Why investors should stick with the Scottish Mortgage Investment Trust

After five years in which the investment return of the technology-focused Scottish Mortgage Investment Trust (LSE: SMT) was nearly double that of the FTSE All-World index, relative performance slowed in 2019. In the first nine months an investment return of “only” 16.7% lagged both the FTSE All-World index and the average for the global IT sector. 

Many believed that high-growth companies had become overvalued and criticism mounted of the low tax paid by the US technology titans, their dominant market positions and their lack of regulation. Scottish Mortgage was increasing its exposure to private equity, yet doubts have grown about some of the valuations of these companies.

Optimism has dwindled

James Anderson and Tom Slater, Scottish Mortgage’s managers at Baillie Gifford, accept the change of mood. “There was utopian optimism ten years ago,” says Slater, “but now it is apparent that technology and related services can be used for good and bad.” Still, “the rise of the online monopolists and the emergence of China as a technology superpower are the investment features of the last ten years” and the pace of change will continue. “The power of these monopolies continues to increase and it is extremely difficult to compete with them as they own the consumer relationship and are commoditising the supply chain.”

“I’m not sure if it would be bad for Amazon to be split into two,” says Anderson, “while regulation freezes the competitive environment, increasing the dominance of big companies. The danger is that they lose their dynamism thereby.” 

Not Amazon, however, where growth in the retail division decelerated to 10% in 2018, but reaccelerated to 20% in 2019 as better use of its database enabled it to offer free next-day delivery to prime customers. 

Amazon remains Scottish Mortgage’s largest holding at 8.8% of the £9bn portfolio. It has been held, like more than a quarter of the portfolio, for over a decade. The top-ten holdings account for half the portfolio, but 24 of 85 stocks have been owned for less than two years. 

Annual turnover is just 6%, but the team is not complacent. Baidu, the Chinese online search company, was sold because “it hasn’t managed to expand away from its core business”. Food-delivery group Grubhub has gone too. Anderson says that Baillie Gifford’s key competitive advantage is that “we build long-term relationships with companies and are not focused on short-term profits... Economic and scientific insights are [crucial] so we also build relationships with [academics]”. 

Finding new ideas 

Investing in unquoted companies “helps us understand emerging technologies before they come to market”. These 44 holdings account for 21% of the portfolio and are mostly small. Several holdings bought as unlisted are now quoted, notably Spotify and Lyft. You & Mr Jones is “the world’s first brandtech company”: an agency “that uses technology to create marketing better, faster and cheaper”. 

There are also several unlisted strategic investments. Zipline designs, builds and operates drones for delivering medical products. ByteDance, formed by ex-Baidu employees, is a Chinese technology company with 800 million daily users of a content platform including the video-sharing service TikTok. 

A strong end to 2019, helped by a doubling of Tesla’s share price, meant that Scottish Mortgage’s total return in 2019 was 25%, ahead of both the world index and its sector. And this year has started well. “The underlying trend of disruption to established businesses is likely to continue,” says Slater. With ongoing charges of just 0.37% per annum, Scottish Mortgage is the way to invest in the upside.