The largest fund in the global growth sector and the largest investment company (if you exclude 3i, which I wouldn’t, but it does try to insist it isn't a fund) is now Scottish Mortgage (SM), in market capitalisation terms at least.
Quite when it surpassed Alliance Trust (SM’s market cap is £2.6 billion versus Alliance Trust’s £2.5 billion) I am not sure, but it would have been fairly recently.
Scottish Mortgage got to this elevated position by dint of very good performance – over the past 12 months its asset value is up 24.2% versus an average of 9.2% for its global growth peers. The trust was also able to eliminate its discount; it is now trading close to asset value and issuing shares.
Scottish Mortgage is a remarkable success story in the global growth sector. Its long-term performance is superior to any of its peers with the single exception of Law Debenture (which has a significant UK bias in its portfolio and has therefore benefited recently from sterling strength).
It has not been smooth sailing however. The fund was caught out quite badly when the credit crunch hit: the share price fell by more than 60% from its peak. It held its nerve however, and the recovery was almost as dramatic as the fall.
The fund, managed at Baillie Gifford by James Anderson and Tom Slater, aims to outperform the FTSE All-World Index (in sterling terms) over a five-year period. Anderson has been managing the fund since 2000. He was Baillie Gifford’s chief investment officer but stood down from that role in 2011 to concentrate on fund management.
Last year he surprised many by taking a sabbatical over the second half of 2013. Unlike many managers who go off on sabbatical and decide not to return to fund management, however, Anderson was back at his desk in January.
For such a big fund, SM’s portfolio is quite punchy. At the end of February 2014, almost half the fund (47.9%) was invested in just 10 stocks. Below this though there are a further 60 holdings.
Holdings get to be large in the portfolio by outperforming. Anderson lets his winners run rather than trimming them but large holdings can sometimes catch you out.
The largest position is in Amazon. This was 7.9% of the fund in February but at the end of December it was 9.2%. On 30 January, Amazon announced fourth quarter 2013 revenues behind analyst’s forecasts and the stock price was hit.
Anderson made no mention of this in his subsequent monthly factsheets and does not seem to have been selling the stock, so presumably he sees this as a short-term blip.
I find this reticence a bit frustrating. The factsheets and accounts contain little real insight into the stocks in the portfolio and I find this a bit strange, given the main focus of the fund is on stock-picking.
Even though the fund’s focus is on the long term, a bit of comment on short-term market moves would go a long way to reassuring investors.
The portfolio is constructed without harping back to an index and there are some sizeable sector bets as well as stock-specific ones.
The biggest weighting is to technology and SM is currently riding the wave of enthusiasm for the sector. Apart from Amazon, the top 10 includes gene sequencing company Illumina; Chinese internet stocks Baidu and Tencent; Google; and Salesforce.com.
Off piste asset calls
SM’s asset allocation differs quite markedly from its peer group as well.
There are a number of global funds whose remit requires them to hold a substantial portion of their assets in the UK (like Law Debenture, mentioned above) but SM had just 11% invested in the UK at the end of February and a higher allocation to Asia (20%, most of which was in China) than almost all its peers as well.
The large exposure to China means SM’s overall emerging market exposure is quite high.
Other fund managers tilting their portfolios towards stocks likely to benefit from the growth of the emerging market economy have been struggling recently in the wake of slowing Chinese growth and falling commodity prices, so SM’s continued outperformance deserves to be commended. Clearly it has the right emerging markets exposure.
I have held SM for some time and I am a fairly happy to continue to do so, even while it is trading at asset value.
The concentration of the portfolio would put me off making it a core holding in my portfolio, but I would consider adding to it if we have a decent market correction.
James Carthew is a director at Marten & Co