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Five trusts on an attractive discount
Over the past few years, multi-asset managers have increasingly turned to investment trusts as a way...
Scottish Mortgage Investment Trust
Investment trust
Oddly enough, Scottish Mortgage Investment trust has no particular focus on Scottish investments and nothing to do with mortgages. Its name stems from its long history, which dates to 1909. These days, the trust typically holds between 50 and 100 companies worldwide, united by their strong growth prospects. The managers have a patient buy-and-hold approach and aim to maximise total returns – i.e. both income and capital growth – for shareholders over the long term. This fund typically has low turnover.
Our opinion
Scottish Mortgage Investment trust is an actively managed trust, with an enviable long-term track record. Fund managers Tom Slater and Lawrence Burns take a high conviction approach and can invest up to 30% of the portfolio in unlisted companies. With this in mind, Scottish Mortgage Investment trust may not be appropriate for lower risk investors. However, for those seeking exposure to higher growth prospects worldwide, this trust is a well-managed option that focuses on finding tomorrow’s winners. It is also competitively priced, with a low ongoing charge and no performance fee as the team believes it undermines investment performance.
Trust manager
Investment firm Baillie Gifford manages Scottish Mortgage Investment trust. Founded in 1908 and employee-owned, the firm is based in Edinburgh and has offices in London, New York and Hong Kong. It has a partnership structure, which has enabled it to retain key people. The company has an excellent record of corporate stability, which has contributed to strong investment performance.
Following the retirement of James Anderson in April 2022, the trust is now managed by Tom Slater and Lawrence Burns. Tom spent five years as deputy manager of the Scottish Mortgage Investment trust before becoming co-lead in January 2015 and then lead manager in April 2022.
Lawrence became a deputy manager on the trust in March 2021, becoming co-manager in April 2022. Lawrence joined Baillie Gifford in 2009 and since 2017 he has co-managed the international concentrated growth strategy. Both Tom and Lawrence are partners at the firm.
We want our shareholders to benefit from the transformational growth opportunities that abound in this era of accelerating change.
Tom SlaterTrust manager
Investment board
The board comprises five members and is chaired by Fiona McBain, the former chief executive of Scottish Friendly Assurance. Before joining Scottish Friendly in 1998, she worked as a chartered accountant at Prudential and Arthur Young (now Ernst & Young).
The remaining board members are Justin Dowley, Professor Patrick Maxwell, Dr. Paola Subacchi and Amar Bhide. Between them, they have a variety of backgrounds in business and financial services, bringing a pool of expert knowledge to the board. They meet six times a year, and Scottish Mortgage Investment trust has a year-end of 31 March.
Investment process
James and Tom are well known for their style of growth investing. They aim to identify businesses which have the potential to disrupt their own industries, with sustainable business models in excess of five years. As a result, the portfolio tends to have a relatively high allocation to technology companies. They focus on the long-term potential of a business rather than its current value. In their own words, they “own companies rather than rent shares”. The managers also try to avoid forecasting the direction of markets or economies.
ESG
ESG - Limited
The trust’s manager, Baillie Gifford, takes an holistic approach to ESG. Rather than setting strict rules and restrictions on investments choices, the managers consider the material impact such factors will have on the long-term sustainability of a company’s business when assessing its investment potential. This means that considerations are made on a case-by-case basis and are factored into the overall investment case for the business, but there is no single process that is applied to every holding.
The strategy does involve a 9-question research framework which looks for specific material ESG issues, to ensure a long-term investment is not undermined by an inherent flaw, though this is looking for stock specific issues rather than broad rules-based investing. The wider investment philosophy focuses a lot on governance, however, and managers always meet company management before investing, and have ongoing engagement with the companies they own.
Risk
The managers make long term investments in disruptive companies, as well as those with sound business models, which enjoy a competitive advantage. Up to 25% of the portfolio can be invested in unlisted companies. Although this allocation can increase risk, it allows the managers to tap into exciting growth stories at an earlier stage. What’s more, they appear to have a keen eye for these types of investments – recent successes include Dropbox and Spotify.
Gearing
Scottish Mortgage employs strategic gearing. If used correctly, this can enhance returns over the long-term. However, it is worth noting that this can increase volatility in difficult market conditions. The maximum exposure to equities as a percentage of shareholders’ funds typically stands at 120% in normal market conditions. In exceptional conditions, borrowing will not exceed 30%.
In June 2018, Scottish Mortgage Investment trust raised a further £170 million in long-term, fixed-rate unsecured private placement notes. This provides additional long-term financing at the cost of a little under 3% per annum. This decision was taken because Scottish Mortgage’s assets have grown in recent years, which had caused the level of borrowing to fall.
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