InvestmentsFeb 8 2016

Fund Review: Scottish Mortgage Investment Trust

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Tom Slater runs this investment trust alongside James Anderson with an emphasis on low-cost, high-conviction, long-term investing. “Our aim is to own the best, long-term growth companies,” Mr Slater says.

“We have a time horizon that we think is a lot longer than the market. We look at investment periods of more than five years – long enough for the strength of [the company’s] management or the advantages they possess to be the dominant drivers of their stock prices, not just the vagaries of markets.”

This trust won the Global Equity category at the 2015 Investment Adviser 100 Club Awards.

The Baillie Gifford managers have a framework that comprises 10 questions and through which they look at individual stock ideas. The first consideration is a company’s sales growth, with the focus on five years and beyond as opposed to trying to predict the next year’s earnings.

Mr Slater explains: “It’s looking for long-term competitive advantages. What is it that makes a company’s culture unique? And why does that give them an edge? Then how does all that translate into financials? How are they allocating capital? And finally is that opportunity attractively valued? Why doesn’t the market already understand that?”

Potential holdings for the fund are not thought of in country or sector terms though, as he believes this is “not helpful”. Instead, he notes: “We are bottom-up stockpickers fundamentally. We are just trying to identify what we think are exceptional growth companies. It’s more about what are the big changes going on in the world that are creating opportunities.”

Some of the changes the managers have identified are based on ideas such as “stockmarkets underestimate the power of technological change. China is a transformational force in the world economy, while the financial services sector has not reformed itself at a sufficient pace and is a damaging influence on what might otherwise be a positive outlook”.

The transformation of the media industry in response to changing consumer behaviour is another important theme for the duo. Mr Slater explains: “We think there’s a big change going on in the model of enterprise IT, in the way the corporates are spending their IT budgets on the types of services we want. We also think there are companies driving changes in the healthcare industry, by taking costs out of the system or by improving outcomes for patients.

“If our shareholders are going to benefit from some of these opportunities, then we have to keep our costs to a minimum. The ongoing charge is now below 50 basis points. We see this as one of the advantages of scale, but also something that’s an important facet of what we offer.”

The ongoing charges figure applied to this trust is just 0.48 per cent.

In the 10 years to January 26 the trust has far outperformed both its peer group and benchmark, delivering an impressive 213 per cent. Over the same period the Association of Investment Companies Global sector’s average return was 71.9 per cent, while the FTSE All World index rose 88.5 per cent. In the past five years the managers have generated a return of 94.1 per cent, while the sector managed an average 31.3 per cent and the index posted a 37.5 per cent increase, data from FE Analytics shows.

The managers avoid getting caught up in short-term performance by removing themselves from market noise. As a result turnover is fairly low, with around 40 per cent of holdings having been in the portfolio for more than five years. Mr Slater notes: “One of our observations is there is an asymmetry in stockmarkets in which you can make far more if you’re right about a stock than you can lose if you’re wrong about it. It’s about owning that relatively small collection of outliers.” He picks out the trust’s largest holding, Amazon, which they have owned for more than 10 years, as well as Tencent, Baidu and Inditex as more examples.

He is also seeing opportunities in unlisted companies – those in the later stages of venture capital. “When we’ve looked at them on a case-by-case basis, generally they’ve seemed to us to offer the most attractive risk and reward. We just see lots of opportunities in contrast to this prevailing negative, panicky mood,” Mr Slater adds.

EXPERT VIEW

Rob Morgan, pensions and investment analyst, Charles Stanley Direct

This trust is positioned to harness technological advances that disrupt established business practices. The managers have long been keen supporters of the technology sector, investing at an early stage in what are now internet and e-commerce giants. They believe in a highly focused approach, targeting innovative firms at valuations that do not reflect their future prospects. As such 94 per cent of the portfolio is different from the FTSE All-World index. I admire the fund’s approach and believe it should be considered a higher-risk global equity option for those who share the managers’ long-term perspective, or possibly as a complement to more cautious funds.