Friday, 20 January 2017

Scottish Mortgage Trust - New Portfolio Purchase

SMT has been on my watch list as a possible purchase for quite a while as I have waited for a pull-back in the share price and a suitable entry point. However my wait has been in vain so despite the share price rise in recent months mainly as a result in the fall in the pound, I have decided to take the plunge - my initial purchase price is 338p.

The trust is an actively managed, low cost investment trust, investing in a fairly concentrated global portfolio. As at 31 December 2016, Scottish Mortgage had total net assets of more than £4bn, making it one of the UK's largest investment trusts.

The managers, James Anderson and Tom Slater run a conviction portfolio of around 70 shares. The result is a portfolio dominated by big holdings in some of the companies involved in the new world of social media, the internet, healthcare, eco-friendly energy and gene therapy.

The top ten holdings account for 48% of the portfolio and include Amazon 10%, Baidu 5% (China's equivalent of Google), Alibaba 5%, Facebook 5%, Tesla Motors 5% and Alphabet (Google) 4%. Some 10% of the portfolio is invested in unquoted companies - Dropbox and airbnb to name a couple I am familiar with.

Largest holding Amazon has become a giant in global retail. Over just 10 years it has grown 20-fold from a market cap of  $18bn to currently £375bn.

Some of the largest holdings in the portfolio have recently released strong operational results, showing a re-acceleration of their growth rates. These include Alphabet, Facebook, Amazon, Alibaba, Baidu and Tencent. The long standing common elements contributing to their success include: strong corporate cultures, driven by their founder/managers; a focus on providing what their customers either want or need; and a willingness to invest for the long term to enable them to adapt to, and increasingly to anticipate, their customers' evolving demands.

These network businesses now seem to have reached a critical tipping point, whereby their sheer dominance and scale become a reinforcing competitive advantage. This stems from the developments within machine learning and artificial intelligence (AI). The increased level of global connectivity, through the combination of the relatively new infrastructure of the mobile internet, social media and smart devices, has produced an explosion in the proliferation of data. The volume of this is now so great that no human could hope to curate the content. It will require machine learning and AI to process it. The leaders in these fields need access to the best data sets, produced by the largest networks. It is no accident that Baidu, Alphabet, and Facebook are leaders in this area.

Scottish Mortgage offers a clear, consistent and simple proposition: a portfolio of long term investments in what the Managers believe to be the best growth businesses, operating in any industry and anywhere around the world.

Over the past ten years, the trust has delivered a return of 286%  (second only to Linsell Train). Although this is essentially a global growth trust, it is worth noting it has increased its dividend every year for the past 32 years. However, due to the share price appreciation, the current yield is 0.9% (about the same as an average savings account!).

3 Yr Chart -v- FTSE All Share Index
(click to enlarge)
I am hoping that, amidst all the gloom and worry surrounding Brexit and the fall in value of sterling and also the controversy surrounding the election of Donald Trump, this is still a good time to be a long term global growth stock picker.  For me, SMT will form a small percentage of my portfolio as I consider it as a higher risk global equity option but I share the managers’ long-term perspective on the sort of companies which are shaping the future. It should complement some of my other more cautious trusts as part of a wider, diverse portfolio.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!


  1. Hi John

    This purchase seems a bit at odds with your simplified low expense passive LifeStrategy approach that you've been migrating towards in recent years. Have you had a change of heart with that direction or is this a one off?


    1. RIT,

      Yes, you are right to highlight the apparent inconsistency however it is not a change of direction and, as you suggest, nearer to a one-off.

      Last year I posted an outline of my strategy plan and I think the purchase falls within the strategy -:

      ongoing charges of 0.45% so low cost
      managers have a good track record returning an average of 14% p.a. over the past 10 yrs
      globally diverse portfolio
      etc. etc.

      I really would have liked to have this on board some 3/4 yrs back when it was added to my watchlist - from memory the price was 200p - but I was possibly waiting for a lower price and better yield!

      No regrets and having dipped a toe in the water with this one I plan to top up along the way should there be a significant pull-back.

      The VLS however remains by far the largest holding in my portfolio!

    2. Thanks for the clarification.

      As always I wish you much success with the purchase.

    3. Hi DIY,

      I use IT's as a bit of diversification in one of my portfolios - one of the biggest holdings being SMT. I've never bothered timing it, but just bought in when I had the cash, reinvesting the dividends.

      I've held now for nearly 2 years now and am up about 20% on book cost (including the cost of reinvesting the dividends), but I think its one to be patient with - my reason for buying was fire and forget for at least 10 years!

    4. Nice going FiL and agree this is one to tuck away for the long term and expect quite a bit of volatility along the way.

      However, that may throw up some good opportunities to top up in the future at a better price.

      I will have a better overview following the final results later in the year.

  2. Hi DIY
    I have a small holding in SMT and am planning to add to it later in the year. As you and FiL say, it's one to buy ant tuck away for the long term.

    1. Yes weenie, looking at your portfolio update recently reminded me to have another look at this IT - I suspect you are well ahead on cost of purchase by now.

      I think it could do well given the cutting edge nature of many of the holdings but be prepared for some ups and downs along the way!