Tom Slater and James Anderson, co-managers of the giant Scottish Mortgage Trust, admitted that “many, if not most, investments” would not turn out as they had hoped.
They said: “Over the long run, stock market returns are driven by a small number of exceptional companies.
“The progress of such companies is rarely smooth or linear. They have breakthroughs and they have setbacks.
“With a longer timeframe, such oscillations matter less and the picture of compounding growth becomes clearer. Many, if not most, investments won’t turn out as we hope.”
Their comments come as the £16bn trust’s interim report, published today (November 6), showed the trust’s net asset value had jumped 76 per cent in the six months since March, compared with a 24 per cent increase in the FTSE All World index.
Over five years, Scottish Mortgage has returned 323 per cent in share price terms compared to the AIC Global sector’s 151 per cent average.
Investors in the trust for 10 years would have seen an 802 per cent return on assets, and the trust is the absolute best performer amongst its peers across a three month, six month, one year, three year and five year period.
The managers said: “For the companies that do succeed, the returns are transformational and have a disproportionate impact on the portfolio.
“This is why we approach our task with optimism. It is more important to identify the factors that will allow a company to prosper than to enumerate the potential pitfalls along the way. This approach has driven our long-run returns.”
Defending Tesla
The portfolio’s largest holding, Tesla, is one of the trust’s success stories. Accounting for 12 per cent of the fund, its share price has soared 570 per cent in the past year.
The managers urged investors to look at the Tesla’s “underlying return picture” rather than the “attention, emotion and noise” created by the company and its “colourful” founder, Elon Musk.
They said: “Tesla has made significant operational progress. It has successfully added capacity and the production ramp of its latest model has progressed far more smoothly than for any of its previous vehicles.
“Demand for its products is strong and the response from its traditional competitors remains muted.”
The story was not so positive regarding the trust’s investment in Amazon, its second largest holding. The trust has made its first reduction in the online marketplace that was not driven by diversification concerns.
The managers said: “[There are a] growing number of opportunities we have to invest in digital businesses of scale beyond the giant western platforms.
“This becomes more important as our views on the platform companies are less differentiated than was once the case.”
The trust has sold its remaining holding in Facebook and reduced its Amazon holding, adding that while the managers had “huge respect” for Amazon’s vision its large size made the path to future returns “more challenging”.
The managers said a clear lesson from the pandemic and the associated societal shifts was that they should “treat confident pronouncements about the future with scepticism”.
They added: “Rather than engage in such speculation, we prefer to back the companies building the future of our economy with the capital and patience they require.
“Such opportunities remain plentiful.”
imogen.tew@ft.com
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