Its name may lack sex appeal, but investment trust Scottish Mortgage has delivered some racy returns over the years.
An investment of £1,000 five years ago is now worth more than £3,000. Not surprisingly, it’s loved by investors of all ages – young and old. Why? The answer is simple: it tends to make investors more long-term gains than they can make elsewhere.
Its success has been such that the trust, managed out of Edinburgh by investment house Baillie Gifford, now has assets under its wing of £5.5billion, making it the only investment trust in the country to form part of the FTSE100 Index. Quite a feat.
Yet, adored though it may be, this investment trust doesn’t provide a one-way ticket to the investment land of milk and honey.
Far from it. It’s actually a rather bold and risky investment vehicle, taking big bets on overseas companies that are driving through technological change or supplying the components allowing such change to take place.
On the edge: Should investors avoid big technology stocks – or have prices fallen so far that there are real bargains to be found?
Some experts describe it as the UK’s biggest technology company – and Baillie Gifford doesn’t disagree.
Last week, it told me its modus operandi was to hunt down ‘exceptional companies and support them in finding solutions to some of the world’s great problems’ – solutions involving decarbonisation, digitalisation and in Baillie Gifford’s own words ‘the intersection of information technology with biology’. Tech, tech and more tech.
As a result, when stock markets sneeze, as they did last week over fears of war in Ukraine and higher interest rates in the United States, Scottish Mortgage’s share price sneezes louder.
Last Monday, it tumbled by more than five per cent, compared to a 2.6 per cent fall in the FTSE100 Index. Although going on to recover, its share price still closed last Friday more than 6 per cent down on the week.
Over the last six months, it is down 24 per cent – nearly 18 per cent over the last year.
With technology shares falling sharply in the United States – biotech giant Moderna, the Covid vaccine maker and Scottish Mortgage’s biggest holding, has seen its price fall by more than 10 per cent over the past five days – a key question for investors now raises its head. Should they avoid big technology stocks, including Scottish Mortgage – or have prices fallen so far that there are real bargains to be found?
Some commentators believe investors should treat all technology-orientated companies with a big dollop of caution.
Among them is Jason Hollands, a director of wealth manager Tilney. He believes rampaging inflation and higher interest rates are game changers for most of these growth-orientated companies whose share prices have been inflated by the high expectation of juicy future profits – rather than what they are delivering today.
Even after recent stock market dips, he says, shares in these companies are far from cheap.
He backs his argument by way of example. ‘Tesla is an innovative and exciting company,’ he says, ‘a pioneer in the electric vehicle market. But every other car manufacturer is now playing – or aiming to play – in this space.’
Although Tesla’s share price is down 30 per cent this year, Hollands says it still looks expensive when taking account of its forecast earnings. ‘There’s an incredible amount of optimism about the future built into the share price,’ he adds. ‘
Maybe, it will continue to defy the equivalent of financial market gravity, but it is my view there are clear risks for investors who continue to pour money into such a highly valued stock.’
‘Proven deliverers and unproven promisers’
Other experts are a little more nuanced. David Coombs runs multi-asset portfolios for Rathbone Investment Management. He says recent market falls represent an ‘overdue check on reality’, but he believes all technology-focused companies should not be ruled out by investors.
He says: ‘Technology is now such a diverse sector. What investors should be doing is buying the ‘proven deliverers’ whose shares have fallen and avoiding the ‘unproven promisers’.
‘So, in the technology space, select those companies with low levels of debt, good visibility on future growth and which have a significant competitive advantage over rivals.’
Among the ‘proven deliverers’ in the portfolios he runs are Adobe, Alphabet, Microsoft and software specialist Ansys. Since the turn of the year, shares in these companies have fallen respectively by 6, 9, 9 and 18 per cent.
Coombs wasn’t prepared to disclose the names of ‘unproven promisers’ other than to say they fall into a basket headed ‘short-term Covid winners’.
But other experts are bolder, naming firms such as home exercise equipment specialist Peloton and e-commerce specialist The Hut Group (THG) as technology shares to be cautious about.
Dan Lane, senior analyst at share trading company Freetrade, makes the same point as Rathbone’s Coombs, but in a broader market context.
Lane says: ‘No amount of apparent share price cheapness can make a shoddy business good. When you’re bargain hunting as an investor, keep that front of mind. Instead of pouncing on anything that’s stepped into the proverbial cartoon manhole, look to the companies that maybe have been unfairly tarred in this market shake-out.’
He elaborates: ‘Divide opportunities into two buckets – those companies you would have invested in before the pandemic; and those you wouldn’t have touched. Then focus on the first bucket – hopefully, the world will spend a longer time in the future out of a global pandemic than in one.’
So, what are the technology-focused companies you should back long term as an investor – and those you maybe should avoid? We asked a number of experts to provide their selections.
Perennial high achievers
Susannah Streeter, senior investment and markets analyst at wealth manager Hargreaves Lansdown, says long-term tech winners should include big established American brands Microsoft (a favourite of Rathbone’s Coombs) and Amazon (its shares are down 17 per cent since the turn of the year).
‘Microsoft’s software and services are increasingly indispensable to our lives,’ says Streeter, ‘be it at school, home or in the workplace.’
She describes Amazon as the ‘king of e-commerce’ and an ‘exciting growth opportunity’ as margins improve. She also believes lesser known tech stocks Roku and Nvidia will bounce back – respective year-to-date share price falls of 35 and 26 per cent.
‘Roku’s shares have been pummelled in the tech sell-off,’ she says. But she believes the US digital media company has a good future as it cements its position as the leading TV operating system in the United States.
American tech company Nvidia, she believes, should benefit from having its ‘fingers in all sorts of pies’ – including digital design and artificial intelligence.
Victoria Scholar, head of investments at wealth manager Interactive Investor, likes iPhone giant Apple whose shares are down 7 per cent since the start of the year.
‘Its share price has got caught up in the tech share price slump,’ she says. ‘But unlike many tech companies, it’s got lots of cash and low levels of debt.’
Charles Jones, of Waverton Investment Management, likes US-listed company Upstart Technologies – a lending platform that embraces artificial intelligence. ‘It has a big market, is profitable and sales this year could grow by nearly 50 per cent,’ he says.
High fliers to be wary off
As Rathbone’s Coombs alluded to earlier, many of the tech stocks to avoid are those that thrived during the pandemic and whose share prices got grossly inflated as a result.
Hargreaves Lansdown’s Streeter includes Deliveroo, Tesla, Peloton and The Hut Group among her shares to be cautious about.
‘There is a tight pack of competitors jostling for position in the delivery sector, she says. ‘Although Deliveroo delivered some appetising financial results in the fourth quarter of last year, it faces an uphill struggle ahead.’
Freetrade’s Lane agrees, believing the company came to the stock market too soon – its shares floated at £3.90 last year and are now trading at £1.46.
He is also sceptical about tech company Darktrace which like Deliveroo listed last year.
Although its shares are above the flotation price of £2.50, Lane says recent share sales by company directors beg the question: ‘Why buy the shares when big chunks are being offloaded by the people who know the business the best?’
Russ Mould, investment director at wealth platform AJ Bell, says investors should avoid Deliveroo and The Hut Group – and also online electrical retailer AO World which he believes could struggle as household budgets get squeezed.
One final word: diversify!
All the investment experts I spoke to on Friday say the best way of building long-term wealth is to maintain a diversified portfolio. This can best be achieved through holding a number of investment funds, stock market-listed investment trusts and shares.
Diversification should be obtained geographically – overseas market exposure as well as UK holdings – by assets (not just equities) and by sector. So invest in financial stocks (Tilney’s Jason Hollands is a big fan). Invest in drinks companies such as Diageo (most of us like a tipple or three). Invest in brands we love, the Burberrys of this world. Invest in travel companies such as Jet2 (the best of them according to AJ Bell’s Russ Mould).
In a nutshell, don’t put all your investment faith in technology shares and do drip your money in.
What about Scottish Mortgage?
Freetrade’s Lane believes Scottish Mortgage will continue to deliver outstanding long-term investment returns, provided manager Tom Slater does not veer from the approach that has proved successful in the past – namely, investing in early-stage companies, often unlisted to begin with, and then building the stakes as conviction in the companies grow.
‘Maintaining such an approach is a more compelling reason to buy than any short-term price hiccup the trust is going through,’ he adds.
The manager’s response? ‘Success requires patience and we promise to be patient as managers.’
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