Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested.

February 2014

Investment Insights from Silicon Valley

www.rcmtechnologytrust.co.uk

Walter Price Lead Manager, RCM Technology Trust With over 40 years of experience of investing in technology companies, Walter Price has witnessed the technology sector improve user productivity through the revolution in semiconductor design, the birth of the personal computer and the arrival of the internet. Based in San Francisco, giving him close proximity to many of the world’s most innovative companies, he heads up the Global Technology Team which manages US$4 billion* in assets.

argue that personal computing is likely to be a growth area, for Technology in the news the time being it seems to have stabilised. Microsoft should also Microsoft has long understood the necessity of shifting its be a beneficiary of a loosening in corporate spending. business from its weakening core markets to newer and At the moment, we have a relatively conservative price target on higher growth areas. To date, its execution has been erratic; Microsoft, but if it can establish itself as a solid competitor to there have been ill-judged forays into the mobile phone world, Amazon in cloud computing, move away from mobile phones for example. However, Microsoft’s turnaround has taken a leap and generate stronger growth, it could easily attract a rating of forward with the appointment of Satya Nadella, who becomes double its current 10x earnings. Chief Executive Officer this month, replacing the outgoing Steve Ballmer. Buybacks Nadella joined Microsoft in 1992 and has a good track record in the Buyback levels in the US market reached record highs at the end areas where the business needs to focus: cloud computing and of 2013 and the technology sector has firmly participated in the enterprise technology. He put Microsoft’s search business on a trend. Notably, Apple has launched a $14bn buyback programme, more solid footing, which at the time had appeared to be a which has attracted criticism and approval in equal measure. daunting - if not impossible - task. The most successful technology Some suggest the money could be better spent. Others would businesses have tended to have users of technology as leaders - like to see more, though billionaire activist investor Carl Icahn – The late Steve Jobs is perhaps the most high-profile example. one of Apple’s biggest shareholders - has now dropped his Nadella is an engineer who understands technology, rather than proposal for Apple to extend its buyback programme even being simply a financial manager or sales person. As such, he also further. commands the respect of the developers in the group. In general, we like buybacks if they are meaningful, shrink the We expect Nadella quietly to forget the episode where Microsoft company and add to earnings. We don’t like those merely tried to be a mobile phone company and focus on the right areas designed to compensate for share options. Apple’s share buyback of key growth markets. Investors should forgive companies these programme has added around 5% to earnings and as such is kinds of mistakes, just as they forgave Google for buying welcome. That said, for the time being it has moved the stock as Motorola. much as likely to do so and Apple really has to focus on new The Trust currently has a position in Microsoft, as we have already products. started to see improving earnings at the group: the group’s There are three main product areas: TV, services and the enterprise business is performing well, and while we would not forthcoming larger-screen iPhone. The latter could see strong

*Source: Allianz Global Investors Europe GmbH as at December 2013. This is no recommendation or solicitation to buy or sell any particular security. Investment Insights from Silicon Valley

demand especially in Asia where Apple has established new sales people and will reject it if it goes too far. LinkedIn hasn’t yet carrier deals and may positively surprise the markets as a result. It worked out how to achieve this balance. may provide some growth when, at the moment, markets are In general, there are two main areas where companies pricing in almost no growth at all. Many larger companies such as disappoint: there may be poor execution, or a fundamental issue Apple are trading on low multiples relative to the wider market. If in the business. Twitter, for example, recently hit its earnings there is any growth at all, there could be a re-rating in the shares. targets, but without growing its user base. In other cases, it may The Trust did not hold Apple for a long time, and this contributed be that costs are needed to sustain high revenue growth. We are to relative performance during the sharp decline in Apple’s more tolerant of the latter than the former. It is difficult to shares. We now have a small holding - 2-3% of the fund versus its generate high revenue growth without a company growing its 10-12% weighting in the benchmark - and are waiting to see how sales force, for example. With LinkedIn, we believe the recent the next round of product development will be received. rout could be a buying opportunity.

LinkedIn disappoints Emerging trend - security Just as expectations are too low for some technology giants, they Department store Target saw the credit card details of 20 million are too lofty for some companies considered ‘high growth’ by Christmas shoppers stolen over the period from 27 November to investors. LinkedIn is now wrestling with this problem and its 15 December. The theft was particularly troubling in its sales forecasts disappointed the markets at the start of the year. sophistication. It was highly organised, rather than a lone hacker The company had attracted an ambitious valuation of $25bn, and showed the vulnerability of large organisations to increasingly which implied an extremely high growth rate. It still grew complex fraud. By January, Target had already introduced new strongly, but its suggested growth is now around 40% per year security systems and was calling on other retailers to bring in Chip rather than the 50% per year expected by the more optimistic and PIN, common in the UK, but rare in the US. analysts. Incidents like these are becoming increasingly common and The recruiting business of LinkedIn is robust, but has seen some security will be a big growth area for 2014. Companies need to slowing of growth. It has recruited for Google and Microsoft, but spend on security to retain competitiveness as customer other companies have been slower to adopt Internet recruiting. dissatisfaction grows. Companies such as Gemalto and FireEye are The problem for the group now is to find a way to use the poised to be key winners from this trend. Both are now important database of contacts on the site for marketing. This is a delicate positions in the Trust’s portfolio. process because people do not use LinkedIn to be besieged by

All sources Allianz Global Investors Europe GmbH unless otherwise noted. This is no recommendation or solicitation to buy or sell any particular security. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Competition among technology companies may result in aggressive pricing of their products and services, which may affect the profitability of the companies in which the Trust invests. In addition, because of the rapid pace of technological development, products or services developed by these companies may become rapidly obsolete or have relatively short product cycles. This may have the effect of making the Trust’s returns more volatile than the returns of a fund that does not invest in similarly related companies. Past performance is not a reliable indicator of future results. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. A security mentioned as example above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. This is a marketing communication issued by Allianz Global Investors Europe GmbH, an investment company with limited liability incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42/44, D-60323 Franfkurt/M. Allianz Global Investors Europe GmbH is registered with the local court of Frankfurt/M under HRB 9340 and is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Allianz Global Investors Europe GmbH has established a branch in the United Kingdom, Allianz Global Investors Europe GmbH, UK Branch, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. RCM Technology Trust PLC PLC is incorporated in England and Wales. (Company registration no. 3117355). Registered Office: 199 Bishopsgate, London, EC2M 3TY.

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