Scottish Mortgage’s recent underperformance during the market sell-off is a warning sign for investors not to get caught up in fund performance league tables, particularly following a long stretch where growth has been in favour.
The share price on the £7bn Baillie Gifford investment trust has grown 453% over the past 10 years but it was one of the worst performing investment trusts during the market sell-off in early October. Shares fell 23% from their peak of 568p on 3 September to an intra-day low of 454p on 11 October, Stifel analysts Iain Scouller and Anthony Stern said in a research note published on Friday.
The last six weeks have been a good example of how volatile the investment trust can be and it is important for investors to be aware of this given strong recent performance, the pair said. A leveraged and concentrated portfolio of growth companies had contributed to volatility alongside its 20-25% allocation to Chinese companies, they added.
“We think there is a danger that some investors are too focused on league tables showing the best performer in a sector, without fully understanding how the returns are generated and the share price volatility that may arise.”
Scottish Mortgage is consistently among the top-three performers by share price in the Global investment trusts sector over one, five and 10-year periods.
Over the last decade, its total return of 730.4% was beaten only by the Lindsell Train Investment Trust, which delivered 944.8%, according to the Association of Investment Companies.
Dangerous time for fund league tables
James Anderson’s investment trust is likely to face volatility when growth and tech stock valuations are stretched or there is a rotation towards other areas of the market, as seen in the early part of the month, the Stifel note said.
Amazon accounts for 11.6% of the Scottish Mortgage portfolio, while Alibaba, Tencent, Tesla, Baidu and Netflix are also in the top 10.
“Buying based on performance tables is never a good idea, but it’s particularly dangerous when you’ve had the same style of investing persisting for such a long period of time,” said AJ Bell head of active portfolios Ryan Hughes in reference to the extended outperformance of growth stocks.
“The level of performance we’ve seen over the last few years cannot continue indefinitely, therefore it’s important to ensure your portfolio is diversified. It may be time to look at some heavily out of favour value stocks or to look at some defensive positions just to lock in some of those gains.”
The Bankers Investment Trust, run by Janus Henderson manager Alex Crooke, is a well-diversified global trust that is likely to outperform during a market correction due to its equity income focus, he said. Its total returns of 268.4% over a 10-year period are significantly below Lindsell Train and Scottish Mortgage investment trusts but it held up better during the October volatility.
Global investment trust performance during October sell-off
| Investment trust | Performance |
| Scottish Mortgage Investment Trust | -17.32 |
| Lindsell Train Investment Trust | -11.51 |
| The Bankers Investment Trust | -8.74 |
| IT Global sector | -8.55 |
Source: FE Analytics/from 1-11 October 2018
Baillie Gifford director of retail marketing & distribution James Budden said the asset manager tells investors they should only invest in the trust if they’re willing to align themselves with its five-year plus timeframe. “However, it is inevitable that some people will buy shares on the basis of shorter term performance figures without considering the trust’s clearly stated philosophy,” Budden said.
FTSE 100 listing exaggerates volatility
Scottish Mortgage could snap back even further than any pull back in growth stocks due to its premium to net asset value, says Willis Owen investment director Adrian Lowcock. The investment trust’s net asset value has grown 383% over 10 years, significantly stronger than the 186% from the FTSE All World index, but well below the share price move of 453%.
“If growth stocks all de-rate much more aggressively than we saw a couple of weeks ago, you would expect Scottish Mortgage’s share price to retreat rapidly as well. It may be overexaggerated because the Scottish Mortgage share price is stretched beyond its underlying assets,” Lowcock said.
Scottish Mortgage is also one of the only investment trusts in the FTSE 100 and is therefore vulnerable to index basket trades, the Stifel analysts said.
While Anderson has managed the trust since 2000, Stifel noted in 2016 shareholders voted to increase the limit on unquoted companies to 25% and the strategy had not been tested in different market conditions. “Investors who think that the long bull-run in growth stocks is over and expect the recent market rotation away from tech and growth to continue, should take profits. On the other hand, those who want a high conviction approach should hold-on,” the analysts said.
