Scottish Mortgage Investment Trust: building relationships with unlisted companies
Part two of our interview with senior research analyst Ryan Lightfoot-Brown and Tom Slator,...
Scottish Mortgage Investment Trust
Investment trust
Oddly enough, this investment trust has no particular focus on Scottish investments and nothing to do with mortgages. Its name stems from its long history, which dates back to 1909. These days, the trust typically holds between 50 and 100 companies from around the world, which are 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
This is an actively managed trust, with an enviable long-term track record. Fund managers James Anderson and Tom Slater take a high conviction approach and are able to invest up to 25% of the portfolio in unlisted companies. With this in mind, Scottish Mortgage may not be appropriate for lower risk investors. However, for those seeking exposure to higher growth prospects from around the world, 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.
Trust manager
Scottish Mortgage is managed by investment firm Baillie Gifford. Founded in 1908 and employee-owned, the firm is based in Edinburgh but also 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.
This trust is co-managed by James Anderson and Tom Slater. James has been running the portfolio since April 2000. He joined Baillie Gifford in 1983 and became a partner in 1987. Meanwhile, Tom spent five years as deputy manager of the fund before becoming co-lead in January 2015, the same year he was appointed head of the North American equities team. Like James, he is a partner 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 of five members and is chaired by Fiona McBain, the former chief executive of Scottish Friendly Assurance. Prior to joining Scottish Friendly in 1998, she worked as a chartered accountant at Prudential and Arthur Young (now Ernst & Young). Professor John Kay also sits on the board. He is a well-known economist, academic and author on business and economic issues. The remaining board members are Justin Dowley, Professor Patrick Maxwell and Dr. Paola Subacchi. 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 the 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.
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%. The trust’s gearing currently stands at 9%*.
Back in June 2018, the trust raised a further £170 million in long-term, fixed rate unsecured private placement notes. This provides additional long-term financing at a cost 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.
*October 2018
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