Alasdair McKinnon is the Lead Fund Manager of The Scottish Investment Trust and spoke to IFA Magazine about why big tech stocks remind him of his experience during the DotCom Bubble.
The Scottish is an independently managed investment trust company which was formed in 1887 to provide investors with an efficient way to invest in companies around the world. The Scottish takes a contrarian approach to global stock markets, which they view as irrational and ultimately inefficient and as high-conviction investors, they focus on stocks that are out of favour with mainstream investors, as they believe that these offer the greatest potential for longterm gains. The Scottish has an unbroken run of 36 years of regular dividend growth, and it won the Shares Awards 2019 ‘Best Investment Trust’.
Pressed on where his own contrarian approach came from McKinnon explained that although based on various strands, its formative stage came during the DotCom Bubble. Exploring this further he explained that one of the biggest factors in the DotCom Bubble was the relatively easy money conditions following a demise in long term capital management. Although starting off as a sceptic McKinnon cites the purchase of Arms Holdings and Orange as a key decision. ‘I thought everyone is soon going to have a mobile phone, and if everyone owns a mobile phone, then I’ll invest in the chip’. This was in 1998, and as the DotCom boom happened McKinnon’s confidence grew. ‘Suddenly in the company I was this internet guru. After a while I got sucked into it.’
In an interesting analogy, McKinnon likened it to young sports stars adding ‘If you keep being successful you inevitably get more and more out of touch with reality.’ Speaking of his own experience and what he has seen in the investment industry, he added that ‘people start off level headed, they get a great idea and then any scepticism disappears, then the money floods in and then get a bust’
This brought us to the area of the stock market that has been thriving during the pandemic, Tech. McKinnon noted that ’a lot of tech stocks have clearly been beneficiaries of the COVID crisis. McKinnon highlighted that we’ve needed to buy hardware, and software on top of that, we’ve needed to pay for subscription for ways of communicating. It might be argued that the government and society as a whole picked its winners, with local smaller scale shops having to close and yet Amazon continuing to deliver. In terms of successes, alongside the Amazons’, McKinnon suggests whats done well are so-called “working from home stocks”. McKinnon said, The things exposed to the real world are still bombed out, especially in the UK market.’Before our interview McKinnon was talking about his invigorated passion for golf, and in his view a lot of people have changed their habits throughout lockdown.
Considering his experience during the Dot Com Bubble, I asked McKinnon what he thought of the tremendous tech stock rally in a historical context. We talked about a recent research that highlighted 6% of S&P 500 stocks are trading on a ratio of ten times value of earnings. ‘To get a pay back on a company on ten times sales, it’s not just a ten year payback – its a 50 year payback.’ McKinnon continued, ‘When you look at the darlings of twenty years ago, and where they are today – I know some people disagree with this – but they usually start off well and then decline. When you buy a generic group on a huge multiple of sales, yes they’ll be individual winners, but as a group you’re not in a good pool.’ Quick to add, ‘Does that mean they’re going to fall – not necessarily.’ However McKinnon talked of a phenomena present across industries, ‘as a company is on top it is likely already oscillating and the institution will not continue to flourish.’
McKinnon ended with an anecdote from his early career in the DotCom bubble, ‘I remember going into the office and parroting what I’d just heard on CNBC. I said I liked this stock, because even though its on 100 times earnings I know we can depend on these earnings… and the guy looked at me. I knew I was talking rubbish, and he knew I was talking rubbish but he didn’t want to say.’ McKinnon ended our conversation with one takeaway and a parallel to what happened during the DotCom Bubble, and something he sees emerging once again and that’s the situation where ‘Clever people are telling each-other things they don’t really believe in because that’s what they think people want to hear, that’s the climate we find ourselves in once more.’