Scottish Mortgage has posted its strongest ever return in a single year after certain portfolio companies were “supercharged” by the social, economic and business disruption due to Covid-19.
On Thursday the £18bn investment trust reported a 111.2% return on a net asset value basis and a 99% share price return for the 12 months to 31 March.
This compared with a 39.6% return for the FTSE All-World index and a 76.8% and 72.2% return for the IT Global sector on an NAV and share price basis, respectively.
Scottish Mortgage co-manager Tom Slater (pictured) said: “Lockdown restrictions over the past year have triggered a reappraisal of historical habits and rituals and many will be superseded. This creates opportunities for entrepreneurs; it changes supply chains and drives demand for new products and services.”
Addressing the pandemic, senior independent director Justin Dowley said: “Quite apart from the devastating human cost, it has also created enormous social, economic and business disruption. However, this has also been a period that has supercharged the prospects of several portfolio companies, faster than many might have expected.
“We could point to Illumina and Moderna who, between them, took only four days to sequence the virus and make a candidate vaccine; online platforms such as Amazon that provided goods to our doors; or Zoom, the video conferencing service that turned into a verb overnight.”
‘We would caution against elation after 12 months’
However, Slater warned against taking a short-term view, saying returns in any given year did not convey much information about the strength of the investment approach.
“Far longer periods are required to make such an assessment,” he said. “We would caution against elation after the past 12 months just as we would counsel against misery following unprofitable years.”
Over the five years to 31 March, Scottish Mortgage has returned 374.9% and 347.9% on a NAV and share price basis, respectively, compared with the FTSE All-World’s 98.5%.
On a 10-year view, the NAV return is 708% and the share price return is 756.1% compared with the benchmark’s 193.7%.
Small number of big winners
Slater said a small number of big winners have a dramatic impact on investment returns, pointing to Tesla which contributed 36.7% of the trust’s overall performance during the period.
“It is not an anomaly that Tesla has contributed so much to the portfolio this year,” he said. “It is a predictable consequence of the structure of stock market returns.”
Increased turnover
Portfolio turnover increased over the year in both monetary and number terms as Scottish Mortgage became owners of several new companies, a number of which play the electric vehicles theme.
The trust initiated a holding in Northvolt, a company led by a former Tesla engineer, which is aiming to become Europe’s largest supplier of batteries for electric vehicles.
It also invested in ChargePoint, one of the world’s largest electric vehicle charging networks, noting how parking spaces at home, in the workplace and in parking lots will provide energy and how software will play a critical role in managing this infrastructure.
Elsewhere, the team initiated a holding in Nuro which is developing ground-based autonomous vehicles for last mile delivery which should help to further reduce the cost of home delivery.
Moderna, which develops and produces RNA-based therapies, was also added to the portfolio. The biotech firm became a household name through the success of its RNA vaccine for Covid-19, but Slater said the technology’s potential is far wider.
Holdings in Facebook and Alphabet were dropped, while the holding in Amazon was reduced.
Slater said: “These companies generate prodigious cashflows and have grown at a remarkable rate. For us, the questions now are around how they deploy their resources in the future and retain their growth credentials at vast scale.
“We think Amazon still enjoys the broadest set of opportunities, but we are wary that Jeff Bezos stepping back from the CEO role may reduce the company’s appetite for bold experiments.”
James Anderson wants managers to ‘remain eccentric’
In March this year it was announced that the trust’s architect James Anderson would be retiring at the end of April next year after nearly 40 years with Baillie Gifford. Lawrence Burns has stepped up to become deputy manager and co-manager Slater will continue to run the trust following Anderson’s retirement.
Anderson urged the pair to “remain eccentric” when managing the portfolio. “In fact we need to become more so and more prepared to be radical,” he said.
Addressing shareholders, he added: “Please help Scottish Mortgage become more unreasonable and more distinctive as the pressures of the investment world continue to pull at us.”
