Ian Cowie: this isn’t the end of the digital road, I’m buying

Our columnist has topped up exposure to a tech investment trust, pointing out that ubiquitous usefulness is often a good indicator of resilient businesses.

Is new technology old hat? I only ask because Mr Market seems to think so, having marked down the value of America’s five biggest tech companies by an eye-stretching total of $800 billion (more than £700 billion) last week.

That should not have hurt readers of this column too much, because I have always recommended diversification to diminish risk and not having too many eggs in one basket. More specifically, I have been warning for months about how rising inflation and interest rates mean lower valuations for ‘jam tomorrow’ shares that pay no or low dividend income, as is often the case with digital giants.

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But it is misleading - and, potentially, an expensive mistake - to assume that all big tech business are much the same. Even within the so-called FAANG stocks - Facebook, now called Meta Platforms Inc Class A (NASDAQ:META), Apple (NASDAQ:AAPL)Amazon.com Inc (NASDAQ:AMZN), Netflix Inc (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL) - there are wide variations of risk and reward.

For example, Meta pays no income and its share price plunged by more than 20% on Friday last week. But Apple yielded 2.2% when I first invested in February 2016, paying the equivalent of $23.75 per share. Even after Apple’s price increased by nearly 8% last Friday, when other FAANG stocks were painfully extracted, the iPhone-maker trades around $150 this week and yields a modest 0.6% dividend income.

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The good news for bargain-hunters is that Apple shares are trading 18% lower than they began this year, while Meta, Amazon, Netflix and Alphabet shares have plunged by 72%, 43%, 52% and 37% respectively. None of the four ‘digital duds’ yields any dividends and there is no guarantee they won’t fall further, if inflation and interest rates continue to rise.

Fortunately for investors - like me - who might have only a nebulous understanding of cloud computing and who are more familiar with chips that come with fish instead of semi-conductors, investment trusts make it convenient and cost-effective to gain exposure to this part of the economy.

Nor does sharing the cost of professional stock selection and the use of diversification to diminish risk necessarily mean any diminution of returns.

To be specific, Polar Capital Technology (LSE:PCT) is one of my longest-held investment trusts and used to rank among my top 10 holdings by value before tech fell from favour. Even after recent shocks, shares I transferred into my self-invested personal pension (SIPP) at 467p in October 2013, have more than quadrupled since then to trade at 1,914p this week.

Its top 10 holdings are led by household names such as Microsoft (NASDAQ:MSFT), Apple and Alphabet. There is also more esoteric exposure to the graphics giant NVIDIA Corp (NASDAQ:NVDA), Advanced Micro Devices Inc (NASDAQ:AMD) and Taiwan Semiconductor Manufacturing (NYSE:TSM).

This portfolio, with total assets of £2.7 billion, managed by Ben Rogoff, produced total returns of 417% over the last decade, 66% over the last five years and fell by 25% last year. The latter setback might explain why the trust is currently priced at a 9.5% discount to its net asset value (NAV).

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Either way, I topped up my PCT holding last month, paying 1897p for shares that - despite last Friday’s drama - cost 1916p this week.

Even greater long-term total returns were achieved by another giant of the Association of Investment Companies (AIC) ‘Technology & Media’ sector, Allianz Technology Trust (LSE:ATT), a £1 billion investment trust that delivered a positive 641% and 99% before a loss of 29% over the same periods: 10, five and one year.

This divergence in returns, with Allianz Technology outperforming Polar Capital Technology over the long term but falling behind over the last year, might be explained by the former’s top 10 holdings including less well-known names such as CrowdStrike Holdings (NASDAQ:CRWD), Palo Alto Networks (NASDAQ:PANW) and Aspen Technology (NASDAQ:AZPN).

Unfortunately, neither tech trust delivers any dividends, so shareholders are not paid to be patient. More positively, I see evidence every day that moderately affluent consumers are willing to pay a premium for Apple products in much the same way that motorists expect a Ferrari to cost more than a Ford.

To return to the question with which this column began, it is noteworthy that Apple enables many folk - including me - to earn a living, which makes its goods and services a necessity, as well as a luxury. Something similar could be said for many businesses’ reliance on Microsoft software.

More generally, who can imagine getting by without the Google search engine? Or shopping online without Amazon? Ubiquitous usefulness is often a good indicator of resilient businesses that might withstand short-term stock market shocks.

Investors should remember that Mr Market is prone to overshoot in his alternate emotions of fear and greed. Technology shares have fallen from financial fashion, but I believe this is more likely to be a buying opportunity than the end of the digital 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.