Pain ahead

Readers are probably fearful that the worst is yet to come for Edinburgh Worldwide, given the very real prospect of Fed tapering in November and of imminent interest rate hikes. One might ask: isn’t this a bad moment to jump into a trust consisting of small-cap tech holdings with valuations premised on future earnings, which are likely to be ultra-sensitive to hawkish monetary policy? But one could also ask: is the trust, with its emphasis on building relationships with immature companies, now a cheaper, more exciting alternative to the large-cap focused Scottish Mortgage?

The point that Svetlana Viteva, Edinburgh Worldwide’s Deputy Manager, made a couple of years ago that “if you do [recognise our holdings], frankly we’re probably not doing our job” could help me to decide. Inflationary pressures may persist for the early part of this cycle as the economy re-gears, and tech investors, large and small, could be in for a bumpy ride.

But it is becoming increasingly apparent that AI, robotics, autonomous vehicles, and next-generation internet, as well as innovative biotech and healthcare solutions, are ways out of the pandemic (and related supply-chain problems) as much as they are legacies of it. In the longer term, Edinburgh Worldwide’s holdings will almost certainly help to propel deflationary forces, and, if they can catch the right waves, allow me to outstrip CPI inflation massively, too. If I were to invest further, I could, in turn, benefit from resultant wealth generation.

Capturing long-term growth

Edinburgh Worldwide has a bold allocation to healthcare and biotech (currently around 30%) and stakes in hard-to-acquire private companies at the forefront of emergent autonomous fields (such as SpaceX and PsiQuantum). In fact, these private companies make up roughly 10% of the trust’s portfolio. By gaining access to exciting unlisted opportunities, I believe that increasing my stake in Edinburgh Worldwide would ideally place me to capture growth in the coming years.

I might have to put up with some short-term uncertainty and temper my immediate growth expectations, but I believe that Edinburgh Worldwide remains among the best alternatives to Cathy Wood’s iconic ARK Innovation ETF and is currently trading at a discount of roughly 7%. Given the bulging size of many of Scottish Mortgage’s top holdings, and with fears that a blow-off top is around the corner for mega-cap US equities that have grown fat on stimulus, perhaps it is time for me to once again turn my head to this rather demure younger brother.

If you had the foresight to buy them during the 23 March crash, you will have doubled your money. 

I’m a big fan of investment trusts. They pioneered low charges long before their unit trust rivals, and regularly beat them for performance as well. Few have done better than Scottish Mortgage Investment Trust (LSE: SMT), which has thrashed the UK’s most popular managers Terry Smith and Nick Train, before and after the stock market crash. Over the last five years, it has returned a mighty 314% (against 154% for Fundsmith Equity and 125% for Lindsell Train Global Equity).

Post-stock market crash triumph

What makes this outperformance even more impressive is that it has invested in broadly the same universe of global stocks, in particular US technology giants. Scottish Mortgage’s top 10 holdings include Tesla at number one, followed by Amazon, Netflix and Spotify, as well as Chinese tech stars Alibaba Group and Tencent Holdings.

The investment trust crashed in March just like the rest of the stock market, but the subsequent fight back has been terrific. It’s up 108% since then, according to figures from wealth platform AJ Bell. I’ve written in praise of Scottish Mortgage before, while adding the proviso that it may flounder when the tech rush finally fades.

There’s little sign of that right now, as employees and consumers rely on their screens for conference calls, online shopping and entertainment during the pandemic. But I think you should still check what exposure you already have to US technology before you buy it, to avoid over exposure. Scottish Mortgage can’t crush all-comers forever. Nothing does.

Another Tesla fan

I haven’t written about Edinburgh Worldwide Investment Trust (LSE: EWI) before, something I now consider a severe omission. It has returned 240% over the past five years and had a good pandemic, bouncing 98.3% since the stock market crash, according to AJ Bell.

This market crash hero invests in a global portfolio of entrepreneurial companies with a market cap of less than $5bn at time of initial investment. It also has outsized US exposure, which makes up more than 60% of the fund and largely explains its stunning performance. The UK accounts for just over 15% of the fund, with the rest spread between Europe and Asia.

Coincidentally, Tesla is this fund’s largest holding too, with the UK’s very own Ocado Group in second place, but the remainder are lesser known names (at least to me) such as Zillow, Chegg and Teladoc.

Both these investment trusts trade at a slight premium to net asset value. This is hardly surprising, given their runaway performance and popularity.

Their long-term outperformance is impressive and could continue. But remember that both rely on a buoyant US economy and tech sector to keep rattling along.

However if you’re looking to geographically broaden your portfolio after the stock market crash, they could be a great place to start.

As collective investment vehicles, they enable people to pool their money together to get exposure to many different companies through a single investment. But unlike unit trusts and Open-Ended Investment Companies (OEICs), investment trusts are listed companies with shares that trade on the London Stock Exchange.

Long-term growth potential

One top performer that may be worth a closer look is the Edinburgh Worldwide Investment Trust (LSE: EDI). The fund has a global investment remit and primarily looks at small and mid-cap firms which are believed to offer long-term growth potential.

The fund does not seek to track any particular index, although it does compare its performance against the S&P Global Small Cap Index. Over the past three years, Edinburgh Worldwide has handsomely outperformed its comparative index, with a total return of 55% compared to the benchmark’s gain of 39%.

Douglas Brodie, its portfolio manager since 2014, seeks out dynamic growth businesses that are shaping tomorrow’s world. He has a preference for immature entrepreneurial companies that have the potential to grow to become many times their current size.

A look at the portfolio shows the fund is heavily weighted towards North America, which accounts for 56% of its total assets. Its five biggest holdings are MarketAxess Holdings (6.2%), Alnylam Pharmaceuticals (5.0%), LendingTree (4.8%), IPG Photonics Corp (2.9%) and Ocado Group (2.6%).

There’s one major downside to investing in the fund right now. The trust is in high demand, causing its shares to currently trade at a 3% premium to its net asset value (NAV).

Technology stocks

In the sector-specific space, I reckon the Allianz Technology Trust (LSE: ATT) is a solid pick for investors who are optimistic about the technology sector in general.

Technology stocks have been on a tear over the past few years, but in recent weeks, they’ve hit a snag and have been underperforming the broader equity markets amid growing regulatory concerns and rising fears of protectionism.

Still, some analysts sense a buying opportunity. As earnings growth in the tech sector is expected to continue to outpace other sectors in the coming years, the party may not be over for tech stocks. Despite potential headwinds, the long-term fundamental drivers for the sector remain intact as technology megatrends continues to disrupt the traditional business landscape.

UK investors

And given the very low number of technology companies listed on the London Stock Exchange, the technology fund is particularly useful for UK investors who seek greater exposure to the sector but don’t want to directly invest in foreign technology stocks.

It’s probably not a good idea to invest in this fund on its own though, because of the sector-specific risks which could cause many stocks within the same sector to fall in price at the same time.

As expected, North American stocks dominate its portfolio, accounting for 89% of its total assets. Top holdings include some well-recognised brands and other exciting names, such as Amazon (7.3%), Microsoft (4.6%), ServiceNow (4.1%), Netflix (3.4%) and Square (3.2%).