InvestmentsJun 18 2018

Trust manager blasts 'bubble' in new technology shares

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Trust manager blasts 'bubble' in new technology shares

A day of reckoning is coming for investors in new technology companies such as food delivery and online retail businesses that have not turned a profit, according to Alasdair McKinnon, manager of the £857m Scottish Investment Trust.

In the half year results for the trust, covering the six months to 30 April, Mr McKinnon said: “Investors currently exhibit remarkably low levels of scepticism about 'hot' investment themes, particularly in the technology area, which mentally transports us back to the late 1990s when similar enthusiasm reigned (it didn't last).”

He said the collapse of Long-Term Capital Management (LTCM) in 1998 and the subsequent Central Bank response, arguably, created the conditions for the dotcom bubble.

"The investment mood swiftly became feverish, with the best performing investments defined by their elevator pitch and eyeballs (the gathering of unprofitable user views)."

He said sales of IT hardware and services boomed both to salve the impending 'Millennium Bug' and due to an increased desire for personal computers, and those companies that had benefited from this trend became valued as if the good times would never end.

While Mr McKinnon admitted things are different today, he argued "in some ways they are the same".

"Once again, investors are excited by concept investments even if the most speculative of them all, the cryptocurrencies, have already disillusioned their fan club.

"Investors continue to reward the new 'eyeball' metric which, these days, is instead unprofitable user growth. Internet shopping, food delivery, ride hailing services, music and video streaming, to name just some, are all subsidised at the point of use by investors.

"Meanwhile, investors show scant concern that the premium smartphone boom has peaked and have only recently started to consider that companies operating in the 'Wild West' space of internet advertising may be about to meet the posse (courtesy of the Facebook data scandal).”

The trust reported a gain of 3.2 per cent in the six months to the end of April, compared with 7 per cent for the average trust in the AIC Global sector in the same time period.

Instead of buying technology businesses, the fund manager has focused on mining companies and what he calls traditional retailers, such as Tesco.

The trust now pays a regular dividend of 5p per share per quarter.

Philip Milton, who runs Philip Milton and Co, an advice firm in Devon, has sold all of his exposure to US technology companies.

He said: “In 1929, the Wall Street crash was heralded by extreme valuations of technology which was destined to change the world.  One was broadcasting – radio waves, etc and the other was the availability of electricity to power businesses and jobs.