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Good fund management is not all about balance sheets and growth figures - it also relies on an experienced head to build a good idea of what the future holds. Since taking over management of the Scottish Mortgage investment trust in 2000, manager James Anderson has shared in the fortunes of several companies which have shaped the way we live today.
Scottish Mortgage’s top holdings read like a Greatest Hits compilation of the decade’s most desirable growth stocks. Electric car giant Tesla and global powerhouse Amazon currently vie for top spot, making up nearly 20% of the trust between them.
Other big names like Alibaba, China’s biggest online commerce company, and Netflix demonstrate well the philosophy driving the fund’s success. Anderson, accompanied since 2015 by co-manager Tom Slater, hopes to discover high-growth potential companies which he feels could develop into market leaders. He looks to invest over a 5-10 year time-horizon, though he is not afraid of holding his position for longer if he foresees continued growth.
This approach has helped turn Scottish Mortgage into a FTSE-100 company, and the world’s largest investment trust.
Anderson holds around 85 companies, with the top 10 assets accounting for almost 50% of the entire portfolio. This concentration reflects the company’s bias for holding large positions in a small number of high-growth giants. The abundance of remaining smaller positions demonstrates Anderson’s practice of testing companies with a small initial investment, which he then hopes to increase as he gains confidence in their prospects.
Among these smaller holdings are several private companies. This too has been a key factor in the fund’s success. As he explained last year in an interview with Tom Stevenson, Anderson believes that, increasingly, companies are generating their value before they go public - a rising trend that he does not see slowing any time soon.
Anderson’s approach is well demonstrated by another big-name holding, Spotify. The trust first invested in Spotify in 2015, well before it floated on the stock-market in 2018 with a $30 billion IPO.
Why private equity?
Since business-building is happening more and more in these early stages, Anderson feels it is essential that a fund which prides itself on finding tomorrow’s winners pays private equity the requisite attention. The trust can invest up to 25% of holdings in unlisted companies, a limit which Anderson is now hoping to increase to 30%. Often fledgling companies make use of his expertise to guide them through their nascent stages.
If real opportunity continues to lie in private equity, investors wary of the long holding periods and high volatility associated with younger companies may feel more comfortable accessing the asset class through an investment trust.
Investment trust managers can afford to hold unlisted companies for a long time without worrying about liquidity demands, a luxury which is typically unavailable to open-ended managers who may need to generate cash quickly to match investor outflows.
Scottish Mortgage also presents a cost-efficient way to gain access to private equity. Ongoing charges for the trust stand at 0.37%, a figure well below your average private equity fund, which tend to charge around 2%1.
No one knows what’s around the corner - 2020 so far is evidence enough of that. Anderson, however, isn’t looking to predict the future. He invests in companies which build it.
1 Investopedia, 2 March 2020
Important information: 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. 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 an authorised financial adviser.