I have written a lot about James Anderson on GuruFocus, as he has been the biggest British investment guru in the last 20 years. He left Scottish Mortgage Investment Trust (LSE:SMT, Financial) in April after 22 years running the fund. His returns were exceptional, driven by conviction picks like Amazon (AMZN, Financial) and Tesla (TSLA, Financial); he identified good opportunites early and stuck with them.
Scottish Mortgage was launched in 1909 and is Baillie Gifford (Trades, Portfolio)'s flagship investment trust. These days, the trust is Global rather than Scottish and has nothing whatsoever to do with mortgages. The fund is a mixture of publicly listed growth stocks and private venture capital investments. I would describe it as the Nasdaq Composite Index on steroids.
The fund’s share price and net asset value have been hit hard his year, as growth and technology stocks have gone out of favour with inflation on the rise and central bankers turning hawkish. Indeed, the share price has fallen more in magnitude this year than it did at the start of 2020 or during the 2008 financial crisis.
Its exposure to Chinese technology companies and “long duration” growth stocks that make up the trust’s largest holdings have meant that the fund has suffered as interest rates and geopolitical tensions have risen. The fund’s net asset value fell by 14% over the first quarter this year to the end of March. In the previous year, the fund’s NAV was up 111%.
I believe there will be a further decline in the share price and NAV this year, but over the long term, I think the fund has the potential to outperform any major index such as the S&P 500 or the FTSE 100 due to its high-risk, high-return portfolio composition.
Scottish Mortgage in recent years gained its excellent track record largely because it was an early backer of companies that it thought had high growth potential, including its initial stake in Amazon in 2004 and Tesla in 2013. These types of investments often take 10 years to play out. In the short term, Scottish Mortgage could be seen as a high beta bet on tech/growth stocks, but for long-term investors to capture the alpha, we must ignore the short-term volatility.
Tom Slater is the fund’s new lead manager, taking over from Anderson. He joined Baillie Gifford (Trades, Portfolio) in 2000 after graduating from Edinburgh University in Computer Science and Maths. Lawrence Burns is the new deputy manager. He joined Baillie Gifford (Trades, Portfolio) in 2009 after graduating from Cambridge University in Geography.
I’m short-term bearish on the stock as I think inflation and interest rates will continue to rise and there will be a better buying opportunity in the stock in the future. But the point is that just because Anderson has retired, that doesn't mean Scottish Mortgage should be forgotten. Its firmly on my watchlist.
The fund is not afraid to invest in China and holds several Chinese stocks, including Alibaba (BABA, Financial), the leading e-commerce giant in China, and Meituan (HKSE:03690, Financial), a food delivery company.
True, the two fund managers won’t ever understand China as well as Chinese investors (or those who have spent a significant amount of time in Chinese markets), but the structural growth areas such as e-commerce are not going away. The fund’s global diversification also protects them from having too much risk in any one country.
One thing to note with the fund is that it says it is benchmarked to the FTSE All World Index. This is misleading, as the fund holds many investments that are not constituents of this index, including positions in many privately held companies. Also, the fund makes no attempt to minimize tracking risk against FTSE All World. The best thing in my view is to ignore the mentions in the fund’s literature of FTSE All World as its benchmark.
The way to view Scottish Mortgage is through the lens of a high-risk strategy, with the potential for equally high returns. The fund’s managers have bought into the academic research of Hendrik Bessembinder, who found that despite the stock market’s gains over the past century, most stocks don’t return much. Of the roughly 26,000 companies listed between 1926 and 2016, more than half lost money or did worse than simply holding one-month Treasuries. However, about 1,000 stocks, or just 4% of the entire sample, in practice accounted for all the net wealth creation over the period, or almost $35 trillion.
This means Scottish Mortgage’s mandate is to look across companies globally, and only invest in the ones with the highest long-term high potential, with game-changing innovations or technology.
It could be argued this strategy was the optimal strategy in a low interest-rate environment. But the empirical evidence from Bessembinder showed good stock picking is necessary and, if done right, can work across all economic environments.
If Slater and Burns can outperform the Nasdaq Composite Index for a couple of years, demonstrating they have truly learned from Anderson, then I think this fund could be a good choice for a high-risk, high-return strategy.
