About Scottish Mortgage Investment Trust
Never have global equities been more accessible to retail investors than today. There’s more to the world of investing than the Nasdaq or the Silicon Valley Vatican. We frequently cover international stocks because there are some gems to be found out there flying under the radar. (For example, three of the five machine vision stocks found in our Guide to Investing in Computer Vision are German stocks.) Today, we’re going to talk about a very interesting investment trust brought to our attention by one of our U.K. subscribers – Scottish Mortgage Investment Trust (SMIT).
What’s in a Name
Names can be misleading. While the name Scottish Mortgage Investment Trust may conjure up images of a U.K. realty company in Canary Wharf, that couldn’t be further from the truth. In short, SMIT is an actively managed portfolio of public and privately held growth companies. The term “actively managed” means that they hold a concentrated portfolio of companies which they believe will outperform the broader market, something they’ve been doing since 1909.
Regular readers know our thoughts on active management. When 95% of finance professionals cannot beat the market, what exactly is their purpose? Why should you pay more fees for an actively managed portfolio in exchange for less returns? The first thing to note about SMIT is that you’re not paying more fees for active management. “We believe that it is our first duty to shareholders to limit fees,” says SMIT, whose fees were around 0.36% last year. (To put that number in perspective, the average fees for a passively managed ETF – one that simply tracks a benchmark – are around 0.44%.) In other words, we have an actively managed portfolio that charges less than your average passive ETF. That’s great, but can it generate returns that outperform the market?
SMIT’s Historical Performance
When evaluating the merits of any given investment you need to choose an appropriate benchmark and timeframe. In SMIT’s annual report, they talk about their compounded annual return over the past 5 and 10 years – +16.6% and +15.1% respectively. These numbers show consistency. In other words, if you invested $1,000 in SMIT in 2010, you’d have just over $4,000 today.
SMIT benchmarks their performance to the FTSE All-World Index (in sterling terms), and they’ve handily trounced that index over the past ten years, and the Nasdaq as well. Here’s a look at rolling 10-year performance for all three:
- Scottish Mortgage Investment Trust +520%
- Nasdaq +261%
- FTSE All-World Index +114%
As SMIT’s portfolio managers correctly point out, taking a backward look at past performance says very little about the future potential of an investment. Besides, you can always torture the data to make it say anything you want. What’s more important to understand is how a portfolio manager goes about making the decisions they do and what they’re charging you for that privilege.
Scottish Mortgage Investment Trust’s Assets
Scottish Mortgage Investment Trust has around $11.5 billion invested in companies that they believe will outperform over periods of five years or longer. (Since just over half our readers hail from ‘Murica, we’re going to be using greenbacks unless otherwise indicated.) Here’s a look at the top 30 holdings in SMIT that constitute just over 80% of their portfolio.
The first thing you might notice is that not all those companies are publicly traded companies. There are some really exciting names on that list like the world’s biggest fintech startup Ant Financial, nanobot factory Ginkgo Bioworks, and Illumina-backed Grail, all of which are not publicly traded. (Per SMIT’s investment policy, they won’t hold more than 25% of their assets in private companies, and that number is around 20% now.) In fact, there are a whole slew of startups that SMIT holds right now including names like Zipline, SpaceX, Palantir, Bolt Threads, Carbon, Convoy, and many others. They’re also quite selective. Over 2019, they considered several hundred private companies but invested in only seven.
They’re also in it for the long haul. In 2012, Alibaba (BABA) became the first private business Scottish Mortgage invested in directly. It became a public company in 2014. Scottish Mortgage still holds every single share in Alibaba that it bought in 2012 as well as many more besides and it has been a top ten holding for years now. (Fair disclosure: We’re long BABA and it’s currently our largest tech stock position.) For shareholders in any company SMIT holds, it might be useful to watch and see when their portfolio managers add to or trim a position, though they don’t do so very often. Today, eight of their top ten listed holdings have been held for more than five years and three have been held for more than ten.
The next thing you’ll notice is what a mixed bag of publicly traded companies make up SMIT’s portfolio, and how geographically diversified the whole thing is. It’s not just about tech stocks.
In SMIT’s latest annual report, there’s a section titled “Managers’ Core Beliefs.” It might be one of the most well-written three pages of collateral we’ve ever read that helps assure investors that their money is in safe hands.
Managers’ Core Beliefs
The first thing SMIT’s portfolio managers, James Anderson and Tom Slater, acknowledge is that most active managers suck at their jobs and try to justify their existence in a number of ways. In their words:
The tendency is to cite recent performance as evidence of skill despite the luck, randomness and mean-reverting characteristics of most such data. If this does not suffice then attention turns to a discussion of the high educational qualifications, hard work and exotic remuneration packages that the fund manager enjoys.Credit: Scottish Mortgage Investment Trust Annual Report
They then go on to site their core beliefs that drive investment decisions, some of which we’ve cherry-picked as follows.
- We are long term in our investment decisions. It is only over periods of at least five years that the competitive advantages and managerial excellence of companies become apparent.
- We are very dubious about the value of routine information. We have little confidence in quarterly earnings and none in the views of investment banks.
- We are global in stock selection, asset allocation and attribution. Holding sizes reflect the potential upside and its probability
- We are determined to own the most promising Growth companies in the world.
- (And our favorite which bears repeating.) We believe that it is our first duty to shareholders to limit fees.
SMIT makes strong active bets on growth companies because they believe “it is of little use to shareholders to tinker around the edges of indices.” In their words:
Academic work on the past ninety years of US data shows that over half of the excess return from equities came from just 90 companies. Investors enjoy little (if any) reward for taking the risk of owning the median stock in the market.Credit: Scottish Mortgage Investment Trust Annual Report
If you’re considering taking a position in SMIT, you should read these three pages in their entirety. Frankly, it’s really tough not to want to invest in this firm after reading them.
Another thing to like about SMIT is the level of detail that goes into their annual report. For example, take a look at how they’ve been investing in multiple rounds for Ginkgo Bioworks that have led to the accumulated position they have today on their books.
Interesting to see how the fair value of Ginkgo’s shares has more than tripled over the past year. There are probably many other insights you could glean from skimming through these annual reports, something that every investor in this company ought to be doing.
For anyone looking to pick up shares in SMIT, they’re trading on the LSA under the ticker SMT and as an American depository receipt (ADR) under the ticket STMZF. Shares are at an all-time high right now, so make sure to use dollar-cost averaging to reduce market timing risk.
We can’t think of any other investment vehicle out there that holds about the same value in Ginkgo Bioworks shares as it does NVIDIA shares. SMIT provides a unique investment vehicle that gives you global-sector-currency diversification while also providing exposure to some of the most exciting names in tech startups. By being an investor in Scottish Mortgage Investment Trust, you’ll hopefully achieve above-average returns, and you’ll definitely learn something while doing so.
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A quick check: current price: 717p. At the time of the article (mid 2020) it was 911p. NAV discount: -11.4%.
52 week range: 670.60p – 1,355.50p
1 Moderna 9.9%
2 ASML 6.8%
3 Tesla Inc 4.9%
4 Illumina 4.1%
5 Northvolt 3.6%
6 MercadoLibre 3.2%
7 Space Exploration Technologies 3.2%
So that list looks very different to what was shown at the time of the article ..
Would be nice to see more private companies in that top-ten list. Wonder how that ratio changed – public vs private.