Our City analyst assesses the view from long-term growth investor Baillie Gifford that the current correction is likely just a glitch on the path to a golden tech era.
A Baillie Gifford fund whose Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) stakes have been pummelled in the rout of growth stocks today provided a longer-term view on Wall Street's recent troubles by reminding investors that “uncertainty and volatility must be embraced”.
The Baillie Gifford US Growth (LSE:USA) investment trust said the “golden era may yet be ahead of us” as technologies such as the internet, mobile and AI spread out and impact a far broader range of industries.
Its results published today for the six months to 30 November cover a period before a significant shift in stock market sentiment. Growth in the company's net asset value of 17.2% to 347p was exactly the same as the total return for the S&P 500 index, but the share price lagged after posting a rise of 9.4% to 337p.
Recent expectations for an acceleration in the pace of US interest rate rises have since depressed valuations of high growth stocks and left the Nasdaq 100 in correction territory. The tech-focused index yesterday slumped almost 5% before a staging a late recovery.
Shares in the FTSE 250-listed trust today recovered 4% or 8.75p to 221.75p, having been as low as 208p on Monday morning.
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Shopify (NYSE:SHOP), the cloud-based e-commerce platform, represents the biggest company in the portfolio, accounting for 6.7% of total assets at the end of November. Vaccine maker Moderna (NASDAQ:MRNA) is the next biggest at 5.4%, ahead of Tesla (NASDAQ:TSLA) in fourth place.
Baillie Gifford points out that the share price and net asset value have returned 235% and 254% respectively since launch in March 2018 compared with 102% for the S&P 500.
It points out that this has not been a smooth journey as the top 15 listed holdings of the current portfolio have experienced 47 drawdowns of greater than 20% over the period.
The largest single peak to trough hit was 86% for retail business Wayfair (NYSE:W) in March 2019 but it has still delivered a 267% return. The total average return of the top 15 stocks from their first investment is 548%, with Tesla topping the list with a 1,798% return.
The Baillie Gifford fund's six new private company investments over the period included Blockstream, which is a bitcoin and digital infrastructure company. The other newcomers are software firm Databricks, instant messaging platform Discord, wholesale marketplace Faire, cyber security company Snyk and chemistry firm Solugen.
It said: “Investing in innovation and entrepreneurship is hard. Bravery is necessary from both entrepreneurs and investors. Uncertainty and volatility must be embraced. Opening your mind to possibility is essential.”
The half-year report points out that the path for companies driving structural change is not always straight.
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“Some paths will weave and wend and turn out to be dead ends. Other paths will branch new opportunities and take us in directions we might not be able to imagine currently.
“But our rucksack is laden with optimism, patience and excitement. In a world of asymmetric returns, we believe it is better to venture, than not venture at all.”
The increased volatility of stock prices over the past six months has led to questions of bubbles, overheating and a debate about growth versus value.
While Baillie Gifford said these questions are not unfounded, they are also a reminder that the human brain is wired to handle incremental change.
It said: “The changes the pandemic has rendered have been fast and wide reaching. It is easier to believe we are heading toward a period of stasis, where the new 'normal' is bedded down. But what if we are at the tip of the iceberg of what change is still to come?”
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