A volatile month at Scottish Mortgage Investment Trust

October was a tough month for shareholders in the country’s largest investment trust, Scottish Mortgage (LON: SMT), with the technology-led sell-off driving the share price down by around 15% at one stage, but it is a unique fund with an impressive long-term record.

In the interim results for the 6 months to the end of September, the NAV rose by 19%, which was well ahead of the 14.9% increase in the MSCI World index, thanks to significant contributions from the likes of Amazon and Netflix. Things have been a lot more difficult since then, with the NAV down by 9.3% during October, compared to a 6% fall in the benchmark.

A unique long-term investment strategy

SMT has a unique long-term investment strategy that focuses on disruptive growth companies − both quoted and unquoted − with no regard to market indices. Over the last 5 years is has generated NAV growth of 19.5% per annum, whereas its global equity peer group has only managed 12% pa and the MSCI World Index just 10.9% pa.

At the end of September, the £7.7bn fund held 80 different holdings, including 37 unlisted investments that accounted for 15% of the total assets. Despite this it remains heavily concentrated, with the 10 largest positions representing 51% of the value in names such as: Amazon, gene sequencer Illumina, online platform Alibaba, internet service portal Tencent, electric car maker Tesla, and internet search engine Baidu.

Most of the largest weightings have been held for more than 5 years as the managers take a long-term approach, with low portfolio turnover of just 13%. One of the most significant changes during the 6 months to the end of September was the reduction in the investment in Facebook, where the holding was cut from 4.8% to 1.2%. The biggest new purchase was Ant International, Alibaba’s online financial services platform, and there were also major additions to the music streaming company Spotify and the online food delivery business Delivery Hero.

Good at identifying unquoted investments

James Anderson and Tom Slater, the managers from Baillie Gifford, have been very good at identifying unquoted investments that have gone on to have successful IPOs. The best of the lot has been Alibaba – which returned over 270% in the 2 years or so between the fund’s private investment and the subsequent listing, and it is up a further 200% since then. Spotify has also been really profitable and is closing in on a gain of 300%.

Normally this sort of strong long-term performance record would have pushed the shares onto a large premium, but the board actively seeks to maintain the share price “within a reasonable range around the underlying NAV” by issuing new shares and undertaking share buybacks whenever required.

There is no doubt that the last few weeks have been tough for Scottish Mortgage shareholders and there could well be more volatility to come, but if you are comfortable with the large potential price movements and are looking for long-term capital growth you might want to consider drip feeding some money in on a regular monthly basis.