The Scottish Mortgage Investment Trust has reduced its position in Amazon over fears the company’s ballooning market capitalisation “makes the path to large future returns more challenging”.
Managers James Anderson (pictured) and Tom Slater said it was the first time they had cut the holding for investment reasons rather than over diversification concerns.
Amazon’s stock price has increased 73% year to date, boosted by the boom in online shopping and services since the Covid-19 pandemic struck.
According to Scottish Mortgage’s latest interim report for the six months ended 30 September, the Jeff Bezos firm accounted for 7.9% of the trust portfolio. This is down from a 9.3% position at the end of March, according to the latest annual report.
Managers bid farewell to Facebook
The managers also offloaded the trust’s remaining holding in Facebook during the period after reducing the position over time. The social media platform accounted for just 0.5% of the portfolio at 31 March.
“In the period, we sold the remaining holding in Facebook and made the first reduction to our Amazon holding that was not driven by diversification concerns,” they said. “While we have huge respect for Amazon’s vision and ability to execute, its starting capitalisation of over $1.5trn makes the path to large future returns more challenging.”
Over five years, Scottish Mortgage’s net asset value (NAV) per share has increased by 340% versus a 96% increase in the FTSE All World index. Over 10 years it has increased by 674% against the benchmark’s 191%.
Since the end of March, the NAV rose by 76% compared with a 24% increase in the index.
Tesla remains trust’s top holding
The managers noted Tesla remains the largest holding despite selling more than 40% of their shares during the period, raising £1.18bn, in order to maintain an appropriate level of portfolio diversification. The electric car maker now accounts for 12% of the Scottish Mortgage portfolio, compared with 8.6% at the end of March.
In September, Anderson and Slater cut their stake in Tesla to less than 5% after the automaker’s soaring share price meant Baillie Gifford was at risk of breaching concentration guidelines.
The duo said the increase in Tesla’s stock price and its dramatic impact on the trust’s returns “should be seen in context”.
“While the company and its colourful founder attract an unusually high degree of attention, emotion and noise, the underlying return picture is far from an aberration. Returns are concentrated in a handful of big winners. With far less drama, this has been the case for our holdings in both Amazon and Tencent over the past decade.
“Tesla’s success has been earned over a period of ownership extending back to 2013 and, as with most successful investments, we have endured large drawdowns in its stock price on the way to the current position.”
They noted Tesla has successfully added capacity and production of its latest model has progressed far more smoothly than for any of its previous vehicles. In addition, they said demand is strong and the response from competitors remains muted.
“The era of electrification that Tesla is helping to materialise will take decades to arrive and have far-reaching consequences,” they added. “Technological progress is driving down costs along an exponential curve that the fossil fuel industry will be unable to match.”
Identifying digital winners beyond ‘giant western platforms’
The managers also flagged furniture retailer Wayfair and food delivery companies Meituan and Delivery Hero as examples of digital businesses outside of the “giant western platforms” that have benefited from the Covid pandemic and stand to do well looking ahead.
Wayfair has benefited from a surge in demand as people have spent more time at home and invested in upgrading their living environment, while Meituan has become the dominant food delivery company in China and Delivery Hero dominates many of the world’s most attractive growth markets, they said.
“The examples of Wayfair, Delivery Hero and Meituan serve to illustrate the growing number of opportunities we have to invest in digital businesses of scale beyond the giant western platforms. This becomes more important as our views on the platform companies are less differentiated than was once the case.”
See also: Investors take a wait-and-see approach to Scottish Mortgage after shares tumble
