Monday, 14 May 2018

Scottish Mortgage - Full Year Results

Scottish Mortgage is an actively managed, low cost investment trust, investing in a high conviction, global portfolio of companies. The managers aim to achieve a greater return than the FTSE All World Index (in sterling terms) over a five year rolling period.

This investment trust was added to my SIPP portfolio at the start of 2017 at the initial purchase at 338p. A year later, following a little turbulence in the share price, I added SMT to my ISA portfolio at 415p. The share price has advanced to currently 505p.


The trust has today issued results for the full year to end March 2018 (link via Investegate). Share price total return for the past year is up 21.6% compared to just 2.9% for the benchmark FTSE All-World index.    

Scottish Mortgage has increased total net assets to more than £6bn making it one of the UK's largest investment trusts. In 2017 it was promoted to become the only investment trust to be listed in the FTSE 100.

The managers, James Anderson and Tom Slater run a conviction portfolio of around 70 to 80 shares. The result is a portfolio dominated by big holdings in some of the companies involved in the world of social media, the internet, healthcare, eco-friendly energy and gene therapy.

The top ten holdings account for 53% of the portfolio and include Amazon 9.9%, Tencent 7.5%, Baidu 4.0% (China's equivalent of Google), Alibaba 7.5%,  Tesla Motors 4.9% and Illumina 6.5%. Some 10% of the portfolio is invested in unquoted companies - Dropbox, peer-to-peer lender Funding Circle and airbnb to name three I am familiar with.


Slater is convinced that Amazon, its single biggest position in the portfolio, remains an ‘absolutely massive’ opportunity despite a five-year share price rise of  370%. He points out that the $100 bn retail sales it generated in the US last year was under 2% of the market and less than a third of retailing colossus Wal-Mart. Yet it was catching up with huge investment in deliveries leaving its traditional rivals in the dust.

Slater highlighted four areas where Amazon had demonstrated its huge growth potential in 2017: US fashion, food, India and web services.

In fashion the e-commerce giant forced Nike to cut a deal and start selling its trainers and clothes through Amazon, wiping $1 bn off the shares of sports retailers when the tie-up was announced in June. That was nothing to the $20 bn knocked off grocery stocks with Amazon’s unexpected acquisition of Whole Foods in the same month.

In India, Amazon had showed it had learned from its difficult experience in China and quickly established market leadership, much to the discomfort of its local rival, Flipkart, one of the smaller unlisted positions that Scottish Mortgage has established in the past three years.

Meanwhile, the potential scale of Amazon Web Services was growing all the time as companies moved their computing operations to the Cloud. ‘This is more of a winner-takes-all market than we previously assumed’ said Slater.

One of the questions investment legend and hedge fund manager Seth Klarman would ask of any fund manager is 'did you hold your nerve during the market turmoil of 2008/09'?

 Although the trust suffered heavy falls during these dark months, Anderson says that enduring this period was key to all the success of the next decade. Apple was purchased on just 3x earnings and they held on to Amazon at the price of $40...currently $1,600...that's a 40 fold increase in just under a decade! The manager says there is nothing he is more proud of in his entire career


Some 22% of the trust's portfolio are allocated to China. China's economy is growing at a rapid pace as it becomes increasingly consumer-led. It is now the second largest economy in the world behind USA and has been the largest contributor to global growth since the meltdown of 2008. Annual growth is averaging 7% each year and over just the past 10 years, real terms household income has increased by 120% and more and more of the huge population of 1.3bn continue spending (and also saving).

Tencent, the Chinese internet giant behind the WeChat messaging app (over 1bn users), has surpassed Facebook in value after it became the first company in China to be worth more than $500bn.
In addition it is a major shareholder in the US social media group Snap.
It has now become the world's fifth-most valuable listed company, disrupting the hegemony of the US tech giants.

Tencent is little known as a consumer name in the West but its WeChat app dominates in China, where Facebook, Twitter and Google are banned.

Baidu is China's leading search engine and has recently started selling 'smart home' products similar to Amazon's Echo/Alexa as well as a personal robot marketed as 'Raven'. They are also looking at more ambitious technology such as driverless cars..

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.

Many of the companies held in the trust's portfolio are disrupting the traditional ways of doing business. They create new markets or impact significant changes on old markets in a wide range of industries such as auto, health, advertising, retail and manufacturing which are transformed by advances in the technological revolution.

Over the past ten years, the trust has delivered a return of 334%. Although this is essentially a global growth trust, it is worth noting it has increased its dividend every year for the past 34 years. Income from the underlying holdings no longer covers the dividend so the board have agreed to provide the difference from capital to continue the progressive pay out. The increase this year will be 2% making a total of 3.07p. However, due to the significant share price appreciation, the current yield is 0.7%.

Further, the ongoing charges have been reduced and have fallen from 0.44% to 0.37% which makes it one of the most competitive trusts on offer.

Obviously I am pleased with progress since my purchases - 50% SIPP and 22% ISA.... I am just sorry I did not purchase earlier. This actively managed investment is one of the satellites which complement my core passive index holdings comprising mainly Vanguard Lifestrategy 60 & 40.

I have also recently started an investment savings plan for my grandchildren using this trust via Baillie Gifford. The opening lump sum has gained 15% in the past month so we are off to a good start.

For now the current holdings can return to the bottom drawer.

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. "I am just sorry I did not purchase earlier."

    I made my first purchase of SMT back in 2015 when the price was around the £2.50 mark. However, as I was only just dipping my toe in investment trusts, it wasn't a large investment and then I got caught up in ITs which paid higher yields and SMT, whilst remaining on my list to top up, was never at the top (until again, recently!).

    I read today that SMT are preparing to increase their gearing, which is interesting and could lead to bigger boosts.

    1. Yes weenie, I noted the comment on gearing and hope it will boost returns for the coming year but it can also accelerate losses so is a double-edged sword.

      From memory, SMT was on my radar from around 2014 and I set an alert for a fall in the SP below 200p but it was never triggered. I eventually decided to bite the bullet at the start of 2017...better late than never I suppose.

      I added it to my ISA earlier this year when the price fell around 6% in a single day and will now drip-feed the monthly amounts into the savings plan and await the next big pull-back.