Beware the onset of Fangst – tech stocks are safe

Aworrying medical condition is spreading across the investment world. It’s called Fangst (noun) – “a state of anxiety brought on by the precipitous fall in the value of technology stocks in an investment portfolio”.

Symptoms include the onset of sweating, heart palpitations, feverish muttering and trembling fingers when clicking open the Scottish Mortgage Investment Trust website. Victims don’t know whether to read on or lie down in a darkened room until the panic passes.

For those anxious to check whether they may be prone to these fast-spreading symptoms, Fangs stands for that clutch of superstar tech stocks Facebook, Apple, Amazon, Netflix and Google, whose shares have rocketed into the stratosphere. Now they have experienced reverse thrust.

The most extreme anxiety attacks have been experienced by aficionados who follow the New York Stock Exchange Fang+ Index. This also includes Twitter, chip designer Nvidia, Tesla and Chinese internet giants Baidu and Alibaba. Many have now retreated under the bedclothes.

My thanks to John Wynn-evans, chief investment strategist at wealth manager Investec, for alerting me to this condition. I thought it was just me. For investors in Scottish Mortgage, travelling downwards has been a strange experience after a fantastic ride. Fund manager James Anderson had gone full tilt for Fang stocks, with the result that shares in the trust have risen more than sixfold over the past decade, propelling it into the FTSE 100.

Now Fangst has struck. Shares in Scottish Mortgage have lost 11 per cent in the past month. Should investors sell out while they can? Switch to defensive “value” stocks, or hang on in?

Part of the problem here, as Wynn-evans points out, is that when shares with similar-looking characteristics are bundled together “into a collective basket with a catchy name” there is a temptation to treat them as one holding – sell the lot or hold the lot. But Fang stocks have different dynamics and characteristics. There are wide differences in trading environment and growth potential. There are notable differences in stock market rating and valuation. Does Tesla really enjoy the same risk characteristics as Netflix? Facebook, as we know, faces specific social and political challenges with concerns over the abuse of personal data. And so on.

Even investment trusts specialising in the sector have varying results. Polar Capital Trust has outpaced Scottish Mortgage with a share price total return of 771 per cent against SMT’S 725 per cent. And the best return over the past year has been scored by Allianz Technology Trust, returning 23 per cent compared with 10 per cent from SMT and 8 per cent from PCT by virtue of its bias towards smaller stocks rather than holding big positions in Tesla.

It is true that tech trusts have enjoyed stunning share price performance in recent years and that periods of consolidation and slowdown are to be expected. But there is one characteristic that they share and which investors should not shy from. “Gaining a stake in businesses whose goods and services where consumers will spend more of their money in future”, argues investment trust guru Ian Cowie, “should be a fundamental objective for any long-term investor. Few sectors offer more opportunities to do so than technology, where innovations such as mobile telephony and the internet provide day-to-day examples of how fabulous wealth has been created out of thin air.”

Too true, as I survey my own clutch of tech gadgetry. And this thirst for innovative new tech products is not going to disappear any time soon. For that reason, the fact that the premium to net asset value at Scottish Mortgage has fallen from 5 per cent to 3 per cent is more of an argument for topping up than for selling out.