Interactive Investor

Ian Cowie: why I’d rather buy the tech dip than sell

4th August 2022 09:01

Ian Cowie from interactive investor

Some fund managers, including Stephen Yiu of Blue Whale Capital, are bailing out of big tech, but our columnist is keeping the faith. Here he explains why.

After the typical technology share lost a third of its value in the first half of this year, many investors fear we might be living through a re-run of the Dot.gone bust that blighted the start of this century. But the first step towards making a profit is often to buy low, when others are selling, because this can create bargains for the brave.

First, though, let’s look into the abyss or, more formally, consider the risks. Scottish Mortgage (LSE:SMT) is probably the highest-profile tech stock on the London Stock Exchange. Its top 10 holdings include the electric car-maker Tesla (NASDAQ:TSLA); the Chinese digital giant Tencent (SEHK:700); and the Dutch semiconductor-maker ASML (EURONEXT:ASML).

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This £14.8 billion investment trust in the Association of Investment Companies (AIC) global sector has not been immune from tech shares falling out of favour. SMT suffered a sharp reversal in fortunes after delivering total returns of 616% over the last decade and 119% over the last five years. It has plunged to a 33% loss in the last year.

Sad to say, Polar Capital Technology (LSE:PCT), one of my longest-held shares, suffered a similar setback. PCT’s top three holdings are the software-maker Microsoft (NASDAQ:MSFT); my biggest direct tech holding, the iPhones and computers giant, Apple (NASDAQ:AAPL); plus Google’s parent Alphabet (NASDAQ:GOOGL). Managed by Ben Rogoff since 2006, PCT delivered total returns of 462% over the last decade, followed by 109% over the last five years before shrinking by 12% in the last year.

No wonder even senior stock-pickers are bailing out, such as Stephen Yiu of Blue Whale Capital, the open-ended fund manager best known for running money for the billionaire Peter Hargreaves. Yiu tells me he sold all his shares in Alphabet last month and similarly shuns the other FAANG stocks; Facebook, now known as Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), Apple and Netflix (NASDAQ:NFLX).

He explained: “Some FAANGs are good services but not good investments - for example, Meta Platforms, Netflix and Amazon.

“Some are good companies, such as Google, but there are better opportunities for investors elsewhere. Then there are companies that offer great products but don't offer the growth potential we want - such as Apple.

“FAANGs represented the forefront of ‘trendy tech’ but, as deeper scrutiny of their businesses has played out in a post-pandemic world, we are seeing their desirability wane.

“Instead, we have found a new breed of tech company that, whilst not necessarily household names, they do deliver cutting edge solutions to some of the world's biggest problems or play their significant part in a world still digitalising at a rapid rate.”

Yiu calls these the VILAANs. That stands for the life sciences cloud operator Veeva (NYSE:VEEV); the compliance and tax software-maker, Intuit (NASDAQ:INTU); the semiconductor manufacturing equipment-maker, Lam Research (NASDAQ:LRCX); American software giant Adobe (NASDAQ:ADBE), Australian software firm Atlassian (NASDAQ:TEAM) and the graphics specialist NVIDIA (NASDAQ:NVDA).

Back in the world of investment trusts, Allianz Technology Trust (LSE:ATT), managed by Walter Price since 2007, also seeks tech opportunities beyond household names. ATT’s top 10 holdings include the semiconductor designer Broadcom (NASDAQ:AVGO);  cybersecurity company CrowdStrike (NASDAQ:CRWD); and the self-descriptive Taiwan Semiconductor Manufacturing (NYSE:TSM).

This approach has paid off for Price and ATT over the longer term but proved painful more recently. For example, ATT delivered total returns of 704% over the last decade and 139% over five years - both ahead of PCT - but fell behind with losses of 19% over the last year.

Rising interest rates make 'jam tomorrow' stocks taste sour, because none of the above investment trusts yield as much as 0.5%.

But I do not foresee a future without digital technology and continue to believe there is a big difference between profitable businesses in this sector that distribute dividends - such as my ‘forever fund’s most valuable holding, AAPL - and no or low-yielders such as the rest of the FAANG stocks or, even worse, fads like Peloton Interactive (NASDAQ:PTON).

To be clear, what you see depends on where you are standing. I have held shares in PCT for more than a decade and transferred them into my ‘forever fund’ at £4.67 in October 2013. They traded at £21.20 this week and so, all things considered, I am inclined to take a long-term view.

Funnily enough, I used to fear PCT might not be adventurous enough in the past, when it underperformed its rival ATT. Now PCT is doing relatively well, although it has fallen out of my top 10 shares by value. But I still think there is a bright future for its biggest holdings; such as Microsoft, Apple and Google - not to mention more nuts-and-bolts exposure to semiconductor chip makers including ASML and Taiwan Semiconductor Manufacturing.

Financial fashions come and go but I can’t see people giving up the services these companies provide. So this long-term investor continues to believe it makes more sense to buy into short-term dips than to sell into them.

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 diversified global portfolio of investment trusts and other shares.

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