Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Even if you’re not too familiar with investment trusts, there’s every chance you’ve heard of Scottish Mortgage. The FTSE 100 trust has garnered a fearsome reputation for investing early in companies that have gone on to shape the way we live today.
Reading through the fund’s portfolio of largest holdings is like flicking through a catalogue of some of the world’s most exciting growth stocks. Recognisable names like Amazon and Tesla all feature in the trust’s top 10 holdings, where you’ll also find Chinese e-commerce giants Alibaba and Tencent.
Scottish Mortgage is a long-term investor, looking to find companies with the potential to grow substantially over the next 5-10 years. Its fundamental belief is that the lion’s share of total stock market returns is accounted for by the performance of just a handful of super-growth stocks - typically the ambitious tech companies that dominate their respective indexes today.
As well as the small number of large holdings that manager James Anderson has built up over many years, you’ll find a much longer tail of smaller holdings. These each account for maybe a mere 0.1% of the trust’s assets. Anderson likes to begin by testing the water and building a relationship with a company’s management, before looking to increase his holding as his confidence grows.
Among these smaller holdings are several private companies. Anderson believes that, increasingly, companies are generating their value before they go public. In his eyes, private companies are where the real action is for an investor today.
This focus too has paid dividends in the past: for instance, the trust invested in Spotify in 2015, three years before it floated on the stock-market with a $30 billion IPO.
But, for all its recent success, Scottish Mortgage now finds itself at something of a crossroads. Two developments make the trust’s future look less certain than it has for some time.
First is the announcement that Anderson will be retiring in April 2022.
Normally, when a manager leaves a fund, investors worry about whether similar levels of performance can be maintained. In the case of Scottish Mortgage, those anxieties were heightened. Anderson has been manager since 2000, and much of the trust’s recent success must be attributed to his skill in identifying and holding the winners of tomorrow. His tenure has become synonymous with the company’s success.
But perhaps those worries are misplaced. Baillie Gifford, the investment house that manages the trust, has a clear growth-focused philosophy that underpins all their funds. Many other Baillie Gifford funds have performed at similarly impressive levels in recent times. It’s unlikely that a change in management will derail the company’s investment approach.
To help with that, Anderson’s replacement, Tom Slater, is a safe pair of hands. He has been co-manager alongside Anderson since 2015 and brings plenty of experience to the role.
The other issue facing Scottish Mortgage is an apparent rotation away from the high-growth tech stocks that make up the bulk of its portfolio, and toward the out-of-favour value companies which could do best amid a wider economic recovery.
Accompanying the rotation have been mounting worries over higher interest rates and rising inflation levels. Both could hurt the sort of stocks Scottish Mortgage invests in, since the opportunity cost of waiting for their future earnings would be higher in a higher rate environment.
These are obstacles that Scottish Mortgage has not had to face for many years. How much they should worry investors depends on your perspective. On the one hand, the trust has undoubtedly benefited from a supportive market backdrop over the last decade. A value rotation would coincide unfortunately with the change in leadership.
On the other, the combination of Scottish Mortgage’s clear philosophy and the robust performance of the tech stocks themselves means any anxieties may be a flash in the pan. There’s every reason to believe that the fund will continue to deliver regardless.
For investors of the latter mindset, you may be interested to see recent falls in the trust’s share price. A peculiarity of investment trusts is that their share price can differ from the Net Asset Value (NAV) of the underlying holdings. Right now, Scottish Mortgage is trading at a -1.2% discount to its NAV, which means the market currently thinks the trust is worth less than the value of its holdings. Investment trusts often trade at a discount, but it’s a rarity for Scottish Mortgage.
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Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. The trust uses financial derivative instruments for investment purposes, which may expose the trust to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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