Scottish Mortgage Trust PLC sees the froth blown off its valuation

Investing in PLC () 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%), (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 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…