Look closer to home to swerve around tech wreck


Size matters. When the share price of Scottish Mortgage, the biggest and best known investment trust, falls by 14 per cent over five days, it is a signal for private investors to take a reality check. 

Despite its stolid-sounding name, the £17.2billion trust backs the big names in technology, a strategy that has caused its price to leap by 723 per cent over the past decade. 

For some, this week’s decline marks the moment to cash in profits on this trust and other Silicon Valley star holdings before they drop further to earth. 

But for others, could there in fact be a buying opportunity, to get hold of a slice of its unlisted stakes in flying taxis and Space X, the Elon Musk extraterrestrial sideline?

Recently, Scottish Mortgage – the flagship fund of investment firm Baillie Gifford – has reduced its stake in Tesla, Musk’s main vehicle, following that company’s decision to buy bitcoin. Other Baillie Gifford funds have also scaled back their holdings. 

Musk – who can be relied on to be inconsistent – now considers the digital currency to be overvalued, and that hit Tesla’s share price this week. 

Musk’s addiction to being outspoken is not the only factor behind the harsher scrutiny now surrounding Tesla and the tech titans whose share prices have seemed to defy gravity since the start of 2020. 

Suddenly, the US markets are fearful about a surge in inflation, triggered by stimulus cash, and the higher interest rates this could produce. Yields on US government stocks have been going up which is seen as the precursor to a rate rise, despite assurances to the contrary from Federal Reserve chairman Jerome Powell. 

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There are concerns that the focus will henceforth be on cheaper ‘value’ stocks. These have been overlooked in the love affair with Tesla, Amazon and their ilk, but likely to benefit from recovery as the pandemic recedes. 

Until now, investors, unable to get a decent return elsewhere, have been happy to pay steep prices for the tech titans, optimistic about a payback from future profits. 

All change? Until now, investors, unable to get a decent return elsewhere, have been happy to pay steep prices for the tech titans

All change? Until now, investors, unable to get a decent return elsewhere, have been happy to pay steep prices for the tech titans

As David Coombs, head of multi-asset investments at Rathbone puts it: ‘They have been taking a huge risk and have been rewarded for it.’ 

Such a phenomenon cannot endure forever, even though in recent months, this may have appeared possible. 

If the portion of tech in your portfolio is now making you uneasy, it is worth pondering the degree of risk you are willing to take – and over what time period. For the next six months or so, inflation apprehension is expected to make the markets more volatile. 

The prices of some goods and services could rise short-term, as the vaccine-led pandemic revival pushes up demand. But this effect may be moderated by sluggish wage growth and unemployment. 

Rates do not seem on the brink of an increase: indeed, the Bank of England seems more minded to move to negative territory than to put up borrowing costs.

Nevertheless, the heightened state of tension will result in a reassessment of some tech stocks, as Coombs explains: ‘People will be asking whether a business is really a tech company, or just a company, like Uber, that is enabled by an app. If it is a tech stock, is its business unique and if so, how much of a premium ought you to pay for this? 

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‘For example, Spotify is vulnerable to competition from Amazon Music and Apple Music. Maybe musicians who are unhappy with their earnings from Spotify could start releasing their albums through Peloton, the exercise bike business, which makes music for its video classes.’ 

He continues: ‘Tesla, although seen as a tech stock, is actually an electric car maker, and although other manufacturers are late to the party, they are catching up.’ 

Coombs contends that tech companies like Adobe, the computer assisted design giant, semiconductor specialist ASML and the software developer Cadence are worth buying because their activities are ‘hard to replicate’. 

Scottish Mortgage, like the others in the Baillie Gifford stable, is shifting away from the Faangs (Facebook, Amazon, Apple, Netflix and Alphabet, the parent company of Google) in favour of such developing areas as cloud services and e-commerce. For this reason I am disinclined to sell out from this element of my portfolio.

But it is a long-term holding and anyone tempted to invest now should remember that. The trust’s past performance has made it seem like a one-way bet, rather than a considerable gamble – but as the warning says, past performance is not a guide to the future. 

‘Technology may be integral to all our lives’, as Ben Yearsley of Shore Financial Planning, points out, but that should not mean all your life savings belong there.

He argues you should turn your eyes from Silicon Valley to the UK which he sees as ‘exceptional value’. He suggests the Man GLG Undervalued Assets and Montanaro Smaller Companies funds. 

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Backing a UK revival will require strong nerves, but there will be less wondering what Elon Musk will say next. 

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