Mello Trust Event and Tech Stocks

I attended the Mello Investment Trusts and Funds webinar yesterday (see https://melloevents.com/upcoming-event/mello-investment-trusts-funds-18th-january-2022/ for the programme). This was a useful event for those people like me who like to hold investment trusts as a way to provide diversification in my portfolio and access those markets outside the UK or outside my sphere of competence.

One thing that was very apparent from what some speakers said was that there is a rotation out of high growth technology stocks into more “value” sectors such as commodities. So trusts such as Scottish Mortgage (SMT), Allianz Technology (ATT), Polar Capital Technology (PTT) are now on discounts to NAV when they have previously been on significant premiums. The current discounts on those three stocks according to the AIC are 3.0%, 6.7% and 8.2% which might suggest they are bargains but if you look at the history of discounts on these trusts they vary widely over time (the AIC provides a useful chart of the discounts under the “performance” tab.

Some of the companies held by these trusts have fallen out of favour and this has been magnified by the discounts being affected by the similar lack of popularity of these trusts of late.

Many of the companies they hold are victims of the manic/depressive nature of US stock markets which historically are often more extreme than in European markets. That arises from the nature of the investors and the way the markets operate with low dealing costs, no stamp duty, low taxes and easy margin trading. This encourages speculation so prices can get divorced from reality.

But is the switch away from high growth and technology stocks a short-term trend or a long-term one? Should we be bailing out of the former? My feeling is that maybe prices of some of the stocks favoured by these companies have become over-inflated but that I still feel that they are better long-term bets than the traditional “value” plays. The world has been changing and technology has responded to meet the new challenges. Those companies that will meet the new demands of world markets are the ones where profits will rise in future.

As one speaker said at the event yesterday, investment trusts should be long term holdings. Trading them in response to short-term market moves can be expensive. But private investors can take advantage of the discounts to improve overall performance. Unlike individual company shares, investment trusts should be purchased when they are out of favour and sold when they are in favour as reflected in their discounts to NAV. Don’t be a trend follower in trusts in other words.

Note: the writer holds some of the trusts mentioned.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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