Scottish Mortgage Trust sees the froth blown off its valuation

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Investing in Scottish Mortgage Investment Trust PLC (LON:SMT) has long been a convenient way for UK retail investors to gain exposure to the US tech boom.


As well as being convenient, it has been lucrative as well. Until recently.


According to figures from Trustnet, Scottish Mortgage’s (SMT) net asset value (NAV) per share rose 500% between March 2016 and February 15 2021.


In just 11 days, that appreciation has been slashed back to 437%, as investors fret that the valuations of the tech glamour stocks might be getting way ahead of themselves – not that this has ever seemed to worry investors before.


SMT’s share price since February 15 has fallen from 1,600p to 1,159p – a fall of 28%. That’s a bigger fall, even than Tesla (down 18%), the stock that has been partly responsible for SMT’s rise to prominence.


Having said that, the investment trust has pared its holdings in Tesla, such that the electric vehicle maker now forms just 5.1% of its portfolio, down from 8.9% at the end of 2020.


That puts Tesla behind Tencent (6.5%), Illumina (6.1%) and Amazon.com (5.9%) in its list of big holdings.


The trust is not specifically set up to invest in technology stocks but that’s the way it seems to have panned out. Other well-known stocks in its top-10 holdings include Alibaba.com, the e-commerce giant, and Delivery Hero, the food ordering outfit.


Tucked away at number nine and forming 3.3% of its portfolio is Moderna, the drugs company set to make a mint from its COVID-19 vaccine.


The biotech stock was not in SMT’s top 10 holdings at the end of 2020 and its appearance now, and the trust’s well-timed paring of its Tesla holdings, suggest that the trust is not just going to live on past glories and that its investment manager, Baillie Gifford, might actually have a clue about spotting winners.


What is a tech stock anyway?


At the end of January, healthcare stocks made up 11.6% of the trust’s portfolio, compared to 19.1% for the technology sector.


Consumer goods companies formed 19.4% of its portfolio and consumer services firms 39.8%, so the trust is not a pure tech play, although it is unclear how much overlap there is between its consumer good & services companies and technology.


Is Amazon.com a technology company? Based on its network infrastructure business – the company provides the servers that host a lot of e-commerce sites – you could argue that it is but you could also be justified in classifying it as a consumer services company.


The big worry for investors, however, is that technology stocks and quasi-tech stocks are going to have the sort of collapse that did for many companies in the dot.com boom.


Technology stock advocates think it is less likely that a similar collapse will happen with today’s technology stocks, many of which seem more powerful and influential than national governments.


Certainly, Google probably knows more about me than my wife does, never mind MI5. Not that MI5 has any reason to be interested in me (ditto my wife but for some reason she does).


It certainly seems that technology is all-pervading, all-seeing and all-knowing but it has not penetrated daily life as much as you might think.


Tech has many territories it has yet to conquer


Dave Bujnowski, a fund manager at Baillie Gifford, said in an interview with Trustnet Magazine, that e-commerce is still just 15% of all retail in the US while only 15-20% of all apps or workloads have migrated to the cloud.


That leaves plenty of room for growth.


If you buy into Bujnowski’s view, then SMT remains a convenient way of buying into tech while spreading your risk.


Other trusts are available, as the BBC might say.


Baillie Gifford US Growth Trust, for instance, has Shopify as its biggest investment (5.5%), followed by Amazon.com (5.0%) and Tesla (4.4%). Down in the number 10 spot is Zoom Video Communications (3.1%), which is perhaps not the hot stock it was at the height of the coronavirus pandemic but it still has tremendous brand recognition because of it.


As the name of the trust suggests, it invests purely in US growth stocks. If Asia-Pacific tickles your fancy more, then a trust such as JP Morgan China Growth & Income might be the one for you. Around 8.3% of its portfolio is in Tencent Holdings and 7.9% in Alibaba.com but it is also invested in stocks that might be a little less familiar, such as Kingdee International Software (2.9%) and Sunny Optical Technology (2.0%).


For technology stock purists, there are Allianz Technology Trust PLC (LON:ATT) and Polar Capital Technology Trust PLC (LON:PCT), both of which have joined SMT in the doghouse in the second half of February.


Investing in these trusts is not, perhaps, as much fun as going on Reddit and joining in the ramp-up of stocks of companies you thought had gone out of business long ago (get ready for the Netscape comeback!) but it takes a lot of the hard work out of the research side and spreads some risk.

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