UNAUDITED RESULTS FOR SIX MONTHS TO 31 OCT 2022

RNS Number : 2999J

Polar Capital Technology Trust PLC

12 December 2022

 

POLAR CAPITAL TECHNOLOGY TRUST PLC

UNAUDITED RESULTS ANNOUNCEMENT FOR THE SIX MONTHS TO 31 OCTOBER 2022

FINANCIAL HIGHLIGHTS
	(Unaudited) As at 31 October 2022	(Audited*) As at 30 April 2022	Movement %
Total net assets	£2,711,516,000	£3,050,985,000	-11.1
Net Asset Value (NAV) per ordinary share~	2095.24p	2305.13p	-9.1
Price per ordinary share	1894.00p	2040.00p	-7.2
Benchmark Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes)	3193.51	3504.44	-8.9
Discount of ordinary share price to NAV per ordinary share~	(9.6%)	(11.5%)
Ordinary shares in issue* Ordinary shares held in treasury*	129,413,314  7,901,686	132,356,426  4,958,574	-2.2 59.4
* The issued share capital on 9 December 2022 (latest practicable date) was 137,315,000 ordinary shares of which 8,337,777 were held in treasury.
KEY DATA
	For the six months to 31 October 2022
	Local Currency %	Sterling Adjusted %
Benchmark (see above)	-16.4	-8.9
Other Indices over the period (total return)
FTSE World	-8.6	0.3
FTSE All-share	-	-5.8
S & P 500 composite	-5.5	3.6
Nikkei 225	3.9	-0.5
Eurostoxx 600	-6.9	-4.3
Exchange rates	As at 31 October 2022	As at 30 April 2022
US$ to £	1.1514	1.2555
Japanese Yen to £	171.13	162.66
Euro to £	1.1649	1.1901

No interim dividend has been declared for the period ended 31 October 2022, nor were there for periods ended 31 October 2021 or 30 April 2022, and there is no intention to declare a dividend for the year ending 30 April 2023.

~See Alternative Performance Measure below.

* The financial information for the six-month periods ended 31 October 2022 and 31 October 2021 have not been audited. The figures and financial information above and in the following pages, for the year ended 30 April 2022 are an extract from the latest published Financial Statements and do not constitute statutory accounts for that year.

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

For further information please contact:
Jumoke Kupoluyi, ACG- Company Secretary	Ed Gascoigne-Pees
Polar Capital Technology Trust PLC	Camarco
Tel: [phone]	Tel: [phone]

CHAIR'S STATEMENT

Dear Shareholders,

I am pleased to present to you my first report as Chair of the Company; the six months under review has been a somewhat testing time where we have seen extremely volatile markets, rising inflation and energy prices, the continuance of the war in Ukraine and then steep central bank interest rate rises. All of these events have without doubt affected the sector in which the Company operates. In the following, the Investment Manager outlines the performance of the portfolio for the six-months to 31 October 2022 and how these events have impacted the portfolio and the sector in general.

The technology sector led the markets in 2020/21 and has suffered most acutely in 2022 in the post pandemic era of central bank driven monetary policy tightening and slower growth. However, the global economy continues to digitise and technology remains a driving force of this and a huge market sector. What is important when investing in the sector is to look deeply within it and to identify those companies that can help investors meet their longer term investment goals. With a strong bench of analysts and strong investment discipline Ben and his team at Polar are well placed to deliver on this.

THE BOARD

As announced previously, Sarah Bates retired as Chair of the Company and the Board on 8 September 2022 at the Company's AGM following 12 years of service on the Board. There have been no other changes to the membership of the Board in the six months ended 31 October 2022. Biographical details of all Directors are available on the Company's website and are provided in the Company's latest Annual Report for the year ending 30 April 2022.

GEARING

As at 31 October 2022, the Company had two, two-year fixed rate, term loans with ING Bank N.V expiring in September 2024 (JPY 3.8bn and USD36m). The JPY loan has been fixed at an all-in rate of 1.13% pa and the USD loan has been fixed at an all-in rate of 5.43% pa. The prior loans were repaid in full at expiry.

SHARE BUY-BACKS

As described in the full year report and accounts for the year ending April 2022, the Board continually monitors the discount at which the Company's ordinary shares trade in relation to the Company's underlying NAV. The discount has widened over the last year reflecting the considerable change in sentiment towards technology stocks and market volatility generally. The Board discusses the market factors giving rise to any discount or premium, the long or short-term nature of those factors and the overall benefit to Shareholders of any actions. The Company does not have an absolute target discount level at which it buys back shares, but has historically bought back significant amounts of the outstanding share capital when deemed appropriate. This does not preclude a more active approach as discounts widen and the Investment Manager may consider that a single purchase or a series of purchases of shares in current or greater volumes, to enhance the Company's NAV per share, would be an attractive investment of the Company's cash resources, given the positive long-term prospects for the Company's portfolio. In the six months to 31 October 2022, the Company has repurchased a total of 2,943,112 shares into treasury representing 2.3% of the total issued capital. Since the period end to 9 December 2022, we have bought back a further 436,091 shares.

AUDITOR

KPMG LLP were re-appointed as the Company's external auditor at the AGM held on 8 September 2022.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors consider that the principal risks and uncertainties faced by the Company for the remaining six months of the financial year, which could have a material impact on performance, remain consistent with those outlined in the Annual Report for the year ended 30 April 2022. A detailed explanation of the Company's principal risks and uncertainties, and how they are managed through mitigation and controls, can be found on pages 65 to 69 of the Annual Report for the year ended 30 April 2022. The Company has a risk management framework that provides a structured process for identifying, assessing and managing the risks associated with the Company's business. The investment portfolio is diversified by geography which mitigates risk but is focused on the technology sector and has a high proportion of non-Sterling investments. Further detail on the Company's performance and portfolio can be found in the Investment Managers' Review.

RELATED PARTY TRANSACTIONS

In accordance with DTR 4.2.8R there have been no new related party transactions during the six-month period to 31 October 2022 and therefore nothing to report on any material effect by such transactions on the financial position or performance of the Company during that period. There have therefore been no changes in any related party transaction described in the last Annual Report that could have a material effect on the financial position or performance of the Company in the first six months of the current financial year or to the date of this report.

GOING CONCERN

As detailed in the notes to the financial statements and in the Annual Report for the year ended 30 April 2022, the Board continually monitors the financial position of the Company and has considered for the six months ending 31 October 2022 a detailed assessment of the Company's ability to meet its liabilities as they fall due. The review also included consideration of the level of readily realisable investments and current cash and debt ratios of the Company and the ability to repay the outstanding bank facilities. Repayment of the bank facility would equate to approximately 20.4% of the total cash and cash equivalents readily available to the Company as at 31 October 2022.

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

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

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

·   The condensed set of financial statements has been prepared in accordance with UK-adopted International Accounting Standard 34, and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company as at 31 October 2022;

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

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

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

The Half Year Report for the six-month period to 31 October 2022 has not been audited or reviewed by the Company's Auditor. The Half Year Report for the six-month period to 31 October 2022 was approved by the Board on 9 December 2022.

On behalf of the Board

Catherine Cripps

Chair

INVESTMENT MANAGER'S REPORT

Market Review

The fiscal half year to 31 October 2022 saw global markets gyrate in the face of persistently high inflation, aggressive central bank tightening actions and a weaker economic growth outlook. The IMF's October World Economic Outlook forecasts global growth to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023, down from its April expectations of 3.6% for both years, and well below its January outlook for 4.4% and 3.8% in 2022 and 2023 respectively.

Investors found themselves navigating a highly uncertain , macro-led market with a wide range of possible macroeconomic and market outcomes. The US once again outperformed global markets as the S&P 500 Index returned +3.6%, ahead of those in Europe (Eurostoxx 600 -4.3%), Japan (Topix -1.5%) and Asia ex-Japan (MSCI Asia ex-Japan -14.7%). US returns, however, were this time driven by the 'revenge of the old economy' as the Dow Jones Industrial Average Index returned 10% against the NASDAQ's -1.9%. Cyclical and inflation-exposed sectors were particularly strong, with the S&P Energy and Industrials indices returning +34.7% and +9.7% respectively (all returns are in sterling terms, unless stated otherwise).

Inflation remained the primary macroeconomic concern for markets during the period. In January, the IMF projected 2022 advanced economy inflation at 3.9%, which it updated to 7.2% by October. Upward pressure was driven by ongoing supply-chain issues globally, the impact of Russia's invasion of Ukraine on energy prices, especially in Europe, and continued labour market tightness. The latter was particularly apparent in the US where monthly non-farm payroll (NFP) additions averaged 347,000 during the period, and average hourly earnings (AHE) growth averaged +0.37% month on month.

Given persistent high inflation and a desire to retain credibility, the US Federal Reserve (Fed) embarked on the steepest tightening cycle since the early 1980s, and increased the magnitude of rate hikes from their initial 25ps in March to 50bps in May, and 75bps at each of the June, July and September meetings, despite "not actively considering" this at the May meeting. Tightening actions pushed the fed funds rate implied for February 2023 from 3% at the end of April to just shy of 5% at the end of October. Fed officials recognised that given relatively strong consumer and corporate balance sheets , a higher terminal rate may be required for a longer period to bring inflation back into the target range.

In October, the Fed reiterated that rate rises impact economic activity with a "long and variable lag" as they attempted to navigate the narrowing path to a soft landing.  However fresh four decade-high Consumer Price Inflation (CPI) readings gave scant opportunity for any kind of Fed pivot, with even less volatile core year on year Personal Consumption Expenditure growth ex-food and energy (the Fed's preferred measure) averaging 4.9% during the half-year. Financial conditions tightened significantly during the period as 10-year Treasury yields increased from 2.93% to 4%, and real US rates went from negative territory to +153bps. The Federal Open Market Committee ('FOMC') officials were quick to reiterate their hawkish posture when rate declines or market rallies coincided with any meaningful loosening of financial conditions, and quantitative tightening (QT) started as planned from May.

The cumulative impact of tightening began to be felt most acutely in the US property market as 30-year mortgage rates climbed from c5.5% in May through 7% in October, and the National Association of Home Builders Market Index fell from 83 to 38, near Covid-era lows. Longer-term inflation expectations did at least remain well anchored with the University of Michigan survey of 5-10-year forward consumer inflation expectations remaining in the 2.9-3.1% range and market-implied 5yr-10yr forward breakevens staying below 2.5%.

The policy response was highly synchronised globally - the percentage of central banks hiking rates has recently exceeded 80%, greater than previous peaks of c70% in 1995. The second-order impact of tightening provoked the highest level of systemic stress in the UK as Liz Truss's government announced the biggest tax cut in 50 years to stimulate growth, paid for by the issuance of more debt. The combination of a greater budget deficit and the prospect of higher interest rates, led to a plunge in both sterling (the pound sank to its lowest level against the dollar since 1985) and gilt prices (surging yields). This forced the Bank of England to provide emergency liquidity in the gilt market to support UK pension funds, to allow them to meet margin and collateral requirements under their liability-driven investment (LDI) commitments.

It was, at least, a period in which Covid case numbers were no longer the key driver of markets, although Covid's lingering impact remained a driver of supply-side inflation as China maintained a strict zero Covid policy throughout. Unfortunately, geopolitical risks were still elevated as the war in Ukraine progressed, Russia shut of gas supplies to Europe, and China dialled up hawkish rhetoric around Taiwan as President Xi attempted to successfully consolidate power at the Communist Party Congress. The yuan fell to levels against the dollar not seen since 2008.

However, political developments were supportive of some parts of the market, most notably clean energy and defence. US President Joe Biden signed the Inflation Reduction Act - a slimmed-down version of the Build Back Better bill - into law, which included combating climate change via tax credits aimed at reducing carbon emissions, and for households to offset energy costs as well as investments in clean energy production. The war in Ukraine has also prompted a more aggressive move to accelerate clean power adoption to strengthen energy security and, since the Russian invasion, 19 EU countries have set new records for the use of renewable power, bringing total EU wind and solar power generation to 24%, while Russian natural gas flows are down more than 80% from pre-war levels.

Market breadth was weak throughout the period, with an average of 25% of New York Stock Exchange companies trading above their 200-day moving average, and liquidity was generally poor (S&P 500 futures book depth touched a five-year low). Investor sentiment was similarly bearish, with the AAII Bull-Bear Index measuring an average of -25, and the BoA Fund Manager Survey indicating investors retained high cash levels throughout the period, reaching 6.2% at the end of October, higher than the summer 2008 (5.4%) and March 2020 (5.9%), and the highest level since April 2001.

Technology review

The technology sector lagged the broader market as macroeconomic headwinds weighed on company results and outlooks, investors rotated into more defensive and pro-inflation sectors, and higher rates weighed on growth and longer-duration asset valuations. The Dow Jones World Technology Index returned -8.9%, in sterling terms, although absolute returns were flattered by currency given the dollar appreciated by +9.6% versus sterling during the period.

The technology sector outside the US once again performed less well, returning -17.5%. Small-cap technology companies performed slightly better than their large-cap peers, with the Russell 2000 [small cap] Technology Index returning -4.1% against the Russell 1000 [large cap] Technology Index's -5.6%. However, loss-making technology companies returned -21.2% as investors' preference for profitability and aversion to high levels of debt and stock-based compensation became more apparent. The weakness of mega-cap technology companies (ex-Apple) was also notable towards the end of the period, as the Goldman Sachs TMT MegaCap Tech basket returned -14.8%. Each company has idiosyncratic drivers of performance but as a group they had previously benefitted from strong equity inflows and perceived safe-haven status. After doubling in valuation during the pandemic, mega-cap technology now trades close to its long-term median valuation.

At the subsector level, none were immune from the macroeconomic impacts. The semiconductor sector as measured by the Philadelphia Semiconductor Index (SOX) returned -9.7%, as weakness in handset and PC markets saw material near-term estimate reductions across the sector as demand softened and inventories corrected. This weakness and slowing hyperscale cloud growth also raised concerns around data centre spending on semiconductors, although this has yet to show up in numbers or data centre capex indications and commentary. Auto and industrial markets have remained relatively resilient thus far, and companies with high exposure here generally held up well. Semiconductor production equipment (SPE) makers have struggled with supply constraints. Logic and foundry World Federation of Exchanges ("WFE") spending outlooks remain robust, but memory capex has been lowered to adjust supply given softer end demand. Towards the end of the period, both semiconductor and SPE companies were proactive in cutting numbers, and many stocks acted well on poor results and weaker guides.

Markets have also had to contend with new rules set by the Biden Administration that further restrict the sale of both semiconductors and semiconductor manufacturing equipment into China. The most detrimental rule is the new control on 'US persons', who are now restricted from specific activities that support the development or production of restricted integrated circuits (ICs) in China without a licence. The aim is said to be limiting China's access to advanced computing for its military modernisation, advanced intelligence collection/analysis and surveillance, but will likely have wider ramifications given that the precise end use of such items cannot be determined by the US person. Several SPE companies have already removed China from their guidance, but 'semiconductor sovereignty' policies (including meaningful subsidies) elsewhere such as the US CHIPS and Science Act will likely provider longer-term opportunities, as will the continued balkanisation of supply chains as companies prioritise supply resilience.

More concerning for the broader technology sector was the extent of the slowdown in public cloud growth as the period progressed. Aggregate cloud revenue growth slowed from +36% in the June quarter to +32% in September, and guidance indicates growth is expected to slow to the high-20s for Q4. This was a disappointment despite the public cloud's vast scale at >$160bn annualised revenue run rate. Customers are optimising their spend and a tighter IT budget environment is slowing the shift of existing workloads to the cloud, given the up-front costs involved in re-factoring and re-architecting applications. Corporate IT spending expectations certainly tempered during the period: CIO spending surveys initially suggested steady mid-single digit 2022 enterprise IT budget growth, followed by similar growth in 2023, but these expectations were downgraded to low single digits by the end of the period as financial conditions tightened and the economy slowed. Spending priorities did, however, remain consistent with cloud, security, digital transformation and artificial intelligence (AI) remaining the focus for most enterprises.

In software, the Bloomberg Americas Software Index returned -4.6%, supported by strong returns from legacy players who have limited growth and innovation but generally strong pricing power and undemanding valuation multiples. Conversely, diminished risk appetite and a higher rate environment has led to a material valuation reset in the higher growth parts of the sector and saw the Goldman Sachs Expensive Software basket return -14.3%. The highest-growth software companies have seen their EV/forward sales multiple compress to 8.7x, more than 75% off February 2021 highs (35.9x) and back in line with the 2014-18 average (8.7x), well below the 17.4x average of the past five years. Companies growing 15-30% were not spared despite their lower starting valuation multiples. They saw multiples compress to 5.9x EV/forward sales and now trade -41% below their trailing five-year average multiple (10x) and below the average 2022 software takeout multiple of 7.6x (Jefferies).

During the period, many software companies highlighted greater deal scrutiny, longer sales cycles, deal compression, and in later months found it more difficult to expand sales as customers retrenched. The impact was generally more pronounced in European and small/mid-sized business customers, further compounding FX headwinds given software companies' relatively high non-US revenue mix. Cybersecurity companies tended to see stronger results and hold up better than other areas (the HACK ETF returned +3.6%) given the defensibility of spend and heightened risk of nation state cyberattacks, given the war in Ukraine and escalating US/China tensions.

In the internet sector, the echoes of the Covid period continued to impact results, from still-slowing gross merchandise value (GMV) growth at many e-commerce companies, inventory issues at retailers and an ongoing travel and entertainment spending boom, as consumer spending continued to shift from goods to services. The NASDAQ Internet Index returned -10.2% as some of the largest internet companies delivered disappointing results and guided to a weaker than normal holiday season. Advertising budgets have been pressured both by the economy and - in social media - exacerbated by market share losses to TikTok, and the ongoing headwind from Apple's IDFA privacy changes which has curtailed the efficacy and measurement of ad targeting. Sentiment remained very negative throughout the period and internet company multiples compressed back to 2013 levels at 13.4x on an EV/T12m EBITDA basis, c.40% and c.34% below their five and 10-year averages of 22.4x and 20.2x respectively. A meaningful slowdown in revenue growth was widely anticipated, but investors were further disappointed by the lack of appropriate cost discipline at some of the largest internet companies despite a stream of news flow about hiring freezes. The market continued to punish companies unable or unwilling to cut costs to protect margins in an uncertain environment but rewarded those that were.

Payments results were also impacted by slowing e-commerce trends and deterioration in credit conditions, although competition for customers and incremental payment flows became less intense which benefitted some of the larger established players. The ongoing travel recovery also helped those with exposure to cross-border spending.

Portfolio performance

The Trust modestly underperformed its benchmark, with the net asset value per share declining by 9.1% during the first half versus 8.9% for the Dow Jones World Technology Index. The largest individual detractor to relative performance was our underweight position in Apple, although the market rotation away from growth towards value stocks during the period proved more costly in aggregate. Fortunately, the impact of this was ameliorated by our underweight allocation to Asia, while our average cash position of 4.7% and NDX put options contributed 87bps and 19bps to relative performance respectively. The Trust's share price fell by 7.2% reflecting the 9.1% decrease in NAV offset by the discount narrowing from 11.5% to 9.6% during the period. We continue to monitor the discount and the Trust bought back 2,943,112 shares during the period.

The half-year proved another active period for the portfolio as much tighter financial conditions weighed on global growth. During the period, we modestly raised cash by c3%, offset by less NASDAQ put option exposure, while our relative underweight position in mega-cap (>$100bn market cap) stocks increased from -14.8% to -24.1%, in favour of large caps ($50-$100bn market cap). In part, this reflected our decision to modestly reduce our US exposure in favour of Japanese, European and Latin American stocks that had previously underperformed. Higher interest rates and energy prices particularly weighed on e-commerce, advertising and social media companies. We exited some of our related names including DoorDash, Etsy and Snap. We also further reduced our remaining exposure to work from home beneficiaries, as earlier pandemic-related demand strength became better understood as pull-forward; we sold both Twilio and Zoom. Higher risk-free rates and wider high-yield spreads saw us reduce exposure to longer-duration companies and/or those with weaker balance sheets, including Coupa Software, Ocado and Seagate Technology. The proceeds were redirected in favour of next-generation infrastructure software companies, such as Confluent and Gitlab, and payment-related assets, including Adyen, Bill.com, Flywire and GMO Payment Gateway, following significant valuation compression. We also took advantage of lower growth stock valuations within medical technology (DexCom; Intuitive Surgical). However, we continue to tread carefully given the challenging investment backdrop, augmenting our new growth stocks with more defensive ones such as Analog Devices, which should fare relatively well if financial conditions deteriorate further.

At the stock level, our relative underweight position in Apple (+7%) proved the most significant detractor to relative performance, despite it being one of our largest absolute positions (averaging 9.6% of NAV versus c17.5% in the benchmark). Outpacing the index by 15% during the half-year, Apple dragged on our relative performance by -112bps. Apple was also partly responsible for the underperformance of Snap (-61%) and Unity Software (-51%) following privacy-related change to IDFA ('Identifier for Advertisers'), that resulted in significant loss of 'signal' at social media and mobile game companies reliant on advertising revenue. Higher risk-free rates, and some macroeconomic weakness, weighed on cloud software and long-duration stocks like CloudFlare (-28%), MongoDB (-43%) and Square (-34%) that suffered further, and significant, valuation compression.

Pronounced PC market weakness also took its toll on a number of semiconductor stocks including Advanced Micro Devices (-23%) and Marvell Technology (-25%). As ever, there were also a few genuine disappointments at the likes of Coursera, CS Law and Kornit Digital, although these were largely contained to the portfolio tail. Performance was also negatively impacted by the outperformance of incumbents such as IBM (+15%) and Oracle (+17%) where we have zero exposure. While these assets have benefited from safe haven status and the rotation towards value stocks, we continue to eschew them as legacy vendors on the wrong side of technology change and IT budget migration. 

While the half-year proved a challenging period for our growth-centric approach, the Trust benefited from the combination of cash and NASDAQ puts (discussed above) as well as a number of strong individual stock performances. Robust data centre spending growth benefited both Arista Networks (+15%) and Pure Storage (+14%) while strong earnings progress helped chipmakers Lattice Semiconductor (+11%) and ON Semiconductor (+29%). The Trust also benefited from strength at Enphase Energy (+108%) as demand for solar inverters increased significantly against a backdrop of sharply higher energy prices, incremental regulatory support, and the desire for greater energy security. Likewise, strong demand for public security technology offered by Axon Enterprise (+42%) and display technology from E Ink (+18%), added to relative performance. In addition, the Trust benefited from outstanding returns in a few tail names such as RFID chipmaker Impinj (+155%) and Wise (+68%), which we added back after pronounced share-price weakness. Finally, the Trust benefitted from the underperformance of a number of larger benchmark positions where we have underweight or zero positions, including Intel (-28%), Meta Platforms (Meta) (-49%) and Tencent (-40%). 

Market outlook

There is little to obviously like about the immediate market outlook: slowing growth, record inflation and central banks embarrassed by how far inflation has surpassed their long-term targets. As discussed during our most recent annual report, the range of potential outcomes, good and bad, looks unusually wide. We cannot know how fast inflation will fall and we continue to believe the Fed and other central banks will prioritise credibility ahead of the economy. Few investors today including us - have experience managing portfolios against a backdrop of persistently high inflation, so market responses and activity could be less predictable - witness the extreme volatility across asset classes around FOMC press conferences and CPI prints. We expect this market volatility to persist as risk is repriced until policymaker and shareholder interests are better aligned. This may result in a more volatile period of performance for the sector and the Trust.

In terms of downside risks, the most prominent remains inflation should it not come under control. This could be due to service inflation remaining elevated as a function of high unit labour costs, which will not slow without significant productivity improvement or nominal wage growth slowing to 3.5%, even as weaker demand improves goods inflation. There are also more structural issues to contend with relating to a structural shortage of labour in many areas of the market (wage inflation was ticking up before Covid), shortages of production capacity in key commodities and the balkanisation of global supply chains. Second, further energy shocks or the impact of pent-up Chinese demand upon reopening could result in incremental upward pressure. Policymakers may also not have the necessary tools at their disposal to tackle systemic imbalances. For instance, further fiscal stimulus may prove counterproductive while the political will to deliver painful supply-side reform, for example in the flexibility of labour laws or immigration, may not be present.

As such, monetary policy may still surprise to the upside or remain restrictive for longer than markets are currently anticipating. Fed Chair Jerome Powell himself has warned that the nature of the current cycle (strong corporate/consumer balance sheets and a tight labour market, coincident with slower growth) might require a higher terminal fed funds rate and staying there for longer than normal; St Louis Fed Governor James Bullard has argued that various Taylor Rule estimates suggest the fed funds rate may have to reach a minimum of 5% and potentially as high as 7%. Tighter than expected monetary policy could continue to weigh on valuations that, while back at long-term averages, could fall further given the atypical market backdrop. However, negative earnings revisions represent a more likely source of downside risk from here. The investment bank Goldman Sachs (GS) recently lowered its 2023 EPS growth forecast to 0% having previously expected 3% after the S&P 500's net margins contracted during Q3 for the first time since the pandemic on a y/y basis.

The scale of downward revisions depends on how much monetary pressure is required to becalm inflation and, by extension, whether a US recession can be avoided. While economies in the UK and Europe are already likely contracting, a US recession is not a foregone conclusion. Although a recent Wall Street Journal survey of economic forecasters estimated the probability at 65%, GS believe the chances are nearer 30%. Despite this range of forecasts, the spread between two and 10-year Treasury yields at -62bps is as negative as it has been for at least 40 years. As a reminder, 2yr10yr yield curve inversions have historically presaged recessions. The yield curve today suggests the Fed will start cutting rates in late 2023 or early 2024, which presupposes their actions will likely have had the desired effect (ie dampening inflation) or that a deeper recession will have required a volte-face. According to Ned Davis Research, the median recessionary bear market sees the Dow Jones Industrial Average Index decline by more than 32% as compared to the 21% contraction registered at the October lows. Finally, it would be remiss not to mention the more meaningful risk associated with (investment) regime change: the end of the low inflation, low rate world in favour of a less friendly, less familiar one. The end of the peace dividend, peak globalisation, polarised politics, bigger government would challenge risk assets and, in particular, growth equities as an asset class.

There are also several upside risks that temper our pessimism. Most importantly, we may already be at peak inflation/peak Fed which - after the valuation compression since the Fed Pivot - would set up 2023 very nicely. This view was supported by the October CPI report which came in at 7.7% (compared to a 7.9% forecast) which was greeted with lower nominal and real yields, and the best one-day move in US stocks in two years. While we know one CPI does not make a pivot, there is still a case that the US can avoid a recession as monetary policy could soon be sufficiently restrictive to see inflation trending back down towards 2% with only a modest increase in the unemployment rate. This could occur as the jobs/workers gap closes from roughly six million peak to around four million today, down towards the two million level needed to slow wage growth to a rate compatible with 2% inflation, along with supply side normalising and slowing shelter inflation. Other potential sources of upside include a successful relaxation of China's zero Covid policy which could be a countervailing force to sagging global demand, US/China relations could thaw as Biden and Xi have shored up their own political positions, and - most important of all - there could be a de-escalation of Russia/Ukraine tensions.

Even if positive surprises are in short supply, strong household and corporate finances can limit the downturn to a mild recession. We could also see more comprehensive central bank/political intervention in FX markets (as per the Japanese Ministry of Finance's recent support of the yen), bond markets (as per the Bank of England's emergency gilt buying) to ameliorate the impact of tighter financial conditions. We have already seen widespread willingness on the part of governments to mitigate the near-term impact of higher energy prices on consumers and businesses, although the UK's experience should remind governments their largesse cannot be limitless. A weaker US dollar would also be good for risk appetite - a 10% appreciation in the trade-weighted dollar delivers the same tightening as a 75bps rate hike per the Fed's model - even if it could hinder our own NAV given that more than 70% of Trust assets are held in the US. A recent Bank of America fund manager survey revealed that institutional investors are not positioned for a positive change in sentiment, with global equity allocations at all-time lows and cash at 6.1%, a level not seen since 9/11. This is an intriguing set-up given strong year-end and post-mid-term market tendencies.

We are also encouraged that some of the excesses that concerned us last year are being worked off. The sharp correction in cryptocurrencies (bitcoin -70% from November 2021 highs) and the recent collapse of crypto exchange FTX have been sobering, especially for those who hoped bitcoin would prove to be a portfolio diversifier and/or store of wealth. Other digital asset classes such as non-fungible tokens (NFTs) have followed a similar path, while the value of MANA tokens for use in Decentraland (touted as a would-be metaverse) have fallen by more than 90% from their 2021 highs.

The IPO market has also struggled, following a record 2021 that saw $608bn raised globally, +84% y/. To date, this calendar year has been the slowest IPO market in five years with year-to-date proceeds tracking at c30% of 2021 issuance with c60% of deals having been withdrawn. Within technology it has been significantly worse still with 2022, so far, the worst year for issuance since the global financial crisis (GFC). SPAC issuance has also collapsed with just 77 IPOs by the end of September, compared to 613 completed during 2021. Other earlier signs of late-cycle exuberance included investor sentiment which - until recently - had become very negative, having been ebullient last year. Valuations that had been well ahead of long-term averages, have also fallen back to more palatable levels. While the forward P/E for the S&P 500 has bounced back to 17.1x from 15.2x recorded at the end of September, the ratio remains below the five-year average of 18.5 and equal to the 10-year average of 17.1. 

Technology outlook

As with the broader market, the combination of higher risk-free rates, slowing growth and some margin degradation makes for a more challenging immediate outlook for the technology sector. Inevitably, higher risk-free rates and wider corporate spreads have weighed on sector multiples, but the magnitude of the compression also reflects a sharp reversal in sentiment around the 'inevitability' of technology disruption which reached a zenith during the pandemic. This has been most pronounced in speculative areas and/or companies with earlier-stage financials as earlier assumptions about future funding and disruption timelines have been called into question. As in 2015-16, this process appears to have entered something of a self-reinforcing cycle with weaker sentiment and sharply lower share prices weighing on both private company financing, where down-rounds are avoided wherever possible and liquidity with the IPO market all but closed. In that earlier period, this reflexivity ran its course until macroeconomic sentiment improved, and strategic M&A highlighted the upside risk associated with compressed next-generation valuations. We expect the current cycle to follow a similar pattern, although this time stocks also have to contend with inflation and the loss of policymaker support. This process may also be further complicated by an unwind of private holdings held within daily-traded investment vehicles, an approach that gained in popularity last cycle, as some investors sacrificed liquidity and daily pricing to access earlier-stage themes. Companies were able to stay private for longer, in part due to unprecedented access to pre-IPO money from many of the same, non-traditional venture capital investors.

The more challenging economic backdrop, and the stronger US dollar, has weighed on worldwide IT spending this year, which is now expected to grow by only 0.8% y/y in 2022, compared to 4% anticipated in April. This softer outlook has been evident in recent corporate results with the S&P technology sector now expected to deliver revenue and earnings growth of 8.1% and 4% in 2022. Weaker growth this year is expected to translate into a stronger rebound in 2023 with current expectations for IT spending (+5.1%) commensurate with S&P 500 technology revenue and earnings forecasts of 4.1% and 4.6% respectively. As things stand, this would see our sector deliver growth broadly in line with the S&P 500, which is currently forecast to grow at 3.4% and 5.7% respectively. Third-quarter earnings season has reflected this less favourable dynamic with technology companies reporting revenue growth of 5.7% y/y compared to the S&P 500 which delivered 10.8%. Margins remain a key focus, with net margins falling to 23.5% during 3Q22, down from cycle highs. While the decision to de-emphasise growth in favour of profits does not sit easily with technology companies addressing large market opportunities, recent industry cost-cutting announcements are a timely reminder the technology sector is able to support margins when it chooses to. However, it almost always takes longer for growth-centric companies to pivot than it does for investors: through a cycle or more, we suspect this is a very good thing for long-term returns.

While there remains considerable uncertainty regarding growth and technology earnings, this appears partially reflected in sharply lower valuations that - all things being equal - should improve our sector's medium-term return profile. Having peaked in November 2021 at 28x, the forward P/E of the technology sector has fallen significantly over the past year, and today, the sector trades at 21.3x - below five-year (21.8x) but above 10-year (18.6x) averages. This largely reflects the broader market derating as the sector's relative rating of 1.1x the market multiple is unchanged with where it stood at year-end and remains within their post-Global Financial Crisis ("GFC") range of 0.9-1.3x. Although the sector's near-term relative growth profile appears unexceptional (as other sectors benefit more from inflation and higher energy prices), this is partially explained by technology's disproportionate exposure to the stronger dollar. We remain excited about a plethora of secular drivers that should support superior growth over the medium and long-term. While sector valuations have clearly been hurt by higher risk-free rates, technology balance sheets remain exceptionally well-capitalised, which should insulate them against refinancing (or even, bankruptcy) risk. 

While aggregate valuations remain flattered by 'cheap' incumbents such as Cisco, HP and Intel, we no longer have the same concern about next-generation valuations that we did a year ago prior to the Fed pivot. At that time, we expressed our discomfort with "the extraordinary valuation premia enjoyed by a narrow group of high growth, high multiple stocks" which seemed to be "pricing in defiantly optimistic scenarios" that we felt unable to underwrite. The ensuing valuation compression has seen next-generation stocks give up all and more of their pandemic rerating, the reset proving far more brutal than we (and others) had anticipated. A year ago, there were 25 SaaS companies trading at more than 20x forward sales. Today there are none. The highest growth cohort (those growing >40%) recently traded at 11x forward sales versus their 52-week high of 41.1x. Overall, cloud software has recently traded with a median NTM (next 12 months) revenue multiple of just 4.4x versus the 2010-20 pre-Covid multiple of 7.8x. As such (and all things being equal) we see much improved risk/reward in this group of stocks and have been moving the portfolio in this direction, coupled by some cash and Nasdaq puts that reflect the unusually challenging market backdrop.

Technology risks 

As highlighted in our last Annual Report, there are many risks to our constructive medium-term view. Many of these remain macroeconomic (recession; inflation; war) that have been discussed elsewhere. Weaker economic growth is likely to weigh further on future technology spending as we have already seen this year. It may also present risk to cloud spending, as seen during third-quarter earnings season, should companies - especially earlier-stage companies - rationalise their spending. Other macroeconomic risks include cost inflation, as a result of labour market tightness or higher prices for inputs such as energy. While valuations appear less of a risk today given the magnitude of the correction from highs, especially in next-generation stocks, earnings risk looks more pronounced with weaker macroeconomic conditions and sentiment already subdued at semiconductor, and other more cyclically exposed companies. Recent cost-cutting announcements at Meta, Salesforce.com and Amazon suggest technology companies are at least alive to this risk. Regulation remains another risk with uncertainty at elevated levels in China, while in the US we continue to expect a resurgence in regulatory scrutiny post-Covid with a number of key lawsuits slated for 2023. There is also the potential that a new economic and market regime (discussed elsewhere) could increase the value of incumbency which would be a meaningful headwind to our investment approach.

Concentration risk 

We should also remind our shareholders about the concentration risk both within the Trust and the market cap-weighted index around which we construct the portfolio. As we have previously stated, the higher concentration of both our portfolio and benchmark reflects the spectacular performance of a handful of stocks that captured the zeitgeist of this cycle. At the end of October, our three largest holdings - Apple, Microsoft and Alphabet - represented c27% of our NAV and c43% of our benchmark respectively. This compares to c29% and c41% respectively at the end of our last financial year; this reduced concentration risk and our higher combined underweight exposure reflects a combination of stock-price movement and portfolio changes. While we continue to believe that these are unique, non-fungible assets that dominate their respective industries, we expect to move materially underweight these stocks should we become concerned about their prospects or find more attractive risk/reward profiles elsewhere in the market. In the meantime, the magnitude of concentration in the benchmark and our expectation of further reducing exposure to the largest index constituents, may lead to increased variance in our relative performance profile. 

Conclusion

Markets continue to reprice risk against a backdrop of an unusually wide range of outcomes, the theme of our last Annual Report. However, we have not given up on the hope that this period will - in time - be understood as another Covid-related episode where excess liquidity, supply shortages and collective trauma have left demand and supply in a state of disequilibrium. The risk of inflation becoming embedded has left policymakers with little choice, their own credibility and personal legacies dependent on the war against inflation. Until there is more certainty about the outcome of this battle, our interests are likely to remain uncomfortably at odds with policymakers. However, we also know that market narratives can change quickly should macroeconomic headwinds and/or exogenous risks subside. Less than three years ago, we were faced with one of the world's deadliest pandemics. Technology kept the world spinning while biotechnology and AI developed vaccines that broke the link between Covid cases and deaths. Even if technology stocks have struggled to live up to their pandemic billing, we remain believers in the primacy of technology and excited about humankind's ability to innovate and reimagine industries. This - above all else - should provide a fertile backdrop against which to invest.

Ben Rogoff

Fund Manager, Polar Capital Technology Trust

9 December 2022

PORTFOLIO BREAKDOWN

Market Capitalisation of underlying investments as at 31 October 2022
% of invested assets	Less than $1bn	$1bn-$10bn	Over $10bn
as at 31 October 2022	0.6	13.2	86.2
as at 30 April 2022	0.3	11.7	88.0

  % of Net Assets as at 

Breakdown of Investments by Geographic Region*		31 October 2022	30 April 2022
North America		71.2	74.2
Asia Pacific (ex-Japan)		8.7	10.2
Japan		4.8	3.4
Europe (inc - UK)		4.6	2.9
Middle East & Africa		1.5	1.4
Latin America		1.3	-

* % of Net Assets, excluding other net assets

Classification of Investments as at 31 October 2022**

	North America (inc. Latin America)	Europe	Asia Pacific (inc. Middle East)	Total 31 October 2022	Total 30 April 2022
	%	%	%	%	%
Software	25.9	0.2	2.0	28.1	27.6
Semiconductors & Semiconductor Equipment	15.5	3.0	3.5	22.0	22.4
Technology Hardware, Storage & Peripherals	11.0	0.1	2.5	13.6	14.6
Interactive Media & Services	8.9	-	0.6	9.5	14.0
IT Services	4.1	0.9	0.6	5.6	2.3
Internet & Direct Marketing Retail	2.4	0.2	1.1	3.7	2.9
Entertainment	1.0	-	0.8	1.8	1.2
Electronic Equipment, Instruments & Components	-	-	1.8	1.8	1.6
Communications Equipment	1.7	-	-	1.7	1.5
Healthcare Equipment & Supplies	1.0	-	0.4	1.4	0.6
Machinery	-	-	1.2	1.2	0.7
Automobiles	0.6	-	0.5	1.1	1.6
Aerospace & Defense	0.4	-	-	0.4	0.7
Electrical Equipment	-	0.2	-	0.2	0.4
Total investments (£2,496,672,000)	72.5	4.6	15.0	92.1	92.1
Other net assets (excluding loans)	7.3	0.9	1.7	9.9	9.6
Loans	(1.2)	-	(0.8)	(2.0)	(1.7)
Grand total (net assets of £2,711,516,000)	78.6	5.5	15.9	100.0	-
At 30 April 2022 (net assets of £3,050,985,000)	79.3	5.2	15.5	-	100.0

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

PORTFOLIO OF INVESTMENTS

Ranking					Value of holding £'000		% of net assets
31 Oct 2022	30 Apr 2022	Stock	Sector	Region*	31 October 2022	30 April 2022	31 October 2022	30 April 2022
1	(2)	Apple	Technology Hardware, Storage & Peripherals	North America	277,629	305,244	10.2	10.1
2	(1)	Microsoft	Software	North America	275,266	336,977	10.2	11.0
3	(3)	Alphabet	Interactive Media & Services	North America	179,221	249,058	6.6	8.2
4	(6)	Samsung Electronics	Technology Hardware, Storage & Peripherals	Asia Pacific	67,998	82,312	2.5	2.7
5	(4)	Nvidia	Semiconductors & Semiconductor Equipment	North America	66,902	95,065	2.5	3.1
6	(5)	Advanced Micro Devices	Semiconductors & Semiconductor Equipment	North America	65,409	86,045	2.4	2.8
7	(10)	ServiceNow	Software	North America	62,730	56,280	2.3	1.8
8	(8)	ASML	Semiconductors & Semiconductor Equipment	Europe	53,692	59,248	2.0	1.9
9	(7)	Taiwan Semiconductor	Semiconductors & Semiconductor Equipment	Asia Pacific	49,735	82,012	1.8	2.7
10	(15)	KLA-Tencor	Semiconductors & Semiconductor Equipment	North America	47,454	39,816	1.8	1.3
Top 10 investments					1,146,036		42.3
11	(13)	Arista Networks	Communications Equipment	North America	46,103	44,318	1.7	1.5
12	(41)	Palo Alto Networks	Software	North America	44,653	18,479	1.6	0.6
13	(16)	CrowdStrike	Software	North America	41,520	39,441	1.5	1.3
14	(9)	Amazon.com	Internet & Direct Marketing Retail	North America	41,499	57,558	1.5	1.9
15	(17)	HubSpot	Software	North America	39,408	38,675	1.5	1.3
16	(38)	Visa	IT Services	North America	36,064	19,629	1.3	0.6
17	(18)	Marvell Technology	Semiconductors & Semiconductor Equipment	North America	35,388	38,601	1.3	1.2
18	(24)	Mastercard	IT Services	North America	33,375	26,330	1.3	0.9
19	(-)	Analog Devices	Semiconductors & Semiconductor Equipment	North America	31,372	-	1.2	-
20	(21)	Qualcomm	Semiconductors & Semiconductor Equipment	North America	30,645	32,622	1.1	1.0
Top 20 investments					1,526,063		56.3
21	(66)	Atlassian	Software	Asia Pacific	28,585	9,414	1.1	0.3
22	(42)	Salesforce.com	Software	North America	27,843	18,315	1.0	0.6
23	(35)	Monolithic Power Systems	Semiconductors & Semiconductor Equipment	North America	25,274	20,305	0.9	0.7
24	(-)	MercadoLibre	Internet & Direct Marketing Retail	North America	25,263	-	0.9	-
25	(-)	Adyen	IT Services	Europe	24,715	-	0.9	-
26	(30)	Elastic	Software	North America	24,420	23,453	0.9	0.8
27	(45)	Cloudflare	Software	North America	23,524	15,864	0.9	0.5
28	(-)	Enphase Energy	Semiconductors & Semiconductor Equipment	North America	22,679	-	0.9	-
29	(31)	Nintendo	Entertainment	Asia Pacific	22,052	23,413	0.8	0.8
30	(26)	Lattice Semiconductor	Semiconductors & Semiconductor Equipment	North America	21,923	24,788	0.8	0.8
Top 30 investments					1,772,341		65.4
31	(73)	Keyence	Electronic Equipment, Instruments & Components	Asia Pacific	21,748	8,251	0.8	0.3
32	(77)	Infineon Technologies	Semiconductors & Semiconductor Equipment	Europe	21,583	6,891	0.8	0.2
33	(36)	Pure Storage	Technology Hardware, Storage & Peripherals	North America	20,668	19,712	0.8	0.7
34	(34)	CyberArk Software	Software	Asia Pacific	20,627	21,721	0.8	0.7
35	(44)	Smartsheet	Software	North America	20,350	16,414	0.7	0.5
36	(49)	Snowflake	Software	North America	19,812	13,973	0.7	0.5
37	(37)	Airbnb	Interactive Media & Services	North America	19,409	19,708	0.7	0.7
38	(47)	ON Semiconductor	Semiconductors & Semiconductor Equipment	North America	19,141	14,451	0.7	0.5
39	(60)	Workday	Software	North America	18,684	11,557	0.7	0.4
40	(80)	Disco Corporation	Semiconductors & Semiconductor Equipment	Asia Pacific	18,639	6,256	0.7	0.2
Top 40 investments					1,973,002		72.8
41	(40)	Alibaba	Internet & Direct Marketing Retail	Asia Pacific	17,750	18,888	0.7	0.6
42	(12)	Micron Technology	Semiconductors & Semiconductor Equipment	North America	17,344	48,220	0.6	1.6
43	(14)	Tencent	Interactive Media & Services	Asia Pacific	17,119	43,880	0.6	1.4
44	(23)	Tesla Motors	Automobiles	North America	16,679	26,891	0.6	0.9
45	(-)	GitLab	Software	North America	16,675	-	0.6	-
46	(-)	Teradyne	Semiconductors & Semiconductor Equipment	North America	16,253	-	0.6	-
47	(11)	Meta Platforms	Interactive Media & Services	North America	16,219	54,509	0.6	1.8
48	(64)	Paycom Software	Software	North America	16,150	10,780	0.6	0.3
49	(48)	TripAdvisor	Interactive Media & Services	North America	15,570	14,362	0.6	0.5
50	(-)	Intuitive Surgical	Healthcare Equipment & Supplies	North America	14,822	-	0.5	-
Top 50 investments					2,137,583		78.8
51	(55)	SolarEdge Technologies	Semiconductors & Semiconductor Equipment	Asia Pacific	13,547	12,519	0.5	0.4
52	(32)	BYD	Automobiles	Asia Pacific	13,486	23,080	0.5	0.7
53	(56)	eMemory Technology	Semiconductors & Semiconductor Equipment	Asia Pacific	13,415	12,388	0.5	0.4
54	(83)	Intuit	Software	North America	13,386	5,521	0.5	0.2
55	(78)	Harmonic Drive Systems	Machinery	Asia Pacific	13,339	6,430	0.5	0.2
56	(39)	E Ink	Electronic Equipment, Instruments & Components	Asia Pacific	13,322	19,235	0.5	0.6
57	(70)	Dexcom	Healthcare Equipment & Supplies	North America	12,832	8,749	0.5	0.3
58	(65)	Square	IT Services	North America	12,697	9,990	0.5	0.3
59	(-)	Pinterest	Interactive Media & Services	North America	12,024	-	0.4	-
60	(71)	Hoya	Healthcare Equipment & Supplies	Asia Pacific	11,456	8,746	0.4	0.3
Top 60 investments					2,267,087		83.6
61	(72)	Roblox	Entertainment	North America	11,111	8,655	0.4	0.3
62	(33)	Axon Enterprise	Aerospace & Defense	North America	10,785	21,985	0.4	0.7
63	(-)	GMO Payment Gateway	IT Services	Asia Pacific	10,557	-	0.4	-
64	(-)	Nabtesco	Machinery	Asia Pacific	10,542	-	0.4	-
65	(79)	Hamamatsu Photonics	Electronic Equipment, Instruments & Components	Asia Pacific	10,542	6,376	0.4	0.2
66	(-)	Bill.com	Software	North America	10,236	-	0.4	-
67	(-)	Globant	IT Services	North America	10,224	-	0.4	-
68	(-)	Meituan	Internet & Direct Marketing Retail	Asia Pacific	10,195	-	0.4	-
69	(50)	MongoDB	Software	North America	10,025	13,343	0.4	0.5
70	(-)	Activision	Entertainment	North America	10,012	-	0.3	-
Top 70 investments					2,371,316		87.5
71	(-)	Flywire	IT Services	North America	9,833	-	0.3	-
72	(46)	Power Integrations	Semiconductors & Semiconductor Equipment	North America	9,071	14,930	0.3	0.5
73	(68)	Kinaxis	Software	North America	8,723	9,169	0.3	0.3
74	(-)	Confluent	Software	North America	8,496	-	0.3	-
75	(87)	Take-Two Interactive Software	Entertainment	North America	8,092	3,926	0.3	0.1
76	(-)	Freshworks	Software	North America	7,982	-	0.3	-
77	(58)	SiTime	Semiconductors & Semiconductor Equipment	North America	7,046	11,860	0.3	0.4
78	(51)	Shopify	IT Services	North America	6,824	13,251	0.3	0.4
79	(-)	ASM International	Semiconductors & Semiconductor Equipment	Europe	5,689	-	0.2	-
80	(-)	Braze	Software	North America	5,429	-	0.2	-
Top 80 investments					2,448,501		90.3
81	(-)	Farfetch	Internet & Direct Marketing Retail	Europe	5,173	-	0.2	-
82	(-)	Darktrace	Software	Europe	5,089	-	0.2	-
83	(92)	Zuken	IT Services	Asia Pacific	5,058	3,081	0.2	0.1
84	(75)	Fuji Machine Manufacturing	Machinery	Asia Pacific	4,917	7,403	0.2	0.2
85	(59)	Ceres Power	Electrical Equipment	Europe	4,491	11,569	0.2	0.4
86	(69)	Qualtrics International	Software	North America	4,256	8,840	0.2	0.3
87	(90)	Impinj	Semiconductors & Semiconductor Equipment	North America	3,944	3,417	0.1	0.1
88	(93)	Seeing Machines	Electronic Equipment, Instruments & Components	Asia Pacific	3,734	2,894	0.1	0.1
89	(67)	Kornit Digital	Machinery	Asia Pacific	3,067	9,356	0.1	0.3
90	(-)	Monday.com	Software	Asia Pacific	2,826	-	0.1	-
Top 90 investments					2,491,056		91.9
91	(-)	HashiCorp	Software	North America	2,771	-	0.1	-
92	(94)	Tobii	Technology Hardware, Storage & Peripherals	Europe	1,482	2,181	0.1	0.1
93	(-)	Datadog	Software	North America	1,362	-	-	-
94	(96)	Cermetek Microelectronics	Electronic Equipment, Instruments & Components	North America	1	1	-	-
		Total equities			2,496,672		92.1
		Other net assets			214,844		7.9
		Total net assets			2,711,516		100.0

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

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 31 October 2022

		(Unaudited)							(Audited)
		Six months ended 31 October 2022			Six months ended 31 October 2021				Year ended 30 April 2022
	Note	Revenue Return £'000	Capital Return £'000	Total Return £'000	Revenue Return £'000	Capital Return £'000	Total Return £'000		Revenue Return £'000	Capital Return £'000	Total Return £'000
Investment income	2	8,408	38	8,446	8,077	-	8,077		15,870	-	15,870
Other operating income	2	988	-	988	3	-	3		31	-	31
(Losses)/gains on investments held at fair value	3	-	(302,041)	(302,041)	-	408,257	408,257		-	(253,694)	(253,694)
Gains/(losses) on derivatives	4	-	8,729	8,729	-	(15,516)	(15,516)		-	(5,799)	(5,799)
Other currency gains	5	-	15,631	15,631	-	2,006	2,006		-	17,535	17,535
Total income		9,396	(277,643)	(268,247)	8,080	394,747	402,827		15,901	(241,958)	(226,057)
Expenses
Investment management fee	6	(11,328)	-	(11,328)	(14,845)	-	(14,845)		(28,281)	-	(28,281)
Other administrative expenses	7	(630)	-	(630)	(700)	-	(700)		(1,335)	-	(1,335)
Total expenses		(11,958)	-	(11,958)	(15,545)	-	(15,545)		(29,616)	-	(29,616)
(Loss)/profit before finance costs and tax		(2,562)	(277,643)	(280,205)	(7,465)	394,747	387,282		(13,715)	(241,958)	(255,673)
Finance costs		(675)	-	(675)	(446)	-	(446)		(973)	-	(973)
(Loss)/profit before tax		(3,237)	(277,643)	(280,880)	(7,911)	394,747	386,836		(14,688)	(241,958)	(256,646)
Tax		(1,080)	-	(1,080)	(987)	-	(987)		(2,000)	-	(2,000)
Net (loss)/profit for the period and total comprehensive (expense)/income		(4,317)	(277,643)	(281,960)	(8,898)	394,747	385,849		(16,688)	(241,958)	(258,646)
(Losses)/earnings per ordinary share (basic) (pence)	9	(3.30)	(212.28)	(215.58)	(6.54)	290.17	283.63		(12.36)	(179.25)	(191.61)

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

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

All items in the above statement derive from continuing operations.

The Company does not have any other comprehensive income.

BALANCE SHEET

as at 31 October 2022

	Note	(Unaudited) 31 October 2022 £'000	(Unaudited) 31 October 2021 £'000	(Audited) 30 April 2022 £'000
Non-current assets
Investments held at fair value through profit or loss		2,496,672	3,566,649	2,811,080
Current assets
Derivative financial instruments		1,432	6,024	6,479
Receivables		24,661	41,064	31,096
Overseas tax recoverable		320	227	286
Cash and cash equivalents	8	261,919	233,600	311,363
		288,332	280,915	349,224
Total assets		2,785,004	3,847,564	3,160,304
Current liabilities
Payables		(20,015)	(33,928)	(57,284)
Bank loans*		-	(50,575)	(52,035)
		(20,015)	(84,503)	(109,319)
Non-current liabilities
Bank loans*		(53,473)	-	-
Net assets		2,711,516	3,763,061	3,050,985
Equity attributable to equity shareholders
Share capital	10	34,329	34,329	34,329
Capital redemption reserve		12,802	12,802	12,802
Share premium		223,374	223,374	223,374
Special non-distributable reserve		7,536	7,536	7,536
Capital reserves		2,564,591	3,604,029	2,899,743
Revenue reserve		(131,116)	(119,009)	(126,799)
Total equity		2,711,516	3,763,061	3,050,985
Net asset value per ordinary share (pence)	11	2095.24	2782.81	2305.13

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

Approved and authorised by the Board of Directors on 9 December 2022.

Catherine Cripps

Chair

STATEMENT OF CHANGES IN EQUITY

for the six months ended 31 October 2022

		(Unaudited) Six months ended 31 October 2022
	Note	Share capital £'000	Capital redemption reserve £'000	Share premium £'000	Special non- distributable reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
Total equity at 30 April 2022		34,329	12,802	223,374	7,536	2,899,743	(126,799)	3,050,985
Total comprehensive expense:
Loss for the period to 31 October 2022	9	-	-	-	-	(277,643)	(4,317)	(281,960)
Transactions with owners, recorded directly to equity: Ordinary shares repurchased into treasury	10	-	-	-	-	(57,509)	-	(57,509)
Total equity at 31 October 2022		34,329	12,802	223,374	7,536	2,564,591	(131,116)	2,711,516
		(Unaudited) Six months ended 31 October 2021
		Share capital £'000	Capital redemption reserve £'000	Share premium £'000	Special non- distributable reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
Total equity at 30 April 2021		34,329	12,802	223,374	7,536	3,240,833	(110,111)	3,408,763
Total comprehensive income/(expense):
Profit/(loss) for the period to 31 October 2021	9	-	-	-	-	394,747	(8,898)	385,849
Transactions with owners, recorded directly to equity:
Ordinary shares repurchased into treasury	10	-	-	-	-	(31,551)	-	(31,551)
Total equity at 31 October 2021		34,329	12,802	223,374	7,536	3,604,029	(119,009)	3,763,061
		(Audited) Year ended 30 April 2022
		Share capital £'000	Capital redemption reserve £'000	Share premium £'000	Special non- distributable reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
Total equity at 30 April 2021		34,329	12,802	223,374	7,536	3,240,833	(110,111)	3,408,763
Total comprehensive expense:
Loss for the year to 30 April 2022	9	-	-	-	-	(241,958)	(16,688)	(258,646)
Transactions with owners, recorded directly to equity:
Ordinary shares repurchased into treasury	10	-	-	-	-	(99,132)	-	(99,132)
Total equity at 30 April 2022		34,329	12,802	223,374	7,536	2,899,743	(126,799)	3,050,985

Note - Share capital, Capital redemption reserve, Share premium and Special non-distributable reserve are all non-distributable. Capital reserves of which realised distributable capital reserve and revenue reserve are distributable.

CASH FLOW STATEMENT

for the six months ended 31 October 2022

		(Unaudited)		(Audited)
	Note	Six months ended 31 October 2022 £'000	Six months ended 31 October 2021 £'000	Year ended 30 April 2022 £'000
Cash flows from operating activities
(Loss)/profit before tax		(280,880)	386,836	(256,646)
Adjustments:
Losses/(gains) on investments held at fair value through profit or loss	3	302,041	(408,257)	253,694
(Gains)/losses on derivative financial instruments	4	(8,729)	15,516	5,799
Proceeds of disposal on investments		1,305,771	1,345,986	2,822,328
Purchases of investments		(1,320,038)	(1,271,030)	(2,618,737)
Proceeds on disposal of derivative financial instruments		42,614	4,557	39,006
Purchases of derivative financial instruments		(28,838)	(22,007)	(47,194)
Decrease/(increase) in receivables		500	208	(64)
(Decrease)/increase in payables		(4,471)	1,063	(355)
Overseas tax		(1,114)	(1,052)	(2,124)
Foreign exchange gains	5	(15,631)	(2,006)	(17,535)
Net cash (used in)/generated from operating activities		(8,775)	49,814	178,172
Cash flows from financing activities
Ordinary shares repurchased into treasury	10	(57,738)	(30,417)	(98,001)
Net cash used in financing activities		(57,738)	(30,417)	(98,001)
Net (decrease)/increase in cash and cash equivalents		(66,513)	19,397	80,171
Cash and cash equivalents at the beginning of the period		311,363	212,732	212,732
Effect of movement in foreign exchange rates on cash held	5	17,069	1,471	18,460
Cash and cash equivalents at the end of the period	8	261,919	233,600	311,363
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows:
Cash held at bank and derivative clearing houses	8	166,376	152,862	219,403
BlackRock's Institutional Cash Series plc (US Treasury Fund), money market fund	8	95,543	80,738	91,960
Cash and cash equivalents at the end of the period	8	261,919	233,600	311,363

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 31 October 2022

1.  GENERAL INFORMATION

The Financial Statements comprise the unaudited results for Polar Capital Technology Trust Plc for the six-month period to 31 October 2022.

The unaudited Financial Statements to 31 October 2022 have been prepared in accordance with UK-adopted International Accounting Standard 34 "Interim Financial Reporting" and the accounting policies set out in the statutory annual Financial Statements of the Company for the year ended 30 April 2022.

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

The financial information in this Half Year Report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the six-month periods ended 31 October 2022 and 31 October 2021 has not been audited. The figures and financial information for the year ended 30 April 2022 are an extract from the latest published Financial Statements and do not constitute statutory accounts for that year. Full statutory accounts for the year ended 30 April 2022, prepared under UK-adopted IAS, including the report of the auditors which was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 of the Companies Act 2006, have been delivered to the Registrar of Companies.

The accounting policies have not varied from those described in the Annual Report for the year ended 30 April 2022.

The Directors believe it is appropriate to adopt the going concern basis in preparing the Financial Statements. As at 31 October 2022 the Company's total assets exceeded its total liabilities by a multiple of over 37. The Board continually monitors the financial position of the Company. The Directors have considered a detailed assessment of the Company's ability to meets its liabilities as they fall due. The assessment took account of the Company's current financial position, its cash flows and its liquidity position. In light of the results of these tests, the Company's cash balances, and the liquidity position, the Directors consider that the Company has adequate financial resources to enable them to continue in operational existence. Accordingly, the Directors are satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial results of the Company.

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

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

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

2.  INCOME

	(Unaudited) For the six months ended 31 October 2022 £'000	(Unaudited) For the six months ended 31 October 2021 £'000	(Audited) For the Year ended 30 April 2022 £'000
Investment income
Revenue:
Overseas dividend income	8,408	8,077	15,870
Total investment income	8,408	8,077	15,870
Other operating income
Bank interest	378	-	4
Money market fund interest	610	3	27
	988	3	31
Total income	9,396	8,080	15,901

Included within income from investment is £239,000 (31 October 2021 and 30 April 2022: £172,000) of special dividends classified as revenue in nature. £38,000 of special dividends have been recognised in capital (31 October 2021 and 30 April 2022: £nil).

All investment income is derived from listed investments.

3.  (LOSSES)/GAINS ON INVESTMENT HELD AT FAIR VALUE

	(Unaudited) For the six months ended 31 October 2022 £'000	(Unaudited) For the six months ended 31 October 2021 £'000	(Audited) For the Year ended 30 April 2022 £'000
Net (losses)/gains on disposal of investments at historic cost	(130,570)	204,926	232,360
Transfer on disposal of investments	(3,653)	(210,520)	(353,508)
Losses on disposal of investments based on carrying value at previous balance sheet date	(134,223)	(5,594)	(121,148)
Valuation (losses)/gains on investments held during the period	(167,818)	413,851	(132,546)
	(302,041)	408,257	(253,694)

4.  GAINS/(LOSSES) ON DERIVATIVES

	(Unaudited) For the six months ended 31 October 2022 £'000	(Unaudited) For the six months ended 31 October 2021 £'000	(Audited) For the Year ended 30 April 2022 £'000
Gains/(losses) on disposal of derivatives held	9,451	(13,350)	(10,212)
(Losses)/gains on revaluation of derivatives held	(722)	(2,166)	4,413
	8,729	(15,516)	(5,799)

The derivative financial instruments represent the call and put options, which are used for the purpose of efficient portfolio management. As at 31 October 2022, the Company held NASDAQ 100 Stock Index put options, and the market value of the open put option position was £1,432,000 (31 October 2021: NASDAQ 100 Stock Index put options with a market value of £3,319,000. 30 April 2022: NASDAQ 100 Stock Index put options with a market value of £6,431,000). As at 31 October 2022, there was no call option held by the Company (31 October 2021: Apple Inc. open call options with a market value of £2,705,000; 30 April 2022: Apple Inc. open call options with a market value of £48,000).

5.  OTHER CURRENCY GAINS

	(Unaudited) For the six months ended 31 October 2022 £'000	(Unaudited) For the six months ended 31 October 2021 £'000	(Audited) For the Year ended 30 April 2022 £'000
Exchange gains on currency balances	17,069	1,471	18,460
Exchange losses on settlement of loan balances	(507)	-	-
Exchange (losses)/gains on translation of loan balances	(931)	535	(925)
	15,631	2,006	17,535

6.  INVESTMENT MANAGEMENT AND PERFORMANCE FEES

INVESTMENT MANAGEMENT FEE

With effect from 1 May 2022, the investment management fee, which is paid by the Company monthly in arrears to the Investment Manager, is calculated on the daily Net Asset Value ("NAV") as follows:

·   Tier 1: 0.80 per cent. for such of the NAV up to and including £2 billion; 

·   Tier 2: 0.70 per cent. for such of the NAV between £2 billion and £3.5 billion; and 

· Tier 3: 0.60 per cent. for such of the NAV above £3.5 billion.  .

Any investments in funds managed by Polar Capital are excluded from the investment management fee calculation.

PERFORMANCE FEE

The Investment Manager is entitled to a performance fee based on the level of outperformance of the Company's net asset value per share over its benchmark, the Dow Jones World Technology Index (total return, Sterling adjusted, with the removal of relevant withholding taxes) during the relevant performance period.

At 31 October 2022, there was no accrued performance fee (31 October 2021 and 30 April 2022: £nil).  The quantum of any performance fee will be based on the audited net asset value at the year end on 30 April 2023.

A fuller explanation of the performance and management fee arrangements is given in the Annual Report.

7.  OTHER ADMINISTRATIVE EXPENSES

At 31 October 2022, the Company's other administrative expenses, were £630,000 (31 October 2021: £700,000 and 30 April 2022: £1,335,000).

8.  CASH AND CASH EQUIVALENTS

	(Unaudited) For the six months ended 31 October 2022 £'000	(Unaudited) For the six months ended 31 October 2021 £'000	(Audited) For the Year ended 30 April 2022 £'000
Cash at bank	166,334	152,862	211,940
Cash held at derivative clearing houses	42	-	7,463
Money market funds	95,543	80,738	91,960
Total	261,919	233,600	311,363

As at 31 October 2022, the Company held BlackRock's Institutional Cash Series plc - US Treasury Fund with a market value of £95,543,000 (31 October 2021: £80,738,000 and 30 April 2022: £91,960,000), which is managed as part of the Company's cash and cash equivalents as defined under IAS 7.    

9.  (LOSSES)/EARNINGS PER ORDINARY SHARE

	(Unaudited) For the six months ended 31 October 2022 £'000	(Unaudited) For the six months ended 31 October 2021 £'000	(Audited) For the Year ended 30 April 2022 £'000
Net (loss)/profit for the period:
Revenue	(4,317)	(8,898)	(16,688)
Capital	(277,643)	394,747	(241,958)
Total	(281,960)	385,849	(258,646)
Weighted average number of shares in issue during the period	130,792,391	136,038,501	134,984,460
Revenue	(3.30)p	(6.54)p	(12.36)p
Capital	(212.28)p	290.17p	(179.25)p
Total	(215.58)p	283.63p	(191.61)p

10.  SHARE CAPITAL

At 31 October 2022 there were 129,413,314 ordinary shares in issue (31 October 2021: 135,225,396 and 30 April 2022: 132,356,426.) During the six months ended 31 October 2022, the Company issued no ordinary shares (31 October 2021 and 30 April 2022: the same ), During the same period, a total of 2,943,112 (31 October 2021: 1,319,368 and 30 April 2022: 4,188,338) ordinary shares were repurchased into treasury at a total cost of £57,223,000 (31 October 2021: £31,395,000 and 30 April 2022: £98,639,000).

Subsequent to the period end, and to 9 December 2022 (latest practicable date), 436,091 ordinary shares were repurchased and placed into treasury at an average price of 1901.81p per share.

11.  NET ASSET VALUE PER ORDINARY SHARE

	(Unaudited) 31 October 2022 £'000	(Unaudited) 31 October 2021 £'000	(Audited) 30 April 2022 £'000
Undiluted:
Net assets attributable to ordinary shareholders (£'000)	2,711,516	3,763,061	3,050,985
Ordinary shares in issue at end of period	129,413,314	135,225,396	132,356,426
Net asset value per ordinary share	2095.24p	2782.81p	2305.13p

12.  DIVIDEND

No interim dividend has been declared for the period ended 31 October 2022, nor for the periods ended 31 October 2021 or 30 April 2022 respectively.

13.  RELATED PARTY TRANSACTIONS

There have been no related party transactions that have materially affected the financial position or the performance of the Company during the six-month period to 31 October 2022.

14.  POST BALANCE SHEET EVENTS

Subsequent to the period end, and to 9 December 2022 (latest practicable date), 436,091 ordinary shares were repurchased and placed into treasury at an average price of 1901.81p per share.

There are no other significant events that have occurred after the end of the reporting period to the date of this report which require disclosure.

Alternative Performance Measures (APMs)

In assessing the performance of the Company, the Investment Manager and the Directors use the following APMs which are not defined in accounting standards or law but are considered to be known industry metrics:

Net Asset Value (NAV) and NAV per share

The NAV is the value attributed to the underlying assets of the Company less the liabilities, presented either on a per share or total basis.

The value of the Company's assets, principally investments made in other companies and cash being held, minus any liabilities. The NAV is also described as 'Shareholders' funds' per share. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the Company's shares can be bought or sold by an investor.  See Note 11 above for detailed calculations. The NAV per ordinary share is published daily.

NAV Total Return (APM)

The NAV total return shows how the net asset value per share has performed over a period of time taking into account both capital returns and dividends paid to Shareholders.

NAV total return reflects the change in value of NAV plus the dividend paid to the Shareholder. Since the Company has not paid a dividend the NAV total return is the same as the NAV per share return as at the six months ended 31 October 2022 and year ended 30 April 2022.

		(Unaudited) For the six months ended 31 October 2022	(Audited) Year ended 30 April 2022
Opening NAV per share	a	2305.13p	2496.44p
Closing NAV per share	b	2095.24p	2305.13p
NAV total return for the year	(b/a)-1	(9.1%)	(7.7%)

(Discount)/Premium (APM)

A description of the difference between the share price and the net asset value per share usually expressed as a percentage (%) of the net asset value per share. If the share price is higher than the NAV per share the result is a premium. If the share price is lower than the NAV per share, the shares are trading at a discount.

		(Unaudited) 31 October 2022	(Audited) 30 April 2022
Closing share price	a	1894.00p	2040.00p
Closing NAV per share	b	2095.24p	2305.13p
Discount of ordinary share price to the NAV per ordinary share	(a/b)-1	(9.6%)	(11.5%)

DIRECTORS AND CONTACTS

Directors (all independent Non-executive) Catherine Cripps (Chair) Tim Cruttenden (Senior Independent Director) Charlotta Ginman (Audit Committee Chair) Charles Park Jane Pearce Stephen White
Investment Manager and AIFM Polar Capital LLP Authorised and regulated by the Financial Services Authority	Portfolio Manager Ben Rogoff
Registered Office and address for contacting the Directors 16 Palace Street, London SW1E 5JD 020 7227 2700	Company Secretary Polar Capital Secretarial Services Limited represented by Jumoke Kupoluyi, ACG
Corporate Broker Stifel Nicolaus Europe Limited 150 Cheapside London EC2V 6ET	Depositary, Bankers and Custodian HSBC Bank Plc, 8 Canada Square, London E14 5HQ

Registered Number

Incorporated in England and Wales with company number 3224867 and registered as an investment company under section 833 of the Companies Act 2006

Forward Looking Statements

Certain statements included in this report and financial statements 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 Strategic Report section on pages 65 to 69 of the Annual Report. 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.

Half Year Report 

The Company has opted not to post half year reports to shareholders. Copies of the Half Year Report will be available from the Secretary at the Registered Office, 16 Palace Street, London SW1E 5JD and from the Company's website at www.polarcapitaltechnologytrust.co.uk

National Storage Mechanism

A copy of the Half Year Report has been submitted to the National Storage Mechanism ('NSM') and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

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

 

END

 

 

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