Packing a punch in the long term

The Scottish Mortgage Investment Trust has seen good returns in the last decade and the fund’s manager plans to continue this performance with a bullish, long-term view on global growth.

As the retail distribution review (RDR) draws nearer it is the large global growth investment trusts which have been picked out by most pundits as those most likely to see a rise in demand. At £2.2 billion in assets, the Scottish Mortgage Investment Trust, is one such fund most predict will benefit.

Launched in 1909, Scottish Mortgage – or the Straits Mortgage and Trust Company as it was then – was Baillie Gifford’s first investment trust client. Some 100 years on James Budden, a marketing director at Baillie Gifford, says the fund is now the group’s flagship retail offering.

Managed by James Anderson, Budden says the fund has almost doubled its assets in the last decade, and has flipped its shareholder base from being 70% institutional/30% retail, to 70% retail/30% institutional.

Having taken over the fund in April 2000, Anderson turned the portfolio into a pure global growth play. He removed previous benchmark constraints, with his focus instead being on about 80 high-quality worldwide companies, with a long-term view. (Investment trusts continues below)

“Scottish Mortgage’s strength is its weakness,” says Budden. “Owing to the manager’s long-term view, the fund will not just bobble along, there will be ups and downs. If you want to invest on a two-three year horizon, this is not the fund for you.”

James Brown, an analyst at Winterflood Investment Trusts, concurs. He notes that Anderson is much more bullish than other managers in the global growth sector.

“He has a clear vision of where the world is headed based on his long-term perspective,” Brown says. “The key is that the fund will be a higher beta, more volatile play as a result of its growth bias, meaning there will be periods of underperformance.”

Indeed, Brown adds that Anderson’s active use of gearing makes the fund even more “punchy”, but adds in the long-term this should serve investors well.

”I believe it true that if we can’t make money doing it in five-year periods then its going to be our fault”

One area in which Anderson is a particular long-term bull is China. He takes umbrage with those who “lump” it with other emerging markets and says “there is a complete scam involved in US hedge funds trying to persuade people that China is on the verge of a housing disaster in the same way as their own country”.

Budden says the portfolio is different to its peers. For example, the fund’s second largest holding, as at January 31, was in the Chinese web services company Baidu.

“I do believe absolutely that the fundamentals of what we think about the world are holding up very well and I believe it true that if we can’t make money doing it in five-year periods then its going to be our fault, rather than because there isn’t much exciting in the world,” Anderson says.

According to Morningstar, over the past five years, to February 17, the fund generated a return of 39.6%, mid-mid, versus the AIC Global Growth sector average return of 14.7%. This ranks it third out of 27 offerings in the peer group.