It’s not just looks that can be deceptive. In the world of investing there is an array of stock market-listed investment trusts that have names which give little away as to what the managers who run them do all day. The list is exhaustive and includes the likes of Foreign & Colonial – the country’s oldest trust – Witan, Monks, Mid Wynd and Alliance (see opposite).
All longstanding trusts with names that maybe give a hint to their past, but which are united by the fact that they scour the globe in search of investment opportunities. All rather effective in their understated way and much loved by private investors.
Yet there is no trust that hides its modus operandi behind an unassuming name more than Scottish Mortgage. Although its title alludes to where it is managed from – as well as to a past when trusts were set up to provide finance to support projects in developing parts of the world – this investment vehicle is very much of the moment.
In the fast lane: Scottish Mortgage invests in some of the world’s largest ‘tech’ stocks – such as electric car manufacturer Tesla
It’s a quasi-international technology fund investing in some of the world’s largest ‘tech’ stocks – such as Amazon, Netflix, Spotify and electric car manufacturer Tesla. Companies that have thrived as a new world forms, in part shaped by coronavirus. One dominated by the internet and the need to combat climate change.
There’s no getting away from it. The trust, managed out of Edinburgh by investment house Baillie Gifford (a thriving business owned by its partners and managing assets of £280billion), is a magnificent British success story. Indeed, as one fund manager told Wealth last week, it is the country’s ‘most successful technology story’ – often investing in tech-focused companies when they are start-ups and not listed on a stock exchange, and then backing them long term. Patient, long-term investing – even if most of the companies it has backed are located in North America (53 per cent) and China (22 per cent). Of its assets, more than 17 per cent are unlisted.
The trust’s numbers are eye-popping. By a Highlands country mile, Scottish Mortgage is the country’s largest investment trust with a market capitalisation of £15.1billion – its nearest listed rival, Foreign & Colonial, is a quarter of its size. Yes, Fundsmith Equity, run by the effervescent Terry Smith, is larger at £21billion, but Smith’s fund (another great success story) is not stock market listed.
Scottish Mortgage’s mega size means it is a key constituent of the FTSE100 Index – the 100 largest companies listed on the London Stock Exchange. In terms of market capitalisation, it’s bigger than household names Aviva, BT, L&G and Next. But it’s the performance numbers that matter in the eyes and wallets of investors. And whatever time period you choose, Scottish Mortgage has delivered in spades. It’s enriched the lives of shareholders. So, over the past five years, it has generated a total return for them of 305 per cent. According to data supplied by Trustnet, only one other investment trust out of a 240-strong universe has achieved a better return (Allianz Technology).
Shorter term, the returns are equally breathtaking – 134 per cent over three years and 102 per cent over the past 12 months. If you had invested £5,000 five years, three years or one year ago – as many Wealth readers have done – you would now be sitting on a respective sum of of £20,255, £11,695 and £10,110 (a fraction less maybe if taking into account buying costs). Something to cheer about in these nervous times.
What’s more, the trust, founded 111 years ago by Boer War hero Colonel Augustus Baillie and Carlyle Gifford, has not fleeced shareholders in the process by imposing a premium annual charge. Its total annual charges of 0.36 per cent are modest compared to rivals – and remain so even when the costs of its £1billion of borrowings are taken into account – money it uses to increase its equity exposure. As if that wasn’t enough, the trust has just announced a half yearly dividend of 1.45p per share in recognition of its ‘value to many investors’. The equivalent dividend last year was 1.39p. Extraordinary capital returns and a little bit of income as icing on the proverbial investment cake.
The two managers responsible for running the portfolio are longstanding. James Anderson has managed it since 2000 while Tom Slater has had a hand on the tiller – first as a deputy and then as a comanager – for 12 years. Despite their success, they remain incredibly humble.
The trust’s latest results, announced on Guy Fawkes Night, reflected this – referring to the fact that most of their investments will not ‘turn out as we hope’ and stressing the patient nature of their approach.
It was also reinforced by a shareholder webinar that Slater hosted last Thursday from a ‘cupboard in his house’ where he talked about their determination to make more from their winners than they lose from their dud stakes. An approach that has served them well over the past ten years with the returns from the likes of Tesla, Amazon and Alibaba more than compensating for the losses suffered on holdings such as Funding Circle and Castlight Health.
Given the trust’s mouth-watering past returns, it now begs the question as to whether its stellar performance can be maintained. In mid-August, analysts at investment bank Stifel argued that there was a good case ‘to take some profits and lock in some gains’, adding: ‘Share prices don’t rise in a straight line indefinitely’. The share price, £8.99 at the time, has indeed not increased in a straight line, but it closed on Friday at £10.32.
Yet Stifel’s cautious view has not gone away. Although most investment experts – see box – admire the managers’ long-term approach, they believe it is time for investors to take some profits.
Emma Wall, head of investment analysis at wealth manager Hargreaves Lansdown, says it would be ‘foolish’ not to do so given the trust’s 76 per cent price gain this year. It’s a view echoed by Ryan Hughes of fund platform AJ Bell who says ‘there may be merit in locking in some profits’ – especially if the trust’s strong performance means it has become too dominant in an investor’s overall portfolio.
The most concerned is Alan Miller, co-founder of wealth manager SCM Direct. On Friday, he told Wealth that ‘nobody in their right mind could criticise the performance of this trust’.
But he added that many of the stocks that Scottish Mortgage is invested in are in the ‘middle of an epic valuation bubble’. In other words, they are overvalued and at some stage will correct.
To make his point, Miller has calculated that Tesla (the trust’s largest holding) now has about the same market value as Toyota, Volkswagen and Audi combined. This is despite the fact that these companies sold 59 times the number of cars that Tesla sold in their last reported financial year.
Furthermore, their combined spend on research and development was 22 times the amount that Tesla spent. This suggests, says Miller, that Tesla’s technological lead may well narrow – and that its share price is ‘grotesquely overvalued’.
‘Generally, the backdrop for tech is becoming tougher,’ said Miller. ‘The worldwide lockdown this year has boosted many tech businesses and their earnings. But these companies face increasing regulatory risk, their margins may well come under pressure, and their rate of organic growth is likely to slow. It appears these risks are being ignored in the positive mood music of loving tech.’
Earlier this month, the $34billion stock market listing of Chinese internet finance company Ant Group was suddenly pulled by regulators at the eleventh hour. For the record, Scottish Mortgage holds 1.8 per cent of its assets in the company. ‘Disappointing,’ was Slater’s response last week, although he said similar regulatory interventions at Chinese tech giants Tencent and Alibaba had not impaired their long-term growth.
Wealth’s advice to Scottish Mortgage investors. Take some profits – and do not look back. Don’t be deceived into thinking Scottish Mortgage’s share price will continue to head towards the stratosphere.
…and what the other experts think
PORTFOLIO MANAGER: PETER SLEEP, SEVEN INVESTMENT MANAGEMENT
‘I have no concerns about Scottish Mortgage’s size, concentration on tech, or its focus on China. The size of the trust is a bonus at the present time. It allows the managers to reduce fees and more importantly ensures the shares are liquid and easy to sell.
‘China is one of the world’s high growth markets and Scottish Mortgage has done a great job in finding some dynamic companies – the likes of Alibaba and Meituan-Dianping. Having said that, it owns Ant Group whose stock market listing has just been pulled. This demonstrates some of the dangers of investing in China and unlisted stocks.’
FUND ANALYST: RYAN HUGHES, AJ BELL
‘Ultimately, Scottish Mortgage takes an unusually long-term investment approach and one that should be applauded. However, investors need to be comfortable with this and set their own time horizons accordingly.
‘If investors do shift their focus to value rather than growth companies, Scottish Mortgage will in all likelihood underperform. But this only reiterates the importance for investors to have diversification in their portfolios.
‘We remain very comfortable with the approach taken by James Anderson and Tom Slater, but any new investor buying today needs to accept that the companies in the trust are on high valuations.
‘They need to take a long-term view alongside the managers and understand that short-term underperformance is entirely possible.’
WEALTH MANAGER: INTERACTIVE INVESTOR
‘Do we still have conviction in Scottish Mortgage? Yes. Should it be a core investor holding? No, it should be a satellite portfolio holding. It’s racy.’
(Scottish Mortgage remains on Interactive Investor’s ‘super 60 investment portfolio ideas’ as an ‘adventurous’ option.)