Alasdair McKinnon, the manager of The Scottish Investment Trust (SCIN), draws parallels between today’s insatiable enthusiasm for ‘disruptive’ technology companies and the dotcom bubble twenty years ago.

The unashamed contrarian believes a prolonged period of excessively cheap money has ‘once again, encouraged an increasingly reckless attitude to financial risk’ and means that insufficient regard is being paid to ‘the cyclicality and valuation of earnings from certain companies that are, currently, perceived as immune to the fluctuations of the economic cycle’.

This enthusiasm is most ardent for ‘disruptive’ technology companies which McKinnon sees as ‘most exposed to share price declines when passions cool’.


Almost 20 years ago, the market had an insatiable demand for stocks that would give investors exposure to the internet. Companies that merely added ‘.com’ to their names sold like hot cakes, but the bubble burst when confidence in these unprofitable stories evaporated.

McKinnon warns that today, ‘the buzzword is “disruption”, with an enthusiasm for privately held start-up companies valued at more than $1bn - known as “unicorns” - that will achieve “profitability at scale”. Perhaps some will, but many unicorns seem to have business models that rely on constant injections of cash which have been facilitated by an easy money environment and a high level of confidence in their long term story.’

The canny contrarian continues: ‘All-in-all, it is hard not to see these unicorn flotations as the apex of a renewed case of unbridled enthusiasm for all things technology. While we have nothing invested directly in this area, the fact that this mentality exists and covers a large part of the market is a cause for concern.’


McKinnon’s comments accompany results for the six months to 30 April showing a 0.5% decline in share price total return during what chairman James Will describes as ‘a less fruitful time for contrarian investors’.

Among their number is ‘The Scottish’, a trust that seeks unfashionable, unpopular investments McKinnon believes can recover and which is recognised as a ‘Dividend Hero’ by the Association of Investment Companies (AIC).


‘US and thus global stockmarket indices remain heavily skewed towards the technology, unicorn and new media areas and it is here that we think that valuations and expectations remain overly enthusiastic, creating a suboptimal balance between risk and reward,’ cautions McKinnon.

During the half, one of the trust’s best gainers was gold miner Newcrest Mining and McKinnon has recently introduced a new holding in Barrick Gold. His thesis is that gold miners will be among the main beneficiaries should the US Federal Reserve cut interest rates and print more money, under pressure from President Donald Trump, and are also set to reap the benefits of a wave of consolidation.

The retail sector has proved a source of mixed fortunes. Whereas the trust's holding in Tesco (TSCO) is ‘delivering well on its turnaround plan’, Marks & Spencer (MKS), Macy’s, Target and Gap all have ‘plans which are yet to be fully realised’.

McKinnon says ‘Macy’s was a disappointment as, having nearly doubled last year on an operational improvement, it gave back most of those gains as sentiment soured.’

Also generating mixed returns was the financial sector. Strong returns came from Standard Chartered (STAN), which benefited from an improved outlook for the Chinese economy, while ING and Citigroup also gained.

However, McKinnon explains, ‘our Japanese banks, Sumitomo Mitsui Financial and Mitsubishi UFJ Financial were among those to register declines as, in the absence of near term interest rate increases, banks faced a more difficult task to boost returns.’

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Issue Date: 17 Jun 2019