And the winner is...
Winner: Scottish Mortgage
Scottish Mortgage Trust (SMT) has by far the best three-year NAV total returns in its sector, and at end-January was way ahead of every other globally diversified trust over five and 10 years. However, it has suffered some steep falls along the way, and investors are warned they must share the managers’ long-term outlook.
SMT’s portfolio is mainly comprised of what managers James Anderson and Tom Slater consider to be the 40 or so greatest growth companies in the world, with no regard for geographical or sectoral diversity. As a result, its active share (divergence from a recognised benchmark index) is well over 90%.
Holdings are typically capital-light disruptors driving big changes in the wider economy as in the case of Amazon, which SMT first bought into in 2007. Alternatively, they may be capitalising on the phenomenal changes being achieved in life sciences and healthcare thanks to the explosion in scientific data, as illustrated by Illumina, which SMT has held since it was an obscure smaller company.
Nearly 20% of SMT’s portfolio is invested in 44 unlisted companies (which have recently been revalued). The managers expect some of these to turn into big winners, with high-multiple gains more than offsetting losses on those that fail.
US-based companies account for around half the trust’s portfolio, headed at end-January by electric car manufacturer Tesla, a holding which has worried a lot of the trust’s shareholders, but which began to soar in late 2019. Chinese companies account for around 20%, headed by internet giants Alibaba (first bought when it was unlisted) and Tencent. Anderson is hugely excited by the pace of development in China and expects it to account for a growing share of the world’s great companies.
Anderson does not try to “time the market”, but he does not ignore the broader world. “On the contrary, many of the discussions about companies revolve around the future shape of the global economy,” he says. “We simply aim to ignore the maelstrom of noise in markets and trade only when appropriate for our investment approach.”
Portfolio turnover is therefore low, at only 7% last year, which in turn contributes to exceptionally low costs
Managed by: James Anderson since 2000 and Tom Slater since 2015
3-year NAV total return: 81.4%
3-year share price total return: 74.2%
Average sector discount: -1.10%
Ongoing charges: 0.37%
Favours capital-light disruptors
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Edinburgh Worldwide Investment Trust (EWI) is another of Baillie Gifford’s globally diversified portfolios. Manager Douglas Brodie invests in initially immature entrepreneurial companies, typically when their market capitalisation is less than $5 billion, in which he expects to achieve substantial growth over the next five years or more. He can invest up to 15% in unlisted securities and can continue to hold his winners no matter how large they get, with his largest holdings including Tesla.
The board seeks to reduce risk by requiring Brodie to hold at least 75 companies, with exposure to at least six countries and 15 industry sectors. Biotechnology and software account for around a third of the portfolio. The trust’s active share of 99% means it bears scant resemblance to its S&P Global Small Cap index benchmark and could well prove more volatile. Portfolio turnover is in single figures and there is no yield.
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