There can be a tendency for larger funds to be a bit staid and boring, but that is certainly not the case with the £7.5bn Scottish Mortgage Investment Trust (LON: SMT), which has recently released its annual report. In the year to the 31st March 2018, it achieved an impressive NAV total return of 25%, compared to just 3% from its FTSE All World benchmark. Over the last 10 years, its NAV is up by more than 300%.
Scottish Mortgage invests in growth companies with the potential to disrupt well-established industries and change the way we do things. These sorts of businesses have the ability to generate huge returns and outperform the rest of the stock market.
The fund has benefitted from its technology holdings and has almost become synonymous with the FANG stocks – Facebook, Amazon, Netflix, and Google (Alphabet) – that have dominated the US stock market, whereas in reality it is much more actively managed than this would suggest.
There are very few companies that meet the managers’ stringent selection criteria, which explains why the 10 largest holdings at the end of March accounted for just over half of the assets. These included the likes of Amazon, Tencent, Alibaba, Illumina, Tesla, Baidu and Ferrari. It is also worth noting the 15.1% weighting in unlisted stocks.
SMT’s largest holding, Amazon, has a massive opportunity to move into the clothing and grocery markets in those regions where it already has a dominant presence, and is growing strongly in other countries like India.
James Anderson and Tom Slater, the fund managers, are positive on the prospects for China and expect its GDP per capita to exceed that of the US in their lifetime. Just over a fifth of the fund is invested in the country, with key holdings including Alibaba – which they see as the distribution chain for Chinese manufacturing, brand development and financial services – and Tencent – which is a global leader in mobile internet services.
Opinion is much more divided about the electric car manufacturer Tesla, which has been shorted by funds like the Jupiter Absolute Return Fund. Anderson and Slater take the opposite view and argue that the opportunity in electric vehicles is large and uncontested, with established car manufacturers having been unable to produce a serious competitor to the company. They acknowledge the production concerns, but don’t think that this will endanger the fierce brand loyalty that the business has built up.
One of its most interesting holdings outside of the tech sector is the gene sequencing company Illumina. The fund managers believe that there are no meaningful competitors that can match its pricing and that the adoption of this kind of stratified treatment is only just beginning.
These types of growth companies have generated fantastic returns for Scottish Mortgage and dominated the wider stock market, but the risk is that they could bear the brunt of any correction. It really all depends on how much faith you have in the ability of stocks like Amazon and Tesla to overcome the older, more established businesses that are standing in their way.