Scottish Mortgage risks becoming a high profile casualty of a tech-stock sell-off but commentators say it is too early to tell if the market reaction is a blip or signs of a bubble.
The £13bn trust has been propelled by its chunky holdings in US tech giants delivering 57.1% returns in the year-to-date, outpacing the 3.4% returns of its benchmark the FTSE All World.
But Thursday’s tech sell-off, which saw Tesla, Apple, Amazon, Alphabet Microsoft and Facebook fall between 4% and 9%, has sent James Anderson’s trust tumbling.
Scottish Mortgage was the second largest faller of the FTSE 100 on Friday, with shares closing at 849p, down 6.4% from the previous close of 908p.
Scottish Mortgage was always going to be vulnerable without a V-shaped recovery
“Scottish Mortgage has been a huge beneficiary of the rally in technology shares in recent years and particularly so after the market bottomed in March helped by the spectacular growth of Tesla,” said AJ Bell head of active portfolios Ryan Hughes.
“Whether this sell off is a short term blip or the start of something wider is not yet clear but certainly the valuation of some stocks in the market had reached extreme levels and any sign that the global economy, and the US in particularly was not going to see a strong ‘V’ shaped recovery was always going to leave them vulnerable,” Hughes said.
Tesla was Scottish Mortgage’s largest holding at the end of July, accounting for 13.4% of NAV. But that is expected to fall after Baillie Gifford was forced to cut its stake in Elon Musk’s automaker to less than 5% after the stock split.
Amazon, its second largest holding makes up a 9.7% weighting, and Netflix sits at 2.6% of the portfolio.
Hughes said prolonged volatility in the tech space would be bad for Baillie Gifford generally which holds sizeable tech weightings across many of its funds, including the £5.3bn American and £4.2bn Global Term Global Growth Investment funds.
Investors taking profits ahead of possible second wave
Willis Owen head of personal investing Adrian Lowcock suspects the selloff is “just a bit of profit-taking” ahead of what is expected to be a fraught period for markets.
“Investors are concerned over a second wave and the impact of the withdrawals of stimulus will have on the economic recovery,” Lowcock said.
“The run of performance of tech stocks which feed into the Scottish Mortgage fund had to come to an end at some point and the selloff is fairly small compared to the streak they have been on.”
Lowcock expects that given Scottish Mortgage’s strong performance and that of the underlying tech sector investors will treat its share price fall as a buying opportunity.
See also: Scottish Mortgage investors nudged to lock in gains after coronavirus outperformance
Blip or bubble?
Tilney managing director Jason Hollands said it is too early to tell if the tech stock tremor would prove short-lived or have further to run but added the market reaction was a long time coming.
“In many ways it is quite healthy to see some steam coming out of this particular pressure cooker,” Hollands said.
“Many market watchers and investors, including us, have been pointing out that valuations in these parts of the market have become too bloated with stocks over bought and clear signs of irrational exuberance as investors have chased momentum.”
Lowcock believes further pull backs in the tech sector are likely given current valuations. But he doesn’t expect to see a sustained sell-off without changes to the global economic outlook or in the tech giants’ results.
