Stellar. In my opinion this is the only word to describe the performance of Scottish Mortgage Trust (LSE: SMT) in 2020. Up 80% in the past six months, the tech stock trust has generated a return to leave investors smiling.
Examining the underlying top holdings of the trust, the reason for the gains become clear. Underpinning the portfolio are giants of the tech stock genre. Tesla, Amazon, Netflix and Spotify are all featured in the top 10 holdings ,and have substantially increased in valuation since the low water mark of April this year.
Overall, my thoughts on the trust are positive. There are low annual charges and it is currently trading at a narrow discount. The management philosophy of James Anderson and Tom Slater is ‘the best potential, durable growth opportunities for the future’, an ethos that will chime with many Fool readers. Earlier this year, Paul Summers cited the stock as a long-term holding for retirement.
I would ,however, sound one gentle note of caution. In the case of SMT, the concern is the proportion of total holdings tied up in a relatively narrow spread of tech stocks.
For any investment trust or fund that I hold, I like to keep abreast of its major components as they can signpost future movements in price. As an early investor into the short-lived Woodford Equity Income fund, I became concerned in 2018 when the top 10 holdings revealed only a singular defensive dividend-paying stock, namely, Imperial Brands. Such stocks should be the bedrock of that fund style, but the remainder were high risk or unquoted companies. As a result, I sold my holding and avoided the later chaos as the Woodford fund was suspended.
Applying this logic to Scottish Mortgage, my concern is that Tesla and Amazon account for 23% of the entire trust. Ultimately, the performance of these companies will hold huge sway over share price movements. This isn’t to say that they won’t continue to grow or that I don’t like the investment as a whole, merely something to be aware of when making decisions.
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The Foolish alternative
I like the look of Allianz Technology Trust (LSE: ATT). For those wishing to gain exposure to tech stocks, it contains similar holdings to Scottish Mortgage, but in smaller overall proportions. Edward Sheldon examined its tech stock credentials earlier this year.
Led by its position in tech giant Apple, it has performed strongly against its benchmark index (Dow Jones World Technology) over the longer term, and is well positioned to continue this through its exposure to companies that have benefitted from the coronavirus pandemic shift to home working and increased online activity. The management team looks to invest in potential high-growth mid-cap companies, seeking leaders in sectors that are driving change through innovation or lower costs.
The trust charges both a management and performance fee, but these are offset by strong returns in the years where the performance fee is levied.
Foolish final thoughts
It is clear to me that the tech stock sector will be a huge driver of growth over the next 10 years, and therefore any investor would benefit from some exposure within their portfolio. Either of these two trusts offer that exposure and are well placed to benefit from that growth.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben Watson holds no position in any share mentioned. The Motley Fool UK has no position in any stock mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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