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Scottish Mortgage Investment Trust: May 2020 update

Investment Analyst Jonathon Curtis provides an update on the Scottish Mortgage Investment Trust following the release of its annual report for the year ending 31 March 2020.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Share price and NAV increased 12.7% and 13.7% respectively, compared with a loss of 6.2% for the FTSE All World index
  • The managers have found the best opportunities in unquoted companies
  • Some of the trust’s investments have benefitted from the coronavirus pandemic

How it fits in a portfolio

This trust invests in pioneering companies with high-growth expectations, half of which are unquoted. The companies have the potential to deliver good long-term returns but they can also be volatile. This means the trust could be a useful addition to a growth-focused portfolio willing to tolerate higher risks. The managers invest significantly in the US and China, so this could be a good option for those wanting to capture the innovation coming from the world’s biggest economies.

Manager

The trust is run by Baillie Gifford managers James Anderson and Tom Slater. Anderson joined Baillie Gifford in 1983 and is a partner in the firm. He’s managed the trust since 2000, and recently announced he was stepping back as head of Baillie Gifford’s Long-Term Global Growth team. We think this is a good thing for investors as he can dedicate more of his time and energy to running the trust. Slater joined Baillie Gifford in 2000 and is also a partner. After serving as deputy manager of the trust for five years, he become co-manager in 2015. Slater also co-manages the Baillie Gifford American fund.

Process

The managers invest in companies they think are helping to shape the future. They currently invest in around 90 companies from around the world, with roughly half from North America. Some are from higher-risk emerging markets. They’ve found lots of opportunities in China and few in the UK, which is why much more of the portfolio is invested in the former and much less in the latter than the global stock market average.

The managers are true long-term investors. They think that’s the best way to capture the potential growth of their companies. It’s also why they’ve not made many changes to the portfolio over the past 12 months – they still own 29 of the 30 largest holdings from a year ago for example.

New investments include MercadoLibre, a Latin American e-commerce platform and Zoom, the remote conferencing provider. The managers think Chinese companies are becoming increasingly innovative, which is why they’ve also invested in Chinese media company Bytedance. It owns the TikTok social media platform, and uses artificial intelligence to predict what content users will be interested in.

Recent sales have included Chinese internet search engine Baidu – once the trust’s biggest investment. The managers think the company hasn’t taken enough advantage of its dominant position. They also sold US food-delivery service Grubhub, and invested more in its Chinese peer Meituan, which delivers more than 20 million meals per day compared to the former’s 500,000 daily deliveries.

The managers are still enthusiastic about one of their most well-known holdings, electric car maker Tesla. They think the company has made great improvements in production, while traditional manufacturers have struggled to get going with electric vehicles.

Half the trust’s companies are unquoted (those not listed on a stock market), making up around 20% of the portfolio by asset value. This figure has been creeping up over time as the managers think they’re among the best opportunities for growth. The managers can invest up to 25% in private companies but this could be raised to 30% pending shareholder approval.

Many of the trust’s unquoted companies are very large. Nearly half would be big enough for the FTSE 100 if they were listed on the UK stock market. Unquoted companies are harder to buy and sell, which makes them higher risk. As a closed-ended investment trust though, the managers don’t have the same liquidity issues that open-ended fund managers can have.

The managers can use gearing (borrowing to invest), which can boost gains but also increases losses, so is a higher-risk approach. They can invest in derivatives too, which if used also adds risk. Investors should refer to the latest annual reports and accounts and Key Investor Information for details of the risks and charging structure.

Culture

Baillie Gifford was founded in 1908 and has become well-known for its investing-for-growth philosophy. The firm is an independent private partnership, allowing its managers to remain focused on long-term investing without short-term shareholder distractions. When they invest in companies, they actively engage with management teams and encourage them to think about the long term too. Baillie Gifford also makes extensive use of academic research, and has consultancy agreements with universities and institutes in both the UK and around the world.

Cost

The trust’s current ongoing charge is 0.36%, which includes the 0.3% annual management charge. We think this is excellent value for access to experienced managers with strong track records of investing in companies for their growth potential. If held in a SIPP or ISA the annual HL platform fee of 0.45% (capped at £200 for a SIPP and £45 for an ISA) also applies. Investment trusts are free to hold in a Fund & Share Account.

Performance

The trust delivered very strong returns during the 12 months to 31 March 2020. Net asset value (NAV) grew 13.7% compared with the FTSE All World index’s 6.2% loss. The trust’s share price rose 12.7%, as its premium narrowed. The share price currently trades on a 3.2% premium to NAV. Remember past performance doesn’t indicate future returns.

Electric car maker Tesla delivered the biggest gains for the portfolio, followed by German online food delivery service Delivery Hero. It’s benefitted from the increase in takeaways due to the recent forced restaurant closures. Web conferencing platform Zoom has also been a successful new investment so far, as users have surged following lockdowns in many countries. Among the worst performers were US gene therapy developer Bluebird Bio, ridesharing platform Lyft, and Chinese travel agent Trip.com.

Over the long term the managers have also delivered impressive performance. Since Anderson took over the trust in April 2000, it’s generated 942.3%* returns versus the benchmark’s 213.6% gain. Past performance is not a guide to the future though and exceptional returns are unlikely to be repeated. Investments fall as well as rise and you could get back less than you invest.

Scottish Mortgage Investment Trust performance under James Anderson

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM *to 30/04/2020.

Annual percentage growth
Apr 15 -
Apr 16
Apr 16 -
Apr 17
Apr 17 -
Apr 18
Apr 18 -
Apr 19
Apr 19 -
Apr 20
Scottish Mortgage Investment Trust -2.1% 47.4% 27.5% 11.5% 27.0%
FTSE All World -0.3% 31.2% 7.8% 11.3% -1.3%

Past performance is not a guide to the future. Source: Lipper IM to 30/04/2020.


Find out more about the trust, including charges


Key Investor Information

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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