UK Edition
The recent sell-off in “growth” stocks is likely to have tested the conviction of even the most cool-headed of investors.
Since the Bank of England raised interest rates in December and the Federal Reserve signalled it is not far behind, investors have re-evaluated fast-growing companies, not least in the technology sector. These stocks had been prized not for their profits today, but for the promise of their future earnings. However, in a higher rate environment these prospective earnings are worth less.
Investors, instead, have turned their attentions to “value” stocks, such as oil majors and miners, which are assessed relative to their profits in the here-and-now. These companies trade on much lower valuations than their growth peers and have started to produce healthy profits following a challenging 2020.
It pains Questor to flag that this mindset shift has sparked share price falls among a number of the growth-focused investment trusts we have tipped. They include Monks, Scottish Mortgage’s smaller and more diversified stablemate, Allianz Technology and Polar Capital Technology, which are down between 7pc and 15pc since the start of November.
Scottish Mortgage, Britain’s largest investment trust, is another obvious casualty. Last Monday, its shares were down 33pc since early November and reached a rare discount of 8pc, according to Morningstar. Since then, shares have rallied 9pc but remain 26pc lower than November.
Managed by James Anderson (who is set to leave Baillie Gifford in April) and Tom Slater, the £16bn fund is packed full of fast-growing names, such as electric vehicle manufacturer Tesla and Covid vaccine maker Moderna, which have derated over the past few months.
Investors in Scottish Mortgage will understandably be feeling nervous, but context is important. The trust’s long-term track record is unmatched by any other mainstream fund. This is down, in part, to the investment team’s exceptional ability to identify disruptive innovators, in some cases years before they go public. Since Questor first tipped Scottish Mortgage in 2017, its share price has risen by 158pc. And over the past decade, investors have benefited from an astonishing 829pc gain. This compares to 222pc by the MSCI AC World index.
However, there is no getting away from the potential volatility associated with the team’s high conviction approach to fast-growing companies.
Peter Hewitt, manager of the BMO Managed Portfolio trust, says there is every chance that Scottish Mortgage lags its value competitors over the next six to 12 months. But on a five to 10-year view, he expects the trust can continue to deliver attractive returns.
“Holding Scottish Mortgage may mean that I underperform in January, but I am not too worried because in the long run you make big gains from sticking with these types of trusts and where they are invested. The same goes for Polar Capital Technology, Edinburgh Worldwide, Monks and Allianz Technology,” he said.
He added that investors with a long-term horizon could consider buying in today, given the share price offers an attractive entry point in comparison to two to three months ago.
Analysts at Stifel agree. They recently advised investors to buy the dip in Scottish Mortgage. “None of us know when the selling will reach its low point, but taking a contrarian view the shares are starting to look interesting. Given the volatile nature of the portfolio, we suggest ‘drip-feed’ investing – adding small amounts of money consistently,” they noted.
This sounds like a wise strategy. Scottish Mortgage’s investment team has a knack of spotting tomorrow’s winners, and we find it hard to believe that their successful run is going to end simply because interest rates and inflation are running higher.
Finally, the elephant in the room is timing. There’s no getting away from the fact that Scottish Mortgage looked much more attractive last week when its share price was 9pc lower. But for those who are happy to take a five to 10-year view, today’s share price still offers an attractive entry point in light of the potential long-term returns on offer. Otherwise, for those who fancy themselves as bargain hunters, this is one to buy on weakness.
Questor says: buy
Ticker: SMT
Share price at close: £11.06
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.