Scottish Mortgage 09 October 2019

Scottish Mortgage (SMT) is a global equity portfolio run with a long-term investment time-frame, via a highly-concentrated, growth-orientated stock picking approach. It is the largest ‘conventional’ UK-listed investment trust with net assets of over £8.3bn. The managers aim to invest in the most promising growth companies across the globe, whether publicly listed or private.

SMT, which is a member of the FTSE 100, has built a long-term track record of outperformance, growing assets at a rate far in excess of its benchmark index and its sector over the past 20 years. The managers’ focus on exponential structural growth opportunities, seeking to identify companies with products that can change and dominate consumers’ spending habits, often leads them to take sizeable long-term positions in often highly volatile stocks, and the portfolio has often been characterised by a strong weighting to technology stocks.

In recent years the managers have identified that an increasing number of companies are seeking to remain privately listed for longer, or even to avoid a public listing altogether. Noting that this often affords management greater freedom to pursue long-term growth opportunities, in alignment with its own investment style, it has sought to incorporate exposure to the private equity market in SMT, and presently holds around 22% (as of 31/08/2019) of its portfolio in unlisted stocks (with a maximum permissible level of 25%).

The reasonably concentrated portfolio, high conviction positions and long-term outlook can often lead to periods of sharp volatility, and the trust has generally been more volatile and exposed to drawdowns than the wider market. James Anderson and Tom Slater, the managers of SMT, believe that the effects of strong management and company growth in their stocks cannot be expected to be realised in less than five years, and tend to look through such short-term volatility.

Scottish Mortgage remains a strongly performing higher-risk option for equity investors, yet is among the cheapest in terms of OCF. The trust has generated higher levels of volatility than the index and peers and is currently on a discount of 2.3%.

Returns have clearly been very strong over the most recent investment epoch, with market conditions strongly favourable. However, the managers have not moved with the crowd, and have enjoyed their success maintaining a long-standing, and previously highly unfashionable, investment strategy. This gives them a certain amount of additional credibility as long-term investors when they seek to get exposure to unlisted opportunities – an increasingly large proportion of assets (now c. 22%) which has delivered very strong returns since 2010.

Yet there are undoubtedly risks involved. Existing investors will have experience of the high level of volatility and downside risk generally incurred (though NAV volatility may be reduced going forward, as discussed in ‘Discount’).

Political risks are also present for many of the largest holdings, and SMT is at risk of a change in market dynamics; were there to be a sharp move higher in bond yields and/or inflation, for example, it would likely underperform. However, the management process remains consistent (albeit increasingly incorporating unlisted) and should ensure investors remain exposed to exponential growth opportunities.