We continually hear that 2020/21 have been stellar years for tech stocks, which has indeed been true for Baillie Gifford’s Edinburgh Worldwide Investment Trust (LSE: EWI), whose share price almost doubled within a year from February 2020. But the trust’s share price nose-dived this spring as fears of what a global economic recovery might mean for “stay at home” stocks with frothy valuations set in. The small-cap focused investment trust is yet to recover with much of the rest of the sector, including its big brother Scottish Mortgage Investment Trust, which has just retraced its yearly (and all-time) highs.
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.
