Technology shares have raced ahead in recent years, with growth-oriented portfolios benefiting handsomely. But popular stocks are always vulnerable to a shake-up, and in the short term these names have been caught out by changing investor sentiment.
Strong long-term performance
Concentrated exposure to leading companies
Experienced management team
Current discount
Potential volatility
In the US, a rise in bond yields has seen the market favourites sell off, with unloved stocks making a comeback. The first half of September saw popular US software shares fall significantly, while beaten-up sectors such as energy made big gains.
The market rotation has been reflected in the performance of indices tracking different investment styles. The MSCI USA Value index rose by 3.85 per cent in dollar terms from 1 September to 16 September, while MSCI USA Momentum fell by 1.27 per cent.
Investment trusts with a focus on tech names have understandably taken a hit. Notably, Scottish Mortgage Investment Trust (SMT) has seen its share price suffer, trading at a discount to net asset value (NAV).
“Performance has been a bit dull in recent months and we are experiencing a big rotation from growth to value right now as bond yields back up,” explains Mick Gilligan, head of fund research at Killik & Co. “SMT is extreme growth so it is struggling in the current environment.”
A hit to performance is rarely welcome, and the recent market rotation raises questions about how growth investors might fare in future. But for those who believe in SMT’s focus on finding future market leaders, the recent share price fall represents an attractive entry point.
Baillie Gifford fund managers James Anderson and Tom Slater, who run the trust, look to build a high-conviction portfolio of global stocks, with an onus on “strong, well run businesses which offer the best potential durable growth opportunities for the future”.
This has resulted in a fairly concentrated portfolio with a strong focus on tech names. The fund had 51.6 per cent of assets in North American equities and 21.3 per cent in the Pacific Basin at the end of July, according to FE Analytics. Its holdings in tech-driven businesses Amazon (US:AMZN), Illumina (US:ILMN), Tencent (US:TME), Alibaba (US:BABA), Tesla (US:TSLA) and Netflix (US:NFLX) accounted for 36.2 per cent of assets alone at the end of July.
The trust, which can also hold up to a quarter of its assets in unlisted shares, has performed extremely well in recent years, both in terms of NAV returns and its share price. The latter, which ultimately affects the end investor’s returns, has significantly outpaced the trust’s benchmark, the FTSE All-World index, over three, five and 10 years.
As a result of this strong performance, the trust’s shares tend to trade at a premium to NAV. The trust was trading at a 2.8 per cent discount on 23 September, according to Winterflood, but this stands in compared with an average premium of 1.6 per cent.
This could represent a bargain for now, because growth stocks may well reassert their dominance, with investors unlikely to abandon SMT. There is also a possibility that the trust’s board could take more direct action to bolster the price by buying its own stocks at the current discount – something that would be likely to lift the price.
“The board has been very active at issuing stock in recent years so it will be interesting to see if it is as keen to make buybacks if the discount widens,” says Mr Gilligan.
Recent problems in the market should remind investors that popular stocks can be vulnerable. But growth investing, and SMT’s own strategy of taking big stakes in high-growth companies, could well continue to pay off. If you have a decent risk appetite, now might be a good time to get in cheap. Buy. DB
