The sky hasn’t fallen in on the tech sector, but the recent sell-off is a stark reminder about the dangers of red-hot momentum investing. As investors reel from a short but brutal sell-off for the world’s tech titans, it is important to remember there are opportunities away from the Silicon Valley gold rush. 
We have been warning investors for some time about the perils of chasing the raging tech bull market. The winners are few, and we have seen an increasingly narrow sub-section of these stocks drive overall US stock price performance.
Another case of history repeating?
The first thing to say is this is not the tech boom. One can easily argue that the current price moves are more grounded than, say, the tech bubble of the late 90s. After all, unlike what happened then, the winners of today are genuinely gaining market share, generating revenues – and profits for most – while benefiting from tangible structural shifts in consumption patterns and behaviours.
As a sector, US technology companies have outperformed the energy sector – the worst-performing sector this year – by 72 per cent. Drilling down even further into individual stocks, despite the recent market correction, Apple – the largest company in the US – is up more than 58 per cent (despite having shed 10 per cent of its value over the past week). This is astonishing for a company with a market capitalisation of more than $2trn, the equivalent of the largest 100 companies listed in the UK.
However, even Apple’s recent performance pales in comparison to Tesla’s blow-out numbers. The electric car company, at the peak of the recent surge, was the seventh-largest stock in the US. This is about ten times as big as General Motors, the largest US car company by sales, having sold more than seven million cars last year versus 360,000 for Tesla.
Examples like Tesla are getting more and more extreme from a valuation perspective. As they move further away from economic reality it is hard not to look at them and remember how previous bubbles have ended– it is rarely a happy ending.
Growth opportunities at a discount
Valuations can only be ignored for so long and many other parts of the market are also on strong fundamental footings with very attractive valuations. We are seeing particularly compelling opportunities beyond the Silicon Valley goliaths – particularly in the world of investment trusts where private equity technology opportunities are trading at steep discounts.
For example, Oakley Capital Investments, the private equity trust founded by internet entrepreneur Peter Dubens, is a consumer-focused portfolio increasingly investing in companies utilising online delivery platforms, such as software solutions and digital infrastructure services. It also targets well-established, profitable businesses, rather than turnarounds. The main themes are consumption with a digital angle, education and technology, and media and telecommunications.
Around 70 per cent of the portfolio companies operate a subscription-based or recurring revenue business model, meaning they are more resilient to declines in customer demand. Thus, these types of business models are potentially less vulnerable to disruptions caused by the pandemic compared with the broader economy. Portfolio holdings include gift voucher platform Seven Miles and high-end Italian homeware brand Alessi, as well as digital and education businesses.
The trust currently trades at a 30 per cent discount to its net asset value which has doubled over the past five years. As investors continue to take chips away from tech mega-caps, we see many value opportunities that will benefit, this includes trusts like Oakley Capital Investments.
Vincent Ropers is portfolio manager of the TB Wise Multi-Asset Growth fund. The views expressed above are his own and should not be taken as investment advice.