economies and continued headwinds in emerging markets. Current global GDP growth forecasts of 3.2% (2015: 3.1%) better reflect tighter monetary conditions in the US and Japan and the reversal of earlier hopes associated with an 'energy windfall'. Advanced economies are expected to expand by 1.9% this year led by 2.4% growth in the US (2015: 2.4%) where housing and labour market strength should offset the impact to exports coming from the stronger Dollar and energy related weakness. Europe is also expected to grow in line with the prior year, current estimates of 1.5% growth capturing weaker external demand ameliorated by lower energy prices, some fiscal expansion and supportive financial conditions. Expectations for Japan have also been revised lower with just 0.5% growth anticipated this year as Yen appreciation and weaker emerging market demand offset the positive impact of lower oil prices and easing measures designed to support private demand. Growth in developing economies has also been revised lower with current expectations of 4.1% about 2% below the average of the past decade as the Chinese economy continues to decelerate. Resource dependent countries remain challenged by lower oil / commodities prices but mathematically will drag less on overall growth this year with Russia and Brazil forecast to contract by 1.8%/3.8% respectively, as compared to 3.7%/3.8% in 2015. As one of the largest beneficiaries of cheap energy, India is likely to remain a bright spot with growth pegged at 7.5% this year (2015: 7.3%) driven by private consumption.

Despite downward revisions to growth, risks associated with a persistent sub-trend recovery and the most unusual recent 'oil shock', our base case remains a positive one where global/US recession is avoided as China/commodity/Dollar-related weakness is ameliorated by consumer strength and further policy action as required. Key to this call remains our constructive assessment of the US economy, which just a few months ago some believed was at risk of stumbling into a recession. Our view at that time - and today - is that while weaker data may have challenged the idea of the US economy as "an oasis of growth in a listless global economy", it largely reflected energy-related weakness (impacting US industrial activity) and pronounced US Dollar strength. As such, the sharp decline in rail cargo volumes witnessed earlier in the year should be considered against a backdrop of strong auto sales, housing market strength and improved bank lending. Moreover, the US labour market remains robust with unemployment at an eight year low (4.5%) having added an average of 221k jobs per month during 2015. In other words, US data remains supportive of a 'two-speed' economy with weak external demand (and oil-related retrenchment) offset by consumption that looks well supported by low interest rates, declining y/y energy prices and low household debt service.

We also remain relatively sanguine about China based on our long-held view that policymakers have sufficient monetary and fiscal 'firepower' to prevent a 'hard-landing'. This position was tested early in 2016 amid a slew of data that pointed to further economic deceleration -Q4'15 annualised GDP growth of 6.8% (the slowest pace of expansion in twenty-five years) and a number of other indicators such as electricity consumption, rail freight, and vehicle sales worse still. Asserting that the economy was on track while easing aggressively, Chinese policymakers raised suspicions that conditions were worse than they were prepared to admit, while earlier policy missteps (including the handling of the stock market) had damaged their credibility. Against this backdrop, the decision to abandon the US Dollar peg and move to a trade-weighted currency basket took on a very defensive hue resulting in capital flight (at a pace that would have exhausted Chinese reserves within three years) and fears that China was prepared to risk a currency war in order to deliver requisite growth. Given long-term structural concerns that are impossible to dispel ("the unwinding of excessive, credit-fuelled investment and overcapacity") investors embraced the view that "what ails China's economy… may not be easily remedied".

However, given positive trade and current account surpluses and with c.$3.2tr in foreign currency reserves we remain steadfast in our view that Chinese policymakers should be able to prevent worst case outcomes. This 'muddling-through' position feels a little less controversial today following a period of US Dollar weakness that has seen the RMB stabilise, allowing reserves to rebuild modestly in both March and April. We have even seen the IMF recently increase its GDP forecast from 6.3% to 6.5% due to strong service sector growth, bringing its forecast in line with the low-end of the official growth target for 2016 of between 6.5-7.0%. Even the decision to reference the Yuan's performance against a trade-weighted basket of currencies looks a little less defensive given divergent monetary policy; sustained Dollar strength and QE in both Europe and Japan. However, we are mindful that the PBOC is likely "preparing the market to interpret a weaker Yuan versus the Dollar (as) not being devaluation" in order to support exports that declined 1.8% y/y in 2015. In a world of sub-trend growth and heightened sensitivity about the use of competitive devaluation as a policy tool, the Yuan is likely to remain an important determinant of investor sentiment. As such, China remains a key battleground and - given the enormity of the (economic rebalancing) task at hand - we fully expect our view to be tested over the coming year.

We are also relatively constructive on oil, commodity and by extension, emerging markets although our interest in the first two is limited to the risk they pose to the global economy and/or risk appetite given that energy prices were the "genesis of the (market) turmoil and angst" in early 2016. While we had previously hoped that lower energy prices would prove additive to global GDP, we - like most investors - had not anticipated the rout experienced in February when oil fell as low as $26/ barrel. Mindful of Hooke's Law (which states that stress is proportional to strain, but only when strain is sufficiently small), by early 2016 the 80% oil price decline since mid-2014 tested the breaking points of most energy exporters. Although prices have subsequently rebounded, we now know that c$30 oil is incompatible with financial market stability. Beyond its contribution to Dollar strength and demand destruction among energy exporters, sustained oil price weakness has been shown to impact the US economy (energy production accounting for c.3% of GDP and 1.7% of employment), agricultural prices and capital spending (more than $380bn worth of oil projects were delayed or cancelled in 2015). Furthermore, the energy sector also boasts a disproportionately large footprint in capital markets, accounting for more than 7% of stock market capitalization, 10% of investment grade credit and 16% of outstanding high yield (HY) bonds while oil and gas funds account for more than 56% of the sovereign wealth market that holds c.$3tr of equity assets.

From our dispassionate (and admittedly novice) perspective, the early 2016 rout looked like it might prove the waterfall conclusion to an eighteen-month period of sustained oil price weakness. Since then, oil has rallied sharply from lows, allowing a number of other markets (high yield, EM currencies) to normalise. As a result of fracking (horizontal drilling and hydraulic fracturing used to extract oil from shale rock) and the end of Iranian sanctions - we expect oil prices to remain volatile. However, there is growing evidence of a much-needed supply response including a US rig count that has declined c.75% from highs. We are also seeing some fiscal adjustments in oil producing countries while financial hedges are also likely to play less of a role in supporting loss-making supply in the year ahead. The energy market also appears oddly vulnerable to any supply-shock with global spare capacity estimated at just c.2% as compared to c.30% in the 1980s and 8% ten years ago. With Donald Trump having recently secured the Republican Presidential nomination, prospects for a more confrontational US foreign policy have likely increased while a rolling back of the Iran deal looks a genuine possibility in the event of a Republican victory. In short, while we do not expect energy markets to return to their original shape (absent an unexpected 'restoring force' such as sustained Dollar weakness) neither do we expect a repeat performance of the oil rout and high yield travails being transmitted into equity markets.

In addition, we continue to take comfort from the fact that policymakers remain alive to the risk posed by deflation. The unusual alignment of interest between policymakers and investors (equally keen to avoid a deflationary outcome) has been a bulwark of the current bull market and - with core inflation below target everywhere and evidenced by recent events in Europe and Japan - it appears alive and well. Even in the US, where policy tightening began in October 2014 (with the end of QE) and more recently in December 2015 when the Federal Reserve actually raised rates for the first time in a decade, policymakers remain dovish - insisting that monetary policy remains data dependent at a time when unemployment has fallen below what many consider to be the economy's long-term natural rate. This unusual degree of latitude reflects core inflation that remains well below target and muted inflation expectations (five year break-evens near post crisis lows), which should allow the Fed to remain comfortably 'behind the curve'. While we acknowledge some evidence of unintended consequences emanating from the latest wave of policy efforts (e.g. negative interest rates perceived to be hindering bank profits without sufficiently steepening the yield curve) we are hopeful that these will prove manageable.

Beyond China, currencies and oil price weakness, there are a number of additional risks worth considering. As previously discussed, the greatest risk to equity markets remains the potential loss of policymaker support that has underpinned risk assets since 2009. This continues to look unlikely for now given that deflation remains a key policymaker focus in Europe and Japan while we expect the Federal Reserve to remain intentionally 'behind the curve'. A sub-trend (and increasingly uneven) global recovery together with large output gaps are likely to present investors with future 'growth scares', particularly in emerging markets where fortunes remain closely tied to commodity prices and China growth. Although systemic risk has continued to diminish, the implications of a Fed tightening cycle are not yet fully known, particularly in relation to its impact on EM currencies and external financing conditions. Policy error is another notable risk; while it is true that the Fed remains 'data dependent', further labour market improvement and greater evidence of wage inflation could yet test the Fed's resolve. We are also mindful of reflexivity, where financial volatility impacts confidence and demand in a negative feedback loop and the longer-term impact of persistent sub-trend recoveries that reduce potential output and increase the potential for secular stagnation. Political risk remains the most potent exogenous risk as it relates to both fragmentation and acts of terrorism. Following the recent UK referendum and the decision to exit the EU, so-called 'Brexit' remains a key political risk. Although we have limited direct exposure to UK equities (<3%) the ramifications of a UK withdrawal are yet unknown; until a modus operandi is found, uncertainty is likely to persist. Failure to reach an accommodation may increase the risk of a so-called tail outcome, particularly against a backdrop of sub-trend global growth. Other risks include US presidential elections in November, corporate tax reform and the challenge to nation states posed by Islamic extremism in North Africa and the Middle East.

Market Outlook

Although risk assets have rallied sharply from their February lows, we are hopeful that equities will add to their gains during the remainder of our financial year. The combination of earnings growth and weaker markets has resulted in equity valuations compressing modestly with the forward PE on the S&P 500 trading on c.17.3x, from 17.6x twelve months ago. Despite this, absolute valuations remain above long-term averages on most traditional measures of value, which is likely to result in returns becoming more dependent on underlying earnings (and dividend) growth. This was certainly true during the past year as muted returns reflected weak global growth, Dollar strength and downward revisions in cyclical groups (particularly energy) that constrained overall US corporate earnings. Things should improve this year as energy-related earnings have been de-risked although currency remains a key determinant of 2016 earnings as every 2% increase in the trade weighted Dollar equates to negative earnings revisions of c.1%. As previously, stocks continue to look compelling against both cash and bonds with the Fed Model (which compares earnings and bond yields) suggesting that equities remain significantly undervalued, while the S&P 500 dividend yield (2.3%) remains in excess of ten-year Treasury yields (1.5%). This picture is similar across much of the world with dividends in excess of long-term sovereign yields in most regions, with around $11.7tr of global government bonds trading at yields below zero. This unusual backdrop has seen US companies apparently recognize the relative appeal of the two asset classes having recently swapped equity for debt at a run rate of c.3% of GDP.

Six years of profit growth have left the S&P500 (ex-financials) with $1.45tr of cash and equivalents. However, with much of this liquidity 'trapped' overseas, US companies have continued to raise domestic cash via bond sales. Despite high yield problems (issuance down 23% y/y in 2015) debt markets have remained open for investment grade companies. Just recently Dell managed to sell $20bn of bonds to finance its proposed acquisition of EMC. The combination of balance sheet strength and near-record debt issuance should continue to support stock repurchases worth $569bn during 2015, equivalent to 3% of S&P 500 aggregate shares outstanding. In contrast, the IPO market has remained subdued after a difficult 2015 with just $12.1bn raised globally during Q1'16, a 70% y/y decline in total capital raised and by far the weakest quarter since 2009. Typically lean years for IPOs (<100 companies coming public in the US) are followed by an average return of 12% over the following twelve months. Although 2015 will be a tough act to follow, M&A activity should also continue to provide support for stocks and valuations. The combination of a challenging first-quarter and the introduction of stricter rules for tax inversions (resulting in the largest withdrawn deal on record when Allergan and Pfizer shelved their proposed merger) has resulted in global M&A volumes declining 14% y/y in Q1. However, we expect activity to recover as companies look to augment slowing growth, cut costs and take advantage of remarkably cheap money. We also expect the Chinese to remain active having spent more than $100bn on outbound M&A during Q1'16 (accounting for almost one-sixth of all deal activity), almost eclipsing their previous annual record of $109bn.

Our constructive view is likely to be tested during the coming year given that valuations and the duration of the present bull market already exceed long-term averages. Equity market setbacks are likely to continue to take the form of 'growth scares' as experienced in early 2016 with China and oil likely focal points. However, we are comforted by the fact that sub-par recoveries 'tend to persist' while slightly elevated equity valuations remain far more attractive than cash and sovereign debt where negative real returns look all but certain. We continue to see limited short-term risk to corporate profit margins with recent weakness almost entirely explained by energy (and to a lesser extent industrial) sector malaise. Rather than subscribe to the mean reversion view, we believe higher margins reflect the shift from manufacturing to services, globalization (which has changed the relationship between capital and labour) and the growth of margin-rich technology companies such as Alphabet and Facebook. That said, we are cognizant of two potential cyclical margin headwinds - higher interest rates and wage inflation. We are also mindful about the impact of potential corporate tax reform following the abolition of the so-called 'Double Irish' tax structure in late 2014. However, we do not anticipate a significant change to prevailing tax rates as the US is likely to resist international efforts to "grab a tax base" of its corporations. Certainly the recent £130m deal between Alphabet and HMRC fits the 'slapped wrist, modestly higher tax' model that we anticipate going forwards. Obviously we will continue to monitor tax related developments but for now our base case does not anticipate wholesale change to a global tax system that has been in place since 1928.

Although we remain constructive, it is worth reiterating the potential catalysts that might require us to significantly alter our view. The first - and one that came into focus during early in 2016 - relates to the high-yield market because widening spreads have empirically preceded equity bear markets. Having bottomed at less than 400 basis points (bps) in mid-2014, high-yield spreads ballooned to almost 900bps in February which was transmitted into the equity market resulting in lower PEs and pronounced small cap / long duration underperformance. However, we opted to ignore this 'signal' because the energy sector (c.15% of the high yield market) was largely responsible for the wider spreads. As such, weakness was "primarily a liquidity issue, not a broad based credit problem" Just as the oil price has recovered, so too has the high yield market with spreads back at c.600bps while high yield bond funds have experienced positive flows of $6.5bn year to date. Naturally recession risk remains a key concern, although there are only two indicators with any track record at anticipating recession, and one of them (the stock market) has "predicted nine of the last five recessions"! The other indicator - the yield curve - has produced far fewer false negatives but we wonder if its signals can be trusted today given ZIRP / QE distortions. The one thing we know we cannot rely on are economists, the majority of whom failed to predict the three most recent recessions even after they had begun! We will also keep a watchful eye on wage inflation, which represents one of the greatest risks to the alignment of interest between policymakers and investors that has underpinned equity markets post the financial crisis. Furthermore, rising wages could signal a peak in profit margins, which have typically preceded stock market peaks by twelve to eighteen months.

Technology Outlook

Given that our sector has become increasingly dependent on global GDP growth, it should come as no surprise that technology spending forecasts have continued to be revised lower, with worldwide IT spending now expected to increase just 1.7% (2015: 2.4%) y/y in constant currency terms. This represents the lowest annual increase since 2010 and is another year where budget growth will likely trail global GDP, suggesting that things are getting worse, not better for technology incumbents. Gartner now estimate a 2015-2020 CAGR of just 2%, consistent with our long-held deflation / new cycle view. With more than half of technology revenues coming from overseas, Dollar stabilisation should result in a less formidable F/x headwind this year although consensus S&P technology revenues are still expected to decline by 1.0%. In terms of geographic and sector risk, China represents only 5.2% of IT spending whereas financial services (another area of investor concern) accounts for almost a quarter of overall spending. It is also worth noting that the US represents c.40% of IT spending making the sector particularly sensitive to US recession risk.

In line with the broader market, the technology sector de-rated modestly over the past year leaving it trading at a forward PE of 15.3x (2015:17.5x) representing a c.14.0% premium to the five year median PE of 13.4x. As in prior years, large cap technology companies remain awash with net cash although market capitalisation weighted measures of value continue to be flattered by inexpensive large-caps. On a relative basis, the technology sector trades at c.0.9x the market multiple (ignoring relative balance sheets). In light of the broader sector's subpar growth profile, we do not anticipate a material re-rating over the coming year. Conversely, relative valuation downside risk should be contained given many growth-challenged incumbents are now focused on margins (rather than revenue) and improving shareholder returns which has allowed them to attract a new (value) audience. Legacy companies have also attracted increased private equity interest, epitomized by Dell / Silver Lake's audacious $67bn acquisition of EMC which we believe says more about the attractiveness of deploying cheap debt than it did about the merits of an ageing enterprise storage company.

While incumbents appear to have become better stewards of capital, accelerating Cloud adoption continues to make enterprise computing look anachronistic, supporting our view that the new technology cycle has become increasingly disruptive with newer technologies and delivery models replacing, rather than merely augmenting existing ones. As in previous years, we continue to believe that incumbent vendors will struggle to even keep up with lacklustre overall IT spending as budgets continue to be reallocated away from traditional areas in favour of new investment priorities. Looking at a number of year-end surveys and Gartner's schedule of IT priorities reveals that analytics, security, mobility, infrastructure and Cloud continue to dominate CIO's spending intentions at the expense of servers, PCs and printing. As we have long argued, these new priorities simply reflect what we already know - that 'all' incremental workloads (units of compute and storage) are heading to the Cloud and the role of IT is in flux. As such we concur with the view that 2015 was the "end of the beginning for cloud computing and the beginning of the end for traditional IT".

As a result, nearly all legacy technology areas are beginning to slow and/or contract. Based on Gartner forecasts, the overall device market will contract for the first time this year with constant-currency end-user spend falling 0.5% y/y to $719bn. After a better 2014 (Windows XP support expiry), the $200bn PC market experienced its worst year on record last year with sales contracting by 10% and units falling below the 300m mark for the first time since 2008. With global PC shipments falling 9.6% y/y in Q1'16 , the outlook for the hard disk drive (HDD) industry remains challenged with units expected to decline by 7.1% annually between 2015 and 2020 as solid state drive (SSD) substitution adds to PC-related woes. The $60bn tablet market is already in full retreat with units forecast to fall by c.5% in 2016, having contracted by an estimated 8% last year. Having supported overall device growth for years, smartphone (2015: $400bn ) units are expected to increase by only 3.1% this year while ASPs will continue to decline (ex-Apple) now that global penetration has reached c.79%. Elsewhere, a number of large traditional technology markets remain in multi-year secular decline including printing (2015: $47bn), UNIX servers (2015: $5.8bn) and mainframes (2015: $4.5bn). With many of these key categories fully penetrated and at risk from technology substitution, growth is unlikely to recover until a genuinely new device type such as virtual reality (VR) becomes mainstream.

That is not to say there is an absence of industry growth; the spectacular successes of Apple, Alphabet, Amazon and Facebook (to name a few high profile examples) are testament to the fact that the combination of tech deflation, smartphone proliferation and the Internet has increased the reach of technology while making it possible to 'reinvent' industries such as advertising, commerce, entertainment and travel. Unfortunately (as we have long argued) these opportunities have little to do with enterprise incumbents and so they embark on M&A activity in order to soften the impact of the new cycle by extending their product offerings and relevance while obfuscating the condition of their core business. Having expected a return of strategic M&A after a two year hiatus, even we have been surprised by the explosion in deal activity during recent weeks as buyers have looked to take advantage of the reset in next generation valuations. So far in 2016 there have been ten M&A deals in the software sector alone (all at sizeable unaffected premiums) with private equity firms unusually accounting for half of the transactions. In addition to the two deals that occurred during the last financial year, we have directly benefited from the acquisition of Demandware by Salesforce.com and the sale of Qlik Technology to Thoma Bravo while benefiting from the wider recovery in next generation valuations. Highly reminiscent of the fertile M&A backdrop following the 2011 growth scare where more than a dozen publically traded SaaS and security companies were acquired for more than $30bn, we expect the recent trend to persist as a number of incumbents who have declared interest in M&A including Cisco, Hewlett Packard and IBM have yet to show their hands.

The return of widespread strategic M&A reflects the interplay of two factors - diverging fundamentals and converging valuations. In terms of fundamentals, we have long argued that the new technology cycle had likely entered a more pernicious phase. As we go on to discuss in greater detail in the 'new cycle update' section, we have long felt it was a foregone conclusion that bespoke enterprise computing would give way to a vastly cheaper, mass produced Cloud alternative. With c.15% of IT workloads now in public clouds, we expect Cloud adoption to accelerate in the years ahead, Gartner predicting that Infrastructure as a Service (IaaS) growth will be 15x greater than overall IT spending in the coming years. Against this backdrop, it is difficult to see anything other than tough times ahead for most enterprise incumbents that have little to gain and much to lose from a disruptive new cycle. Although the divergence of sector fortunes has long been apparent, first quarter earnings season provided us with the best evidence yet with Amazon's cloud progress ($10bn annualised revenue run-rate, +64% y/y growth) in stark contrast with earnings and/or guidance mishaps across incumbents. While many of the challenged legacy companies fell back on 'macroeconomic uncertainty', the vast majority of our holdings reported strong results. There was no evidence of uncertainty at Splunk which delivered its largest "beat" versus expectations since its 2012 IPO while Salesforce.com reported impressive results with billings growth accelerating to 29% y/y.

Unfortunately the bifurcation in technology fortunes has been obfuscated by a convergence in sector valuations with a number of legacy companies recently trading at their highest price earnings ratios for years because of broader market PE expansion, improved capital return, private equity interest and/or the articulation of Cloud strategies. During the recent market swoon, these challenged incumbents significantly outperformed as investors sought (perceived) safety and dividend income. In contrast, 2015 saw a continuation of the post Q1'14 trend of valuation compression that almost entirely offset fundamental progress at most next generation companies. This process appears to have concluded in Q1'16 as a handful of Q4 earnings disappointments and severe risk aversion saw the average growth stock fall more than 30% during January alone. This time last year we acknowledged that the valuation readjustment between the sector's 'winners' and 'losers' might continue, but not in our wildest dreams did we expect SaaS stocks to shed three points from their forward EV/Sales valuations (7x->4x) - as much as they did during the Great Recession (5x->2x) - in less than twelve months. The extent of this valuation compression was mirrored elsewhere within our sector as Internet and security stocks made post 2009/2011 lows respectively. By the end of January, Cloud and legacy software valuations had almost converged while a number of our favourite names (Proofpoint, Red Hat and Salesforce.com) had fallen to c.5x EV/ maintenance revenues, a level where financial M&A has typically taken place.

Despite experiencing our most challenging period of relative performance this cycle we took advantage of the unusual market backdrop by rotating further from our benchmark - selling incumbents and growth cyclicals in favour of next generation companies with exposure to our preferred themes. While valuations have recently rebounded with the market and the return of strategic M&A, they remain below five year averages and this feels insufficient given that after years of 'travelling', our 'new technology cycle' story appears to have arrived. Going forwards, we are doubtful that many legacy technology stocks will continue to be considered 'bond like', even against a backdrop of record low yields, which is why we will likely continue to pare and/or exit long-held (underweight) positions in the likes of Cisco, Oracle and Qualcomm. The root cause of the incumbent challenge - deflation - together with smartphone proliferation has created a remarkably fertile backdrop for innovation that millennials are embracing as second nature. Technology companies are re- inventing industries, creating new markets, empowering customers and allowing them to increasingly 'route around institutions'.

New Cycle Update

Last year was a pivotal one for the Cloud as adoption accelerated and permeated up the technology stack, wreaking havoc on incumbents and exploding the myth of the so-called hybrid approach. In addition, Amazon "dropped its bombshell" in Q1'15 when it revealed its cloud infrastructure business - Amazon Web Services (AWS) - generated operating margins of 17% , exploding conventional wisdom that cloud computing "was a race to the bottom on price". A seminal moment in Cloud history, Amazon's unexpected disclosure, combined with 70% growth at AWS during the year saw more than $228bn added to the combined market caps of Amazon and Microsoft during the remainder of 2015 as investors began to more fully embrace "the biggest growth story of the decade, maybe our generation". And as if that wasn't enough, large traditional companies began to publicly anoint the Cloud with Jim Fowler, CIO of GE perfectly capturing the zeitgeist when he declared at AWS re:Invent in October that "the Cloud has gone from probable to inevitable". Today, the $17bn public cloud infrastructure market is dominated by AWS which has used its six-year head start to establish a sizeable lead in raw compute and storage (Gartner estimate that AWS deploys over 10x more compute than all the other infrastructure-as-a-service companies combined). With revenues expected to grow well past $10bn this year AWS is set to become the "the fastest growing enterprise technology company in history" taking only ten years to reach this rare milestone which compares favourably to the likes of Microsoft (22 years), Oracle (23) and Apple (19). The remarkable ascent of AWS reflects the size of the market opportunity, the unprecedented scale of public clouds and the disruption to existing franchises with IT conversations now dominated by "names unrecognizable ten years ago".

2015 was the year when Cloud went mainstream because of a growing number of traditional companies prepared to go "all in" and evangelise its merits. This trend was epitomised by GE which outlined its plan to move 60% of its workloads to the Cloud by 2020 (from 20% today) which would allow them to close 30 of its 34 datacentres and migrate more than half of their 9,000 on-premise applications. Having concluded that running their own datacentres would not help them "sell another aircraft engine" and in the light of the 52% cost savings achieved in their oil and gas division having migrated applications to Amazon, GE gushed "AWS is our trusted partner who's going to run our company for the next 140 years". In addition, News Corp announced its plans to migrate 75% of its entire IT infrastructure to AWS in order to increase the pace of new product velocity while saving $100m over three years. Financial giant Capital One also struck a blow for the cloud when it stated it had begun to "deploy some of our most critical workloads on Amazon" because it "enables us to operate even more securely in the public cloud than our own datacentres".

While the decision to migrate to the Cloud ultimately rests with its superior economics (due to scale, elasticity and relentless cost cutting that has seen AWS reduce prices 49 times ) and a usage- based pricing model, we think accelerating adoption reflects the fact that many of the earlier concerns associated with the Cloud have been addressed. At the top of the list has been security, which we have long felt was misplaced but difficult to disprove (much like 19th century concerns about skyscrapers). However, the fact that "all of the high profile security breaches over the last two years have occurred in on- premise IT infrastructures" has not gone unnoticed. Indeed, Tony Scott, the US Federal Government CIO echoed Capital One when he said that Cloud providers "do a better job of security than any one company or organisation can probably do". Microsoft's decision to invest aggressively in Azure will have also helped ease concerns about potential vendor lock-in while at the same time addressing the issue of data sovereignty, with Microsoft Cloud available in 20+ regions while Amazon will soon have 84 datacentres across twelve regions. In addition, enterprises have become increasingly comfortable with the Cloud thanks to their growing experience of software-as-a-service (SaaS) that accounts for c.27% of software applications in use today.

Having debunked many of the earlier barriers to adoption, we expect cloud penetration to accelerate over the coming years with Cisco forecasting that by 2019 roughly half of all IT workloads will be in public clouds. Over the next five years, incumbents are therefore likely to suffer far greater disruption, which to date has been limited to the absence of growth (as every incremental IT Dollar has gravitated to the public cloud) and some pricing pressure. However, the next wave of adoption will be driven by workload migration - the uprooting of existing enterprise compute - which Gartner believe will see more than $1tr of IT spending shift to new categories as a result of cloud computing by 2020. The ongoing 'hollowing out' of the $55bn server market - where 'white box' (unbranded) servers preferred by the likes of Amazon account for 31% of units but only 13% of revenues - suggests that a large portion of the $1tr will probably be destroyed (by cloud deflation) in the process. As AWS moves further up the computing stack, segments that have been unaffected by disruption thus far are likely to be sucked into the Cloud maelstrom. This is likely to include the database market, where we think a recent agreement announced by Salesforce to increase its use of AWS is best understood as part of a longer-term plan to get off the Oracle stack.

Over time we expect the cloud will also catch up with the $800bn IT services industry, which captures a staggering 40% of overall technology spending today. Renting engineers from a hyper-scale infrastructure provider like AWS or Azure is an order of magnitude more efficient (and more secure) than managing an underutilised, bespoke infrastructure estate, irrespective of whether it is off-shored or not. A typical enterprise might employ one IT person for every 30 servers. By comparison, Microsoft reportedly employs 15 people to manage a 150k server datacentre, ten of whom are security guards and cleaners! Cloud services are now sufficiently penetrated in the enterprise that CIOs can seriously plan for the move towards a serverless architecture. IT infrastructure estates could shrink by 25%+ in the coming years, taking IT services companies down with them. As almost all incremental IT spending moves to the cloud, it is hardly surprising that pricing is brutal across IT services. We believe that worse lies ahead. Robotic Process Automation (RPA) is already taking over low value repetitive work, generating massive cost savings for clients. This will prove highly disruptive to an industry that has grown fat on a "cost plus" pricing model. Just as rats are said to leave a sinking ship, the behaviour of incumbents speaks volumes about what they really think about "one of the most disruptive forces of IT spending since the early days of the digital age". We have seen EMC attempt to escape the glare of public markets via a marriage with Dell, the breakup of HP and Symantec, ongoing weakness at IBM and challenged incumbents such as Informatica and TIBCO happily surrendering to private equity. We have also witnessed a comprehensive agreement between Red Hat and Microsoft (previously "unthinkable" given that Steve Ballmer once described Linux and open-source as a "cancer") because both companies understand that cloud computing is going mainstream and are attempting to "rebalance the ecosystem to check Amazon". The remarkable rise of AWS has also exploded the myth of so-called 'hybrid cloud' (where on-premise compute is augmented with public cloud) as "a statement of the obvious, not a strategy" articulated by incumbents to slow public cloud adoption or help them sleep better at night. As such, we continue to believe that the most important investment conclusion is to avoid legacy companies with much to lose and little to gain from cloud migration. In terms of actual cloud exposure, it is increasingly obvious that public cloud computing has become a two-horse race with AWS way out in front and Microsoft a "clear number two". With pricing relatively stable and emboldened by the fact that AWS has been solidly profitable for years we have increased our Amazon holding. We have also pared our underweight position in Microsoft, which looks set to participate in cloud migration having invested heavily in its own cloud ('Azure') over recent years. While Google remains a wildcard, the public cloud looks off-limit to everyone else including IBM (who spent $2bn on Softlayer), EMC (who acquired Virtustream for $1.2bn) while HP has already given up, closing down its Helion public cloud in January.

Internet applications remain key beneficiaries of the Cloud delivery model with smartphone growth driving the number of global Internet users beyond 3bn (+9% y/y) last year, representing 42% of the world's population. In addition, mobile usage trends remain positive with non voice time spent on tablets and smartphones increasing to 174 minutes/ day in the US in 2015 (+11% y/y). The ubiquity of smartphones and other Internet-connected devices continues to change consumption patterns, a trend magnified by the growing demographic importance of so-called millennials who today account for 27% of the US population. While growth in users and usage has continued to provide a favourable backdrop, 2015 highlighted once again that scale matters in the Internet space; that cumulative CapEx and R&D spend provides significant barriers to entry and competitive advantage. Alphabet and Amazon epitomise this, with cumulative CapEx spend of $40bn and $21bn respectively between 2010-2015. First party data is another key factor inherent to success and Alphabet and Facebook have created a clear lead in this race with both boasting numerous applications that exceed 1bn active users across multiple devices. Not only does the size of these networks provide both companies with near unparalleled targeting capabilities but they are helping both companies evolve into natural monopolies. This is entirely consistent with Metcalfe's Law (which states that the value of a network is proportional to the square of the number of its nodes) and explains why Google and Facebook captured 76% of incremental online advertising in the US last year while in China, Tencent, Baidu and Alibaba accounted for 71% of mobile time spent during April.

Worth an estimated $156bn in 2015 (+13.6% y/y) the outlook for on line advertising remains positive with growth coming at the expense of offline traditional media spend. China (+39% y/y ) was the fastest growing region for the third year running while the US once again dominated share of spend with 36% of the total. In the US, online advertising growth actually accelerated (from 16% to 20% y/y) as mobile (+66%) became a tailwind last year. With online (Internet + mobile) accounting for 47% of US media consumption but just 35% of advertising budgets, growth should remain well supported with mobile display and mobile video ad formats likely to plug this gap worth $22bn in the US alone. The two clear beneficiaries of this trend are Alphabet and Facebook as the dominant players in nearly all regions (ex-China) worldwide and likely to account for 41% and 17% of the US online advertising market in 2016 respectively. Two additional advertising tailwinds exist this year - the US Presidential election, which is expected to generate $11bn in political ad spend and the Olympic Games, the world's most watched sporting event. Social media companies continue to look particularly well positioned to benefit from mobile advertising growth (and the explosive growth in video traffic). Facebook remains the undisputed 'social' leader boasting 1.6bn monthly active users (and an astonishing 1.1bn daily users) while its >1bn WhatsApp users send 42bn messages and share 1.6bn photos every day. Tencent also looks well positioned as its chat app WeChat enjoys an undisputed position in China with 650m MAUs. With monetisation at the earliest stage, there is great potential for Tencent to significantly increase performance-based advertising.

The growth of e-commerce continues unabated. In the US, the Census Bureau disclosed that e-commerce ended 2015 at 15.3% of core retail sales (ex food, autos and gas) having added a further 1.5% market share at the expense of traditional retail channels during the year. As with advertising, mobile is driving overall growth as it continues to develop into an integral part of the shopping experience, with m-commerce expected to account for over 20% of total US online spending this year rising to c.45% by 2020. Amazon remains our flagship e-commerce position as growth continues to significantly outpace overall e-commerce with net sales of electronics and other general merchandise growing 31% y/y in North America, capturing an incredible 60% of incremental online sales driven by its 44m US Prime customers. We also continue to hold an Alibaba position as we think the improving monetisation rate (thanks to increased spending on advertising within the platform) should more than offset the negative revenue impact from slower gross merchandise value (GMV) growth. Furthermore, we do not believe the market has properly valued its stakes in Ant Financial, which owns Alipay, the Chinese equivalent of Paypal.

Although smartphones are facilitating change at an unparalleled pace, the market itself continues to slow, our downbeat assessment a year ago borne out by moribund unit growth in 2015 and pricing that continued to erode. 2016 is likely to prove another year of deceleration with smartphone units forecast to grow just 3%, with growth skewed to the second half of the year as consumers delay purchases ahead of the iPhone 7 launch expected in September. With penetration at c.75% globally (and nearer 90% in developed markets) the smartphone market will increasingly depend on replacement demand that is expected to account for 70% of units between 2016- 2020 with the balance skewed towards (lower ASP) emerging markets. However, slowing industry growth does little to convey how difficult the market has become for handset OEMs because Samsung and Apple continue to account for >100% of industry profits with c.39% combined unit share. The reality is worse still as Apple has tightened its grip on industry profits due to its continued success in the premium segment of the market. This has allowed the company to increase ASPs to $717 in 2015 while average Android selling prices fell to $216. With industry ex-Apple profits under severe pressure, it is understandable why loss-making OEMs such as LG have begun to question Qualcomm royalties that are based on revenues, rather than profits. We do not expect any significant alleviation of this adverse IPR trend as unit growth slows, ASPs decline and industry revenues/profits increasingly gravitate towards OEMs with scale and a significant amount of their own IP.

After a year when Apple put even greater distance between itself and its smartphone peers, we remain constructive on the company although we have modestly reduced our position to reflect the more challenging smartphone market. Although its best years of growth are behind it, we still expect Apple to continue to 'defy the s-curve' inline with our 'mass affluent / luxury good company' thesis outlined last year. At the heart of the Apple story is the world's best brand selling premium products with high residual values to affluent customers who use them a lot (on average, 83 times/day ). During a more difficult 2015 where the combination of the strong US Dollar, weaker trends in China and an incremental 6s upgrade cycle weighed on growth, Apple still managed to sell 231m devices with ASPs more than 3x the industry average. Unfortunately, the smartphone market (responsible for between 70- 80% of profits is now essentially penetrated leaving growth reliant on share gains and/ or pricing, neither of which have been heading in the right direction following the introduction of the entry-level iPhone SE and the company's most recent quarter where it reported its first drop in quarterly revenues since 2003 having sold 10m fewer iPhones than a year earlier. Obviously all that can change with the iPhone 7 (due in September) although we expect incremental improvement rather than something akin to the iPhone 6 when a larger screen device drove a sizeable upgrade of the installed base. Despite this, Apple stock remains inexpensive and supported by its exceptionally strong balance sheet, which explains our large absolute (but significantly underweight) position. With the company seemingly at a crossroads, the iPhone 7 is likely to prove a fairly critical waypoint because if it is unable to reignite unit growth, investors may begin to ask if smartphones are going the way of the PC where high levels of penetration and a slowing pace of innovation saw replacement cycles extend from two to five years.

After a strong 2014, the sharp slowdown in smartphone growth (combined with weak PC demand and moderating datacenter builds) resulted in a semiconductor downturn last year. Rather than delivering high single digit revenue growth, industry sales contracted modestly while earnings fell further due to negative operating leverage. However, semiconductor stocks were supported by record M&A activity as companies looked to diversify away from slowing smartphone and PC markets, scale up or simply take advantage of cheap debt. In addition, there was a significant acceleration of outbound Chinese M&A intended to 'jump start' the domestic semiconductor industry. The State Council decision to introduce 'Made in China' targets for semiconductor self-sufficiency (40% of chip consumption by 2020, and 70% by 2025) should ensure ongoing Chinese M&A interest while a number of 'leading edge' manufacturers have agreed to build local manufacturing facilities. While an acquisitive new entrant should support asset prices, we expect the industry to be negatively impacted over time in the same way that the LCD and DRAM sectors were in the late 2000s when new entrants were heavily subsidized by the Taiwanese and Korean governments. As a result, and given our view on device exhaustion, we remain underweight the semiconductor sector which we expect to undershoot global GDP until a new application becomes mainstream. In terms of preferred areas, we still favour semiconductor capital equipment suppliers such as Applied Materials due to rising capital intensity (in the absence of Extreme Ultraviolet Lithography) and faster growth companies with unique technologies such as eMemory (embedded memory IP), Himax Technologies (VR/AR) and Silicon Motion (SSD controllers).

Despite fewer major breaches in 2015, cyber-security remains an important theme within the portfolio and an 'evergreen' beneficiary of smartphone proliferation, Cloud migration and ever greater reliance on the Internet as a delivery mechanism. Increasingly heterogeneous computing has created new attack vectors that have seen 4bn data records breached globally since 2013. As such, security remains a key IT priority with a year-end Piper Jaffray survey revealing that 82% of respondents expected to increase spending this year while in February, President Obama announced a new cyber security National Action Plan calling for a c.35% increase in spending to $19bn in FY17. We expect the regulatory backdrop to remain favourable and substantial upside to existing budgets as and when new threats materialise. However, after a year when companies were furiously plugging holes revealed in their systems, it appears that industry growth is moderating while emphasis has shifted from 'block and protect' (i.e. keeping the hackers out) to more comprehensive solutions focused on "shoring up security at the user level, walling off the most sensitive data and quickly detecting and closing breaches". This should be positive for endpoint growth, security information and event management (SIEM) spending as rapid detection and response solutions garner 60% of enterprise security budgets by 2020, up from less than 10% in 2014. We also expect email security to remain a key multiyear priority as cloud penetration of office productivity software increases from c.15% in 2015 to 60% by 2020. Privileged account management (PAM) is another area we like because the abuse of privileged credentials has been responsible for some of the highest profile breaches in recent history. Longer-term, securing the Internet of Things (IoT) is also likely to prove an attractive area for investment as Internet connectivity exposes new markets (such as televisions and cars) to attack. Despite the longer term risk to some vendors posed by the Cloud, we continue to favour the security theme following its recent de-rating and anticipate renewed M&A activity should valuations not rebound towards five-year averages.

At a time when the value of content is being challenged by usage-based pricing and the power of new platforms, videogame companies appear to be rare beneficiaries of digital distribution made possible by the Internet. Despite wildly exaggerated rumours of its death at the hands of smartphone/casual games, the console is alive and well and midway through a new cycle that began in November 2013 when Sony and Microsoft launched the Playstation 4 (PS4) and Xbox One. Excluding the dramatic rise and fall of the Nintendo Wii (which engaged an entirely new and apparently transitory family audience) this cycle looks like it could be the biggest yet with the installed base estimated to have reached 55m by the end of 2015, 47% greater than the prior cycle and well ahead of expectations. As a result of industry consolidation/bankruptcies during the last cycle, there are only four remaining Western console game players - Activision (held), Electronic Arts (held), Take-Two and Ubisoft (held) - that between them accounted for 58% of the market in 2014. While greater development costs ($30-100m for a triple AAA title) act as a useful barrier to entry, the shift to digital distribution is proving hugely beneficial by allowing users to download full games (20-25% of the market) bypassing the retailer and adding c.$7 to a gross profit of $38 per physical unit sold. However, the more exciting part of the story is that digital distribution allows publishers to sell high margin additional content such as expansion packs, weapon upgrades and virtual currency which should drive revenue growth and margin expansion beyond the peak of the console cycle. Given the improved industry backdrop and limited number of remaining players, we would not be surprised to see further M&A, with potential suitors in the media sector (Vivendi, Time Warner, Disney) and within the gaming industry itself. Lastly, there are two additional drivers that represent upside to existing numbers - eSports (gaming as a spectator sport) estimated to be worth $465m in 2017 and virtual reality (VR) with each of Facebook, HTC and Sony slated to release products this year.

In addition to these key areas, we have a number of other important themes that we have exposure to within the portfolio including payments where mobile is emerging as the dominant payment platform. While current usage of platforms like Apple Pay remains modest, merchant adoption is improving quickly with more than 2m in the US (of a total around 8m). Over time, we expect the smartphone to replace the physical wallet although obstacles clearly remain given that US adults spend 59% of their time online but spend only 15% of their online Dollars using a mobile device. As payments are increasingly taken out of the banking system, banks are being reduced to 'dumb pipes' while their current revenue-take from payments looks at odds with the fact that value is moving into the networks. This should create opportunities for Visa (held) and Mastercard to increase their revenue take. Both companies remain attractive long-term plays on the electronification of payments globally, including in China. Longer term, we are also excited about the potential of distributed ledger technology that enables payment systems (such as bitcoin) to operate in an entirely decentralized framework. This is likely to attack intermediaries with its promise of transparency, commission-less exchange and substantially improved security. However, successful innovation in payments usually requires acceptance from multiple stakeholders in the network and distributed ledger has yet to have its "Netscape moment". Meanwhile banks and insurers look increasingly anachronistic; Gartner estimates that banks will spend more than $360bn on technology in 2016 largely to paper over their creaking infrastructure.

We are also excited about the role technology will play disrupting the automotive market with advances in processing power, sensors, connectivity and vehicle monitoring improving safety, lowering costs and reducing congestion time. In its simplest form, the rise of so-called 'smart vehicles' should see semiconductor content per vehicle increase from $340 in 2014 to $400 by 2019 resulting in a $40bn opportunity. Within this, ADAS (advanced driver assistance systems) will be among the fastest growing categories as worldwide penetration rises from 11% in 2015 to 50% in 2020 and 70% by 2025. However, ADAS is likely to prove just a waypoint on a journey of automobile reinvention as the likes of Alphabet, Apple and Tesla attempt to use software to transform what has been a mechanical industry for the past 100 years. Autonomous vehicles are the goal with a number of automakers and technology companies stating that they will be technically feasible by 2020. To date, Alphabet's self-driving cars have already completed 1.5m miles while Tesla customers are said to have driven 100m miles with autopilot active. Obviously ethical, regulatory and legal challenges will need to be overcome, but CLSA predict 12% global autonomous vehicle penetration by 2025. Concurrent with the move towards autonomous vehicles, we are also likely to see new automotive usage models evolve that address the fact that the average car is used just 4% of the time. Uber is already transforming the way that we travel by taxi (in part by changing their utilization rate) and has longer-term ambitions of disrupting the entire transportation system. As the CEO of GM put it, "we're going to see more disruption in the next 5-10 years than we've seen in the last fifty" - an observation that perfectly captures our excitement about the new cycle and is likely to prove equally valid across most industries now that the Cloud has made landfall.

Ben Rogoff

HISTORIC PERFORMANCE FOR THE YEARS ENDED 30 APRIL

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Total Assets less current liabilities(£m)	358.2	335.5	300.4	274.2	398.6	468.7	503.3	528.8	606.6	793.0	801.3
Share price (pence)	245.0	228.0	190.8	183.0	306.8	373.5	387.0	398.5	442.0	592.0	566.0
NAV per share (pence)	255.9	239.7	226.7	216.8	315.1	368.7	392.6	412.4	458.4	599.2	605.5
Indices of Growth¹
Share price	100.0	93.1	77.9	74.7	125.2	152.4	158.0	162.7	180.4	241.6	231.0
NAV per share²	100.0	93.7	88.6	84.7	123.1	144.1	153.4	161.2	179.2	234.2	236.6
Dow Jones World Technology Index³	100.0	97.9	99.4	94.0	131.3	137.4	148.8	157.7	178.3	230.9	230.6

The Company commenced trading on 16 December 1996 and the share price on the first day was 96.0p per share and the NAV per share was 97.5p.

Notes:

1 Rebased to 100 at 30 April 2006.

2 The net asset value per share growth is based on NAV per share as adjusted for warrants.

3 Dow Jones World Technology Index, (total return, Sterling adjusted) and from April 2013 with relevant withholding taxes removed.

All data sourced from Polar Capital LLP

Market Capitalisation of underlying investments
	<£1bn	$1bn-$10bn	>$10bn
% of invested assets as at 30 April 2016	6.7%	28.1%	65.2%
(as at 30 April 2015)	5.1%	22.4%	72.5%

Breakdown of Investments by Geographic Region		As at April 30 2016	As at April 30 2015
North America		70.3%	70.6%
Europe		7.2%	7.5%
Asia (incl. Middle East) & Pacific		17.9%	19.1%

Excludes cash of 4.6% (2015:2.8%)

CLASSIFICATION OF INVESTMENTS* AS AT 30 APRIL 2016

Benchmark weightings as at 30 April 2016 %		North America %	Europe %	Asia & Pacific %	Total 30 April 2016 %	Total 30 April 2015 %
23.7	Internet Software & Services	20.6	0.5	6.6	27.7	22.7
21.1	Software	20.2	1.9	1.6	23.7	20.1
17.6	Semiconductors & Semiconductor Equipment	6.0	1.1	5.7	12.8	18.4
20.3	Technology Hardware, Storage & Peripherals	6.9	-	1.7	8.6	13.1
-	Internet & Catalog Retail	4.5	-	-	4.5	4.2
6.2	Communications Equipment	3.6	0.1	-	3.7	7.6
1.3	Electronic Equipment, Instruments & Components	2.2	0.2	0.8	3.2	3.3
8.5	IT Services	2.1	0.4	0.1	2.6	1.7
0.7	Healthcare Technology	1.7	0.6	-	2.3	1.4
-	Machinery	0.5	0.6	0.5	1.6	1.1
-	Other	-	0.9	-	0.9	0.7
0.3	Diversified Telecommunications Services	0.9	-	-	0.9	-
0.0	Aerospace & Defence	0.6	-	-	0.6	0.3
0.1	Media	-	0.6	-	0.6	0.4
-	Healthcare Equipment & Suppliers	0.2	-	0.3	0.5	-
0.1	Household Durables	-	-	0.4	0.4	0.5
0.0	Chemicals	0.2	-	0.2	0.4	0.3
-	Electrical Equipment	-	0.3	-	0.3	-
0.0	Wireless Telecommunications Services	-	-	-	-	0.3
-	Automobiles	0.1	-	-	0.1	0.2
0.0	Life Sciences Tools and Equipment	-	-	-	-	0.9
	Total investments	70.3	7.2	17.9	95.4	97.2
	Other net assets (excluding loans)	3.8	3.2	1.7	8.7	4.5
	Loans	-2.0	-	-2.1	-4.1	-1.7
	Grand total (net assets of £801,307,000)	72.1	10.4	17.5	100	-
	At 30 April 2015 (net assets of £793,019,000)	71.2	9.6	19.2	-	100

* The classifications are derived from the Benchmark as far as possible. The categorisation of each investment is shown in the portfolio.

Where a 0.0 weighting is shown for the Benchmark, the sector is in the benchmark but comprises a sub 0.1% sector; where a dash is shown for the Benchmark it means that the sector is not represented in the Benchmark. Not all sectors of the Benchmark are shown, only those in which the Company has an investment at the financial year end.

Statement of Comprehensive Income (uNAUDITED)

for the year ended 30 April 2016

	Notes	Year ended 30 April 2016			Year ended 30 April 2015
	Notes	Revenue return £'000	Capital return £'000	Total return £'000	Revenue return £'000	Capital return £'000	Total return £'000
Investment income	3	6,618	-	6,618	6,018	-	6,018
Other operating income		5	-	5	5	-	5
Gains on investments held at fair value		-	8,782	8,782	-	191,422	191,422
Net gain/(loss) on derivative contracts		-	1,550	1,550	-	(3,263)	(3,263)
Other currency gains		-	1,040	1,040	-	1,165	1,165
Total income		6,623	11,372	17,995	6,023	189,324	195, 347
Expenses
Investment management fee	4	(7,921)	-	(7,921)	(7,033)	-	(7,033)
Other administrative expenses		(759)	-	(759)	(739)	-	(739)
Total expenses		(8,680)	-	(8,680)	(7,772)	-	(7,772)
(Loss)/profit before finance costs and tax		(2,057)	11,372	9,315	(1,749)	189,324	187,575
Finance costs		(445)	-	(445)	(302)	-	(302)
(Loss)/profit before tax		(2,502)	11,372	8,870	(2,051)	189,324	187,273
Tax		(582)	-	(582)	(887)	-	(887)
Net (loss)/profit for the year and total comprehensive income		(3,084)	11,372	8,288	(2,938)	189, 324	186,386
Earnings per ordinary share (basic) (pence)		(2.33)	8.59	6.26	(2.22)	143.06	140.84

The total column of this statement represents the Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.

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

All items in the above statement derive from continuing operations.

The Company does not have any other comprehensive income.

Statements of Changes in Equity (UNAUDITED)

for the year ended 30 April 2016

	Share capital	Capital redemption reserve	Share premium	Special non-distributable reserve	Capital reserves	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Total equity at 1 May 2014	33,084	12,802	141,955	7,536	483,015	(71,759)	606,633
Total comprehensive income:
Profit/(loss) for the year to 30 April 2015	-	-	-	-	189,324	(2,938)	186,386
Total equity at 30 April 2015	33,084	12,802	141,955	7,536	672,339	(74,697)	793,019
Total comprehensive income:
Profit/(loss) for the year to 30 April 2016	-	-	-	-	11,372	(3,084)	8,288
Total equity at 30 April 2016	33,084	12,802	141,955	7,536	683,711	(77,781)	801,307

Balance Sheet (UNAUDITED)

AT 30 April 2016

	30 April 2016	30 April 2015
	£'000	£'000
Investments held at fair value through profit or loss	764,771	770,353
Current assets
Receivables	12,811	14,575
Overseas tax recoverable	96	103
Cash and cash equivalents	70,325	33,815
Derivative financial instruments	2,244	-
	85,476	48,493
Total assets	850,247	818,846
Current liabilities
Payables	(15,375)	(12,288)
Bank loans	(33,565)	(13,539)

	(48,940)	(25,827)
Net assets	801,307	793,019

Equity attributable to equity shareholders
Share capital	33,084	33,084
Capital redemption reserve	12,802	12,802
Share premium	141,955	141,955
Special non-distributable reserve	7,536	7,536
Capital reserves	683,711	672,339
Revenue reserve	(77,781)	(74,697)
Total equity	801,307	793,019
Net asset value per ordinary share (pence)	605.51	599.25

Cash Flow STATEMENT (UNAUDITED)

for the year ended 30 April 2016

	2016	2015
	£'000	£'000
Cash flows from operating activities
Profit before tax	8,870	187,273
Adjustment for non-cash items:
Foreign exchange losses	(1,040)	(1,165)
Adjusted profit before tax	7,830	186,108

Adjustments for:
Decrease/(Increase) in investments	5,582	(185,554)
Increase in derivative financial instruments	(2,244)	-
Decrease/(increase) in receivables	1,764	(7,346)
Increase/(decrease) in payables	3,087	(5,380)
	8,189	(198,280)

Net cash generated from/(used in) operating activities before tax	16,019	(12,172)
Overseas tax deducted at source	(575)	(894)
Net cash generated from/(used in) operating activities	15,444	(13,066)

Cash flows from financing activities
Loans matured	(13,649)	(25,634)
Loans drawn	30,621	13,649

Net cash generated from/(used in) financing activities	16,972	(11,985)

Net increase/(decrease) in cash and cash equivalents	32,416	(25,051)

Cash and cash equivalents at the beginning of the year	33,815	54,950
Effect of foreign exchange rate changes	4,094	3,916

Cash and cash equivalents at the end of the year	70,325	33,815

NOTES TO THE FINANCIAL STATEMENTS

FOR the year ended 30 April 2016

1.	General Information
	The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS and IFRSIC guidance. The Company's presentational currency is pounds Sterling. Pounds Sterling is also the functional currency of the Company because it is the currency which is most relevant to the majority of the Company's shareholders and creditors and the currency in which the majority of the Company's operating expenses are paid.
2.	Accounting Policies
	The principal accounting policies, which have been applied consistently for all years presented are set out below:
	(a) Basis of Preparation The financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the inclusion of investments and derivative financial instruments at fair value through profit or loss. Where presentational guidance set out in the Statement of Recommended Practice (SoRP) for investment trusts issued by the Association of Investment Companies (AIC) in November 2014 (which replaced the SoRP issued in January 2009), is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SoRP. There have been no changes in accounting policies as a result of the application of the new SoRP. The financial position of the Company as at 30 April 2016 is shown in the balance sheet. As at 30 April 2016 the Company's total assets exceeded its total liabilities by a multiple of over 32. The assets of the Company consist mainly of securities that are held in accordance with the Company's investment policy and these securities are readily realisable. The Directors consider that the Company has adequate financial resources to enable it to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Company's accounts.

3.	Investment Income	Year ended	Year ended
		30 April 2016	30 April 2015
		£'000	£'000
	Franked: Listed investments
	Dividend income	174	51
	Unfranked: Listed investments
	Dividend income	6,444	5,967
		6,618	6,018

4.	Investment Management Fee	Year ended	Year ended
		30 April 2016	30 April 2015
		£'000	£'000
	Investment management fee paid to Polar Capital (charged wholly to revenue)	7,921	7,033
	No performance fee was paid to Polar Capital in either the current or prior financial year
	The quarterly investment management fee is calculated on the net assets on the last day of the prior quarter. The increase in the management fee for the year ended 30 April 2016 is due to the 31% increase in net assets which took place over the previous year. In line with the change agreed to the investment management agreement the basis of calculating the investment management fee changed from 1 May 2015 to net assets from the prior year's method of gross assets.

5.	Loss/Earnings per ordinary share	Year ended 30 April 2016			Year ended 30 April 2015
		Revenue return pence	Capital return pence	Total return pence	Revenue return pence	Capital return pence	Total return pence
The calculation of basic earnings per share is based on the following data:
	Net (loss)/profit for the year (£'000)	(3,084)	11,372	8,288	(2,938)	189,324	186,386
	Weighted average ordinary shares in issue during the year	132,336,159	132,336,159	132,336,159	132,336,159	132,336,159	132,336,159
	From continuing operations
	Basic - ordinary shares (pence)	(2.33)	8.59	6.26	(2.22)	143.06	140.84

Portfolio as at 30 April 2016
North America		30 April	30 April	30 April	30 April
	Classification	2016	2015	2016	2015
		£'000	£'000	%	%
Alphabet (previously Google)	Internet Software & Services	70,922	56,041	8.9	7.0
Apple	Technology Hardware, Storage & Peripherals	50,659	84,441	6.3	10.6
Facebook	Internet Software & Services	48,785	30,914	6.1	3.9
Microsoft	Software	39,490	24,991	4.9	3.2
Amazon.com	Internet & Catalog Retail	27,459	17,289	3.4	2.2
Splunk	Software	15,440	6,736	1.9	0.8
Intel	Semiconductors & Semiconductor Equipment	13,298	14,609	1.7	1.8
Salesforce.com	Software	13,154	11,074	1.6	1.3
Visa	IT Services	11,039	7,613	1.4	0.9
Palo Alto Networks	Communications Equipment	10,111	6,928	1.3	0.9
Netsuite	Software	9,930	5,671	1.2	0.7
Proofpoint	Software	9,635	4,779	1.2	0.6
Medidata Solutions	Health Care Technology	9,436	5,262	1.2	0.7
Dolby Laboratories	Electronic Equipment, Instruments & Components	9,027	-	1.2	-
Cisco	Communications Equipment	8,370	21,230	1.0	2.7
Texas Instruments	Semiconductors & Semiconductor Equipment	8,126	7,160	1.0	0.9
Universal Display	Electronic Equipment, Instruments & Components	8,037	1,892	1.0	0.2
8X8	Diversified Telecommunication Services	7,162	-	0.9	-
Electronic Arts	Software	6,979	3,049	0.9	0.4
Lam Research	Semiconductors & Semiconductor Equipment	6,907	7,409	0.9	0.9
Demandware	Internet Software & Services	6,789	4,435	0.8	0.6
Activision	Software	6,787	2,210	0.8	0.3
QLIK Technologies	Software	6,707	-	0.8	-
Red Hat	Software	6,657	9,674	0.8	1.2
Arista Networks	Communications Equipment	6,504	2,767	0.8	0.3
Adobe	Software	6,430	5,153	0.8	0.6
LinkedIn	Internet Software & Services	5,949	8,846	0.7	1.1
Servicenow	Software	5,933	-	0.7	-
Zendesk	Software	5,875	3,265	0.7	0.4
Applied Materials	Semiconductors & Semiconductor Equipment	5,756	3,052	0.7	0.4
TripAdvisor	Internet & Catalog Retail	5,448	6,828	0.7	0.9
Ultimate Software	Software	5,225	634	0.7	-
Linear Tech	Semiconductors & Semiconductor Equipment	5,058	-	0.7	-
Nimble Storage	Technology Hardware, Storage and Peripherals	5,031	6,229	0.6	0.8
Hubspot	Software	5,011	-	0.6	-
Twitter	Internet Software & Services	4,659	6,076	0.6	0.8
Taser International	Aerospace & Defence	4,553	2,198	0.6	0.3
ebay	Internet Software & Services	4,296	-	0.5	-
Ruckus Wireless	Communications Equipment	4,287	2,743	0.5	0.3
Paycom	Software	4,194	-	0.5	-
Akamail Technologies	Internet Software & Services	3,871	6,849	0.5	0.9
LogMeln	Internet Software & Services	3,778	4,522	0.5	0.6
Proto Labs	Machinery	3,649	723	0.5	0.1
Integrated Device Technology	Semiconductors & Semiconductor Equipment	3,515	4,415	0.4	0.6
Workday	Software	3,514	4,871	0.4	-
Mobileye	Software	3,488	1,665	0.4	0.2
Cvent	Internet Software & Services	3,325	3,356	0.4	0.4
Cavium	Semiconductors & Semiconductor Equipment	3,239	5,399	0.4	0.7
PayPal	IT Services	3,220	-	0.4	-
Priceline.com	Internet & Catalog Retail	2,971	2,901	0.4	0.4
Athenahealth	Health Care Technology	2,932	4,062	0.4	0.5
Box	Internet Software & Services	2,752	-	0.4	-
Vasco Data Security	Software	2,647	2,300	0.3	0.3
Tableau Software	Software	2,237	2,878	0.3	0.4
Comsore	Internet Software & Services	2,110	-	0.3	-
IAC Interactive	Internet Software & Services	2,063	4,397	0.3	0.6
Callidus Software	Software	2,014	3,071	0.3	0.4
Alliance Data Systems	IT Services	1,914	-	0.3	-
Dexcom	Healthcare Equipment & Supplies	1,731	-	0.2	-
RingCentral	Software	1,720	2,001	0.2	0.3
J2 Global	Internet Software & Services	1,717	2,649	0.2	0.3
Monsanto	Chemicals	1,599	-	0.2	-
SPS Commerce	Internet Software & Services	1,564	-	0.2	-
Apigee Corporation	Internet Software & Services	1,390	-	0.2	-
Xilinx	Semiconductors & Semiconductor Equipment	1,171	-	0.1	-
Telsa Motors	Automobiles	1,108	-	0.1	-
Kinaxis	Software	1,025	-	0.1	-
Rapid7	Software	857	-	0.1	-
Synaptics	Semiconductors & Semiconductor Equipment	646	4,314	0.1	0.5
Castlight Health	Healthcare Technology	641	-	0.1	-
Cermetek Microelectronics	Other	-	1	-	-
Total North American investments		563,523		70.3

Europe		30 April	30 April	30 April	30 April
	Classification	2016	2015	2016	2015
		£'000	£'000	%	%
SAP	Software	5,680	9,278	0.7	1.2
Impax Environment	Other	5,525	-	0.7	-
UBI Soft Entertainment	Software	5,495	-	0.7	-
Arcam	Machinery	4,492	2,819	0.6	0.4
NXP Semiconductors	Semiconductors & Semiconductor Equipment	4,049	8,570	0.5	1.1
Relx	Media	3,777	-	0.5	-
Criteo	Internet Software & Services	3,604	3,152	0.4	0.4
Arm Holdings	Semiconductors & Semiconductor Equipment	3,487	-	0.4	-
First Derivatives	IT Services	3,373	-	0.4	-
Globant	Software	3,233	-	0.4	-
EMIS	Healthcare Technology	2,706	-	0.3	-
Compugroup Medical	Healthcare Technology	2,698	-	0.3	-
TKH Group	Electrical Equipment	2,329	-	0.3	-
Infineon Technologies	Semiconductors & Semiconductor Equipment	1,635	-	0.2	-
Herald Investment Trust	Other	1,569	5,436	0.2	0.7
Accesso Technology	Electronic Equipment, Instruments & Components	1,318	-	0.2	-
YouGov	Media	857	-	0.1	-
Materalise	Software	760	1,064	0.1	0.1
Mimecast	Internet Software & Services	633	-	0.1	-
Telit Communications	Communications Equipment	589	1,584	0.1	0.2
Herald Ventures Limited Partnership	Other	266	270	-	-
Herald Ventures Limited Partnership II	Other	32	68	-	-
Low Carbon Accelerator	Other	-	-	-	-
Unus Technologies	Other	-	-	-	-
Total European investments		58,107		7.2


Asia & Pacific		30 April	30 April	30 April	30 April
	Classification	2016	2015	2016	2015
		£'000	£'000	%	%
Alibaba	Internet Software & Services	19,214	9,166	2.4	1.2
Tencent Holdings	Internet Software & Services	16,686	19,289	2.1	2.4
Taiwan Semiconductor	Semiconductors & Semiconductor Equipment	11,603	11,988	1.4	1.5
Baidu	Internet Software & Services	9,703	12,456	1.2	1.6
Samsung Electronics	Technology Hardware, Storage & Peripherals	8,181	14,882	1.0	1.9
Toyko Electron	Semiconductors & Semiconductor Equipment	5,371	1,785	0.7	0.2
CyberArk Software	Software	5,343	-	0.7	-
Nintendo	Software	4,901	5,279	0.6	0.7
DeNA	Internet Software & Services	4,325	-	0.5	-
SK Hynix	Semiconductors & Semiconductor Equipment	3,761	5,804	0.5	0.7
Silicon Motion Technology	Semiconductors & Semiconductor Equipment	3,692	3,056	0.5	0.4
Himax Technologies	Semiconductors & Semiconductor Equipment	3,654	3,116	0.5	0.4
Keyence	Electronic Equipment, Instruments & Components	3,505	5,520	0.4	0.7
NetEase	Internet Software & Services	3,489	-	0.4	-
Ememory Technology	Semiconductors & Semiconductor Equipment	3,367	1,614	0.4	0.2
Sony	Household Durables	3,290	-	0.4	-
Realtek Semiconductor	Semiconductors & Semiconductor Equipment	2,981	-	0.4	-
Broadcom	Semiconductors & Semiconductor Equipment	2,911	-	0.4	-
Nexon	Software	2,718	-	0.3	-
Murata Manufacturing	Electronic Equipment, Instruments & Components	2,618	-	0.3	-
Harmonic Drive Systems	Machinery	2,583	5,093	0.3	0.6
Hoya	Healthcare Equipment & Supplies	2,517	-	0.3	-
Gigabyte	Technology Hardware, Storage & Peripherals	2,307	1,314	0.3	0.2
Silergy	Semiconductors & Semiconductor Equipment	2,237	-	0.3	-
Catcher Technology	Technology Hardware, Storage & Peripherals	2,162	2,041	0.3	0.3
Pixart Imaging	Semiconductors & Semiconductor Equipment	1,844	-	0.2	-
Shin-Etsu Chemical	Chemicals	1,685	-	0.2	-
Advanced Semiconductor	Semiconductors & Semiconductor Equipment	1,219	1,758	0.2	0.2
Nabtesco	Machinery	1,215	-	0.2	-
Eizo Nanao	Technology Hardware, Storage & Peripherals	1,139	-	0.1	-
Seeing Machines	Electronic Equipment, Instruments & Components	817	643	0.1	0.1
Chipbond Technology	Semiconductors & Semiconductor Equipment	764	-	0.1	-
Ardentec	Semiconductors & Semiconductor Equipment	694	1,602	0.1	0.2
Zuken	IT Services	645		0.1	-
Total Asian investments		143,141		17.9

Status of announcement

The figures and financial information contained in this announcement do not constitute statutory accounts for the year ended 30 April 2016. The Financial Statements for the year ended 30 April 2016 will be finalised on the basis of the information presented to the Directors in this preliminary announcement. The Annual Report and financial statements for the year ended 30 April 2016 have not yet been delivered to the Registrar of Companies but will be following the approval of the Annual Report and Financial Statements by the Board.

The figures and financial information for 2015 are extracted from the published Annual Report and Financial Statements for the year ended 30 April 2015 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements for the year to 30 April 2015 has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or Section 498(3) of the Companies Act 2006.

Annual Report and AGM

The Annual Report and Financial statements for the Year ended 30 April 2016 and a separate Notice of Meeting for the Annual General Meeting will be posted to shareholders in July and will be available thereafter from the company secretary at the Registered Office, 16 Palace Street, London SW1E 5JD or from the company's website at www.polarcapitaltechnologytrust.co.uk

The AGM will be held on 9 September 2016 at 2:30pm at the Royal Automobile Club, 89 Pall Mall, London SW1Y 5HS.

Forward Looking Statements

Certain statements included in this announcement and in the 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 of the 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.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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