The freshly crowned king of the investment trust industry, Scottish Mortgage, is banking on a suite of new bets in the biotechnology sector to retain its leading position in 2014.
The manager of the trust, Baillie Gifford’s James Anderson, has revealed the new holdings in his first press outing since the £2.6bn fund eclipsed the Alliance Trust to become the biggest trust listed in London late last year.
Established in 1909, Scottish Mortgage has benefited from its global investment outlook, gaining 204.1 per cent in the past five years compared to an 81.8 per cent gain from arch-rival Alliance Trust, according to FE data.
Scottish Mortgage has also benefited from longstanding bets in innovators such as US internet groups Amazon and Google.
Mr Anderson said areas such as healthcare, transport and energy would benefit next from technological innovations. Healthcare in particular will be “the most important area” for innovation in future, he said, which was both “fascinating and exciting” as it had the power to “destroy so much market capital and tradition”.
Key to the revolution is biotechnology, including advances stemming from the sequencing of the human genome, he said.
The manager cited US firm Illumina, now the fifth-largest holding in the trust, as being at the forefront of this change. The group manufactures equipment used to analyse gene structures and has been the subject of bid speculation in recent years, with US pharmaceutical giant Roche making a failed approach in 2012.
Mr Anderson, along with deputy manager Tom Slater, has added a number of other new biotechnology stocks in recent months.
The recent purchases include Genomic Health, a cancer research firm, and Myriad Genetics, a molecular diagnostic company.
Mr Slater said that it was impossible to know if the new companies will be the winners of the future, but “the opportunity is so large that even partial success could be extremely lucrative”.
Scottish Mortgage remains smaller than Alliance Trust in terms of its total assets, but it is bigger than its rival in terms of its market capitalisation.
The trust’s shares are trading at a slight premium to its net asset value, while Alliance Trust’s shares are trading at a 12.3 per cent discount, according to the Association of Investment Companies.
The trust has only recently moved to a small premium after the discount narrowed sharply in the past year and the managers said they would consider issuing new shares, which would help prevent the premium from widening further, if there was continued significant demand from investors.
In running the fund, Mr Anderson continues to focus on long-term investment with two main themes: the rise of China and the potential of new and disruptive technology.
In the past year, the managers also invested in Twitter and in electric car firm Tesla Motors.
What Scottish Mortgage snapped up in 2013
Scottish Mortgage participated in the initial public offering of Twitter in November 2013. With its history of investing in social media companies, Mr Anderson said the trust was able to receive favourable treatment and access to shares in Twitter.
It is a prime example of the fund’s aim to find high growth stocks using technology in new and disruptive ways and the managers cited the potential applications for Twitter, including partnerships with retailers.
It is also an example of the managers’ interest in the uses of ‘big data’ and a reflection of their views that firms are likely to continue to steamroller over concerns about individuals’ privacy in the future.
Tesla Motors
Founded by Elon Musk, who also founded PayPal and is the chief investment officer of space exploration company SpaceX, Tesla Motors is an electric car manufacturer.
The company initially produced an exclusive sports car, but has since brought out a slightly less expensive version and is in the process of designing a mass-market version, which is set to hit the market soon.
The stock increased in value by more than eight times between January and October in 2013, though has pulled back slightly.
Although the current price is expensive, the stock is being priced on its potential to massively increase car sales when it brings an affordable car to market.
Splunk
Splunk is another example of the remarkable potential to be harnessed from the amount of data that is being produced in the modern age.
The US firm produces software for searching, monitoring and analysing machine-generated ‘big data’, and is now used by more than 5,200 companies. The software can analyse patterns and interesting features in enormous packages of data in real-time and collate it down to be visualised in charts and tables.
It is another stock held by Scottish Mortgage that has already grown considerably, nearly tripling in the past year. However, the managers think the stock still has enormous potential as more uses are found for big data sets.
