For many small investors, putting money into the 113-year-old Scottish Mortgage Investment Trust, flagship of the illustrious Baillie Gifford fund empire, has been highly lucrative – until recently, that is.
But now the trust is at the most challenging moment of its long history after the departure of its manager, James Anderson, whose high-risk, high-reward strategy attracted a cult-like following.
Shares have tanked over the past 12 months and some very hard questions are being asked about the outlook for the £11billion trust. Tens of thousands of investors – of which I am one – have a stake in this fund.
End of an era: Former Scottish Mortgage Investment Trust manager James Anderson’s high-risk, high-reward strategy attracted a cult-like following
At issue are its choices of high-tech shares, along with Anderson’s behaviour and strategies.
The mastermind of its stock-picking approach, he ran the FTSE 100 trust for 20 years and was famed as the most adept spotter of super trends.
He has left to chair Kinnevik, a Swedish fund. His well-heralded exit three months ago should not have left Baillie Gifford in shock, even though his feats include recognising the potential of Jeff Bezos before Amazon became a household name, and buying Tesla when the shares were $6, against $889 before last week’s share split.
The renowned investment house is bigger than any one man and was not built around him as an individual.
But the culture of the Edinburgh-based organisation has come under scrutiny in an article carried by Bloomberg, the influential news and data service, which included an admission by Anderson that he could be ‘hot-tempered’.
The Economist, meanwhile, called the 63-year-old ‘an iconoclast’. Current and former staff said that they learned to stay silent rather than question Anderson’s decisions.
This less-than wholly flattering portrayal of the manager comes as a surprise to investors who chose Baillie Gifford for its collegiate approach.
The business’s private partnership structure appeared to offer access to the benefits of an array of talents and viewpoints.
One analyst I spoke to likened the atmosphere to a ‘cult’.
Ewan Markson-Brown, now with Crux Asset Management, but previously the manager of the Baillie Gifford Pacific fund, admitted last year that he only felt comfortable reducing that fund’s holdings in Chinese tech titans Alibaba and Tencent while working from home during lockdown, without the ‘indirect and direct pressure’ of the office. Scottish Mortgage also owns stakes in these groups.
Baillie Gifford’s funds together lost £100billion in value in the six months to June, according to Bloomberg.
Scottish Mortgage shares are down 36 per cent this year, a humiliating reverse for the trust, which is the UK’s largest, even though there has been a small recovery of late.
The decline, which has been caused by the slide in the shares of Alibaba, Tencent and other holdings, has caused consternation among its investors.
Despite the stolid name – which, doubtless, confused some – Scottish Mortgage was founded to fund Malaysian plantations.
The next generation: With shares down 35% this year, new managers Tom Slater (right) and Lawrence Burns (left) must act swiftly to restore trust
The business’s beating heart is in Silicon Valley and Shanghai, rather than Scotland.
Nor does the trust have anything to do with mortgages. It has taken big bets on Elon Musk, with large stakes in Tesla and Space X, Musk’s rockets group, which is one of the trust’s 51 unlisted holdings.
Other names include Tik Tok developer, Bytedance, which is based in Beijing, and flying taxi group Joby Aviation of Santa Cruz, California.
Unlisted companies are viewed as riskier as they can be harder to trade, though there can be spectacular returns on bets that pay off.
Moderna, the biotech titan, whose shares are down by 40 per cent this year to date, is the trust’s largest holding.
The success of its Covid vaccines has not been able to outweigh the wholesale shift in sentiment against ‘growth’ stocks.
Shares in these healthcare and technology companies, which boomed in the pandemic, were purchased in the hope of bumper future profits.
The tech-heavy strategy worked well when interest rates were low, which made investors more amenable to taking a risk in the hope of a decent return.
But at a time when the US Federal Reserve is bent on further interest rate rises, that has gone into reverse.
Shares in Netflix, Ocado, Spotify and Zoom – all constituents of the Scottish Mortgage portfolio – have suffered as rates have risen post-pandemic.
The deterioration in US-Chinese relations due to the war in Ukraine has not helped the trust, and nor has the Beijing policy of prolonged Covid lockdowns.
China’s crackdown on internet companies last year added to the woe and manager Tom Slater, writing in the trust’s annual report earlier this year, admitted in hindsight it had been a ‘mistake’ for him and Anderson to reduce their holdings in Western online platforms, such as Facebook-owner Meta and Google owner Alphabet, rather than China’s Alibaba, Meituan Dianping and Tencent.
In response to the changes in the economic and geopolitical climate, Scottish Mortgage has written down some of its unlisted holdings which make up 30 per cent of the trust. Some were slashed by 80 per cent, though the average cut was 23 per cent.
The transparency of this revaluation process, which investment bank JP Morgan describes as ‘robust, prudent and well thought-out’ should provide some solace to the trust’s investors.
But Slater and his deputy Lawrence Burns face a considerable task as they hope to persuade investors to stay on board in the post-Anderson era.
Some may be happy that the trust’s net asset value is still up by 600 per cent over ten years, ahead of its benchmark. But others will wonder if the glory days can return, and if so, when.
Controversially, there are no plans to change the strategy. Slater, who became a joint manager with Anderson in 2015, is a disciple of the belief that a small number of companies drive stock market returns. Burns, who joined in 2021, defends this credo.
He says: ‘Our role is to invest in change. We back entrepreneurs who are building the future of our economy and radical innovation always matters over the long term.’ He adds that more than half of the portfolio in percentage terms is still delivering positive earnings per share.
‘A decent proportion of the companies are still actually producing free cash flow – arguably the most important metric,’ he says.
Without naming names, he concedes that a section of the portfolio is ‘burning cash’, adding that some of these companies are unprofitable by choice.
‘They are choosing to invest and gain market share, and we would usually support that choice.’
He does not elaborate on the stance that will be taken towards those that fail to make progress.
Record low interest rates in 2020 and 2021 helped propel Scottish Mortgage to greatness, but Burns argues that the trust can still thrive in this year’s climate.
‘We recognise we may be entering into a very different macroeconomic environment with higher interest rates,’ he says.
‘Higher rates do matter for the valuations of stocks, but radical innovation will also still matter in driving returns.’
Such has been the collapse in Scottish Mortgage’s share price that some regard the trust as a bargain – the share price is at an 11 per cent discount to the value of net underlying assets.
But Burns discourages those looking for a quick gain. ‘We can offer no insight as to what the next few quarters will bring – and we would continue to discourage anyone from buying our shares that has a shorter than five-year horizon,’ he says.
During this period, Anderson’s moves will continue to be under close examination – the trust has a £56million investment in Kinnevik.
But so too will the long-term wisdom of the decisions he made when investing other people’s money.