Our columnist explains why January’s tech-wreck looks more like an opportunity than the busting of a boom.
Was the ‘tech-wreck’ that wiped 14% off the Nasdaq index by the time it hit its low point last month the beginning of the end for technology stocks? Or just a bump in the digital road to nirvana?
Let me give you a clue to my view. I am writing this on an Apple MacBook Air, and you are probably reading it on an iPhone or something made by Samsung and/or running Microsoft. Whichever brand you favour, they all come with chips made by Taiwan Semiconductor Manufacturing or its rivals Advanced Micro Devices, ASML or NVIDIA. Where did you buy all that kit? On Amazon! Where did you find this article? On Alphabet’s Google, of course!
That’s why, when digital dimwits were running for the hills, I bought shares in Polar Capital Technology (LSE:PCT), the titan of its sector with total assets of £3.5 billion. Coming down from the clouds, this small investor added to what is already a top 10 holding by value in my forever fund - accumulated over more than a decade - at £23.47 on 20 January. In the fortnight since then, they have ticked up to £24.32 and they are still trading at an 8% discount to their net asset value (NAV).
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This looks like reasonable value for globally diversified exposure to the digital revolution that delivered total returns to PCT shareholders of 571% over the last 10 years, 171% over the last five years and still just about remain in positive territory with 2.8% growth over the last year. That last modest figure is no mean achievement when all three of its rivals in the Association of Investment Companies’ (AIC) Technology & Media sector were in negative territory after January’s abrupt rotation away from growth shares promising ‘jam tomorrow’ and towards value shares delivering dividends today.
Only a fool fights the Fed - or the Bank of England - and rising interest rates mean the opportunity cost of holding low or no yield shares will tend to rise, pushing down their market price today. Put another way, Mr Market is rediscovering the joys of a bird in the hand, rather than the possibility of two in the bush next year - or the year after that, or maybe never.
But this investor survived the dotcom bust at the start of this century and, to be candid, the digital downturn at the start of this year feels nothing like that. The big difference this time is that many tech companies are generating massive profits and sitting on enormous piles of cash. The biggest company in the world - and my modest portfolio - Apple (NASDAQ:AAPL) - is a prime example of both, with gross profits last year of nearly $153 billion (£113 billion) plus $190 billion cash at hand.
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By contrast, loss-making tech and smaller names where you have to ask what they do are finding it harder to persuade punters that good stories today will translate into profits tomorrow. January’s sell-off was also something of a ‘Wile E. Coyote’ moment, with some shares that had seemed capable of walking on air, suddenly succumbing to the usual laws of gravity.
All these elements play a part in explaining why Allianz Technology Trust (LSE:ATT), another mega-share in this sector with total assets of £1.3 billion, currently trading at a 3% discount to NAV, fell more than PCT in January. ATT is more adventurous than PCT and achieved higher performance over the past decade and five years, but has slipped behind over the last year with respective returns of 887%, 254% and zero.
You can see what I mean if you look at both these mega-trusts biggest underlying assets. While ATT’s top holding is Microsoft (NASDAQ:MSFT), its second slot is held by Tesla (NASDAQ:TSLA), the electric car maker that is priced for perfection and whose $850 billion (£630 billion) stock market capitalisation is equal to pretty much all the other carmakers put together.
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Meanwhile, most carmakers are currently working on e-vehicles and/or producing them. So it remains unclear how much of a moat Tesla can really sustain; it had better be a good one.
To be fair, elsewhere in ATT’s top 10 we can also find familiar names including Alphabet (NASDAQ:GOOG) in fifth, Taiwan Semiconductor Manufacturing Co (NYSE:TSM), ranked eighth by value, followed by Apple at number 10.
But Micron Technology (NASDAQ:MU), a memory storage facility, ranks third; Zscaler (NASDAQ:ZS), a cloud security platform, and Snowflake (NYSE:SNOW), another cloud platform, rank fourth and sixth by size, have yet to achieve household name status, to put it politely.
By contrast, PCT’s top 10 holdings read reassuringly like tech royalty. Here they are in descending order by size: Microsoft, Apple, Alphabet, NVIDIA (NASDAQ:NVDA), Meta Platforms (NASDAQ:FB), Advanced Micro Devices (NASDAQ:AMD), TSMC, Samsung Electronics (LSE:SMSN), Amazon (NASDAQ:AMZN) and Micron Technology. Perhaps I am being timid, but this does not feel like a good time to reboot for more risk.
Both these mega-trusts have delivered strong medium- and long-term returns for ongoing annual charges of about 0.8%. So, unless you can imagine a world where we won’t use digital technology every day of our lives, January’s tech-wreck looks more like an opportunity to top up exposure than the busting of a boom or the end of the road.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in Apple (AAPL) and Polar Capital Technology (PCT) as part of a globally diversified portfolio of investment companies and other shares.
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