Scottish Mortgage 29 June 2020

Scottish Mortgage (SMT) aims to generate superior returns from global equities with a highly active, long-term approach. The success of that strategy, particularly over the past decade, has led SMT to grow into the largest investment trust on the FTSE and pass on the benefits of scale in exceptionally low fees.

The NAV growth has largely come through performance. As we discuss in the Performance section, over the past decade the trust has generated annualised NAV total returns of c. 20%, one of the very best results in the investment-trust sector. Growth has also come through regular issuance of shares in the long periods the trust has been on a premium. Despite a wobble during the recent crisis, the trust is now back on a 3.6% premium.

The managers James Anderson (appointed in 2000) and Tom Slater (deputy manager from 2009 and joint-manager since 2015) aim to identify companies which can deliver exceptional returns, then invest in them at an early stage of their development and hold them for the long run. In recent years this has led them to invest heavily in companies developing and benefitting from new technologies, often centred around the internet. This includes those companies operating out of Silicon Valley, but increasingly also their Chinese equivalents and competitors.

The managers believe the new technologies being developed in recent years tend to provide opportunities for increasing returns to scale, meaning that many investors have underestimated the long-term potential in companies exploiting them. This has led to a willingness to hold onto companies at apparently high valuations when the managers believe their long-term potential is still being underestimated.

SMT’s success is highly impressive. James and Tom’s ability to maintain conviction in their long-term expectations for companies despite vicious volatility and shrill concerns about valuation from other investors is not often found, and their patience has been well rewarded. The real question for investors is whether this success is sustainable or has been the result of having had the right strategy at the right time.

In our view there is now a realistic path to high inflation and higher interest rates over the next couple of years, thanks to the likelihood of massive public expenditure in the developed world to attempt a recovery from the current crisis. This could provide a mechanical drag on the valuation of high-growth companies through the discount rate. However, the question is whether this would offset the growth potential in the portfolio. We would not bet on this, as we think there is still huge growth potential in trends evident at the top of the portfolio – for example in online services and electric vehicles, both of whose growth may be accelerated due to the crisis.

However, SMT’s ability to replicate the past ten years will depend on the ability to find new opportunities to revivify the portfolio in time. This will be difficult and require getting numerous calls correct. For this reason, although we think there is huge potential in SMT, we would be wary of putting all our eggs in this basket.