A total of $32trn of stockmarket value accumulated in America between 1926 and 2015. But just 1,000 out of 26,000 listed companies accounted for all of the gains, according to recent academic research from Arizona State University. Eighty-six stocks accounted for half the gains and 196 for another 25%.
The lesson that Baillie Gifford derives from this is that the key to investment success is identifying and investing in a small number of big long-term winners. Plausible candidates tend to be expensive and appear risky; many soar high on misguided hopes only to fall precipitously. Investors, fearing a collapse, tend to take profits on shares that multiply in value only to see them multiply again.
The Baillie Gifford solution is to think long term, to put more emphasis on the size of the opportunity rather than the price and to resist the temptation to take profits. Its flagship for this approach is the £6bn Scottish Mortgage Trust, which has returned 220% in the last five years, 120% ahead of the MSCI World Index while charging a fee (0.28%) that few active managers would get out of bed for.
This performance is making some investors queasy, relying as it does on the continuing success of global technology titans such as Amazon, Tesla and Facebook. Unlisted investments account for 12% of the portfolio, a proportion that could rise to a maximum 25%. Those who like the Baillie Gifford style but seek a less volatile approach should take a look at Scottish Mortgage’s sister trust, the Monks Investment Trust (LSE: MNKS), co-managed since 2015 by Spencer Adair.
Monks has kept pace with the MSCI World index over five years, but is significantly ahead over one year and since Adair took over, showing that he has revved up the returns. While Scottish Mortgage has invested exclusively in out-and-out growth stocks, these account for only 40% of Monks’ portfolio. A quarter is invested in “growth stalwarts” such as Prudential and Visa, with around 10% annualised growth. Another quarter is in “cyclical growth” companies such as Royal Caribbean Cruises and Irish builder CRH, and 15% in “latent growth” companies such as Samsung.
The portfolio overlap with the MSCI index is just 8%, and with Scottish Mortgage only 20%, but Adair’s views are as robust as his colleagues’. “I am optimistic about the long-term future in a world where it is all too easy to be gloomy,” he says. “After seven years of rising markets, I would expect a lot more mergers, acquisitions and risk-taking than we are seeing. This does not indicate a peak any time soon.” He points out that a 90-year chart measured on a log scale (a way of representing data which can be useful when trying to show a large range of values) does not show the S&P 500 being significantly above its long-term trend.
Adair’s harshest criticism is directed towards companies that plough cash flow into dividends and buy-backs rather than capital investment. “The ratio of growth capital expenditure to dividends and buy-backs has fallen from 2.5 to 0.6 since 1989. This is madness,” he says, adding a quote from Facebook’s Mark Zuckerberg: “The only strategy that is guaranteed to fail is not taking risks.”
Failing to take risks is not an accusation that can be levelled against Baillie Gifford; nor is short-termism, following the herd or over-charging. Scottish Mortgage has led the way, but now it has a worthy competitor under the same roof in Monks.
The London Stock Exchange group and its chairman Donald Brydon seem to be “writing a case study in how not to deal with an activist”, says Paul J Davies in The Wall Street Journal. Chris Hohn’s The Children’s Investment Fund has been pushing for an explanation of why the LSE’s chief executive Xavier Rolet is leaving the company; it is convinced Rolet has been dismissed against his will and is bound by confidentiality agreements.
But the LSE has merely responded with “terse statements on process”. Hohn, whose fund owns 5% of the group, has called for an extraordinary shareholder meeting to vote on removing Brydon instead. The LSE’s board is lining up its finance director as an interim head, reports the FT.
In the news this week…
• Norway’s trillion-dollar sovereign wealth fund wants to sell its oil and gas holdings to make it “less vulnerable to a permanent drop in oil and gas prices”. This is “faintly amusing”, says Jeremy Warner in The Daily Telegraph, given that the fund is “entirely founded on the windfall of North Sea oil and gas”. Norway’s central bank, which runs the wealth fund, insists that the proposed divestment doesn’t reflect its view on the outlook for oil and gas prices or the sustainability of the sector.
However, the world’s biggest equities holder is sending a signal: petroleum companies “need to prepare for a low-carbon future”, warns Breakingviews.com.
If parliament approves the proposal, the fund would sell $37bn of oil and gas stocks, but a vote is unlikely before 2019.
• A Paris-based asset manager has launched Europe’s first bitcoin unit-trust fund, reports the Financial Times. The unregulated Tobam fund is “the latest evidence that cryptocurrencies are pushing deeper into the mainstream”, in order to court institutional investors.
The fund is not traded on an exchange, but it does have daily liquidity based on market closing prices. It would be “disappointing” if the bitcoin fund doesn’t grow to a size of more than $400m in the next two to three years, says founder Yves Choueifaty. “We have had a lot of interest from an intellectual point of view.”