Scottish Mortgage cuts Amazon and Facebook after strong performance

Scottish Mortgage (LON: SMT) is the country’s largest investment trust with almost £17bn of assets under management and it is also the most successful. Its concentrated portfolio of global companies with exceptional long-term growth prospects has generated a ten-year share price return of 800% with the latest six monthly accounts to the end of September revealing an increase in NAV of 76%.

In total there were 95 holdings at the latest reporting date, including 47 unlisted investments that accounted for 17% of the portfolio, yet the fund remains highly concentrated with just over half of the assets in the ten largest investments. These include the likes of Tesla, Amazon, Alibaba, Tencent and Illumina.

Managers James Anderson and Tom Slater of Baillie Gifford take a long-term approach and think in terms of decades rather than years. This has enabled them to identify and benefit from a number of key trends such as the increasing influence of technology and the shift in the geographic centre of the global economy towards China.

Some interesting changes

There were some interesting changes to the portfolio during the last few months with the fund making the first reduction in its Amazon stake that was not driven by diversification concerns. Its initial investment in the company was made in 2004, but a market cap of $1.5 trillion makes large future returns a lot more challenging.

SMT has been selling down its Facebook holding for some time and has now exited the position completely. The managers believe that it is becoming more important to invest in digital businesses of scale beyond the giant western platforms, which is why the fund has been shifting its focus to companies such as the global online furniture retailer Wayfair, the European online food delivery company Delivery Hero and its Chinese equivalent Meituan Dianping.

Electric car manufacturer Tesla remains the fund’s biggest holding at 12%, although it has had to cut its stake to maintain an appropriate level of diversification after some strong performance. During the six months to the end of September the shares were up an astonishing 293% in sterling terms with SMT raising £1.18bn from the reduction in its position.

The road ahead

A growing theme in the portfolio is the ‘end of carbon’ with the fund recently initiating a small position in Northvolt, which the managers believe will be critical to the creation of European battery manufacturing capacity. The company benefits from access to cheap hydroelectric power in Swedish Lapland that should give it a cost advantage as the industry grows.

Another interesting aspect is that the managers accept that many of the top growth companies are not available in the listed markets and are willing to gain exposure while they are still at the unlisted stage. At the end of September just over a third of the fund was invested in unlisted companies or those that were originally acquired before they floated and these have the potential to drive future returns.

Scottish Mortgage has a unique long-term approach that focuses on disruptive growth companies and has built up an outstanding track record. As long as the managers remain focused on the road ahead and willing to change direction when the circumstances demand it there is a reasonable chance that they can continue to deliver market beating returns.