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Investment Trust

Scottish Mortgage Investment Trust

Elite Rated by FundCalibre

Oddly enough, this trust has no particular focus on Scottish investments and nothing to do with mortgages. Its name stems from its long history, which dates back to 1909. These days, the trust invests in about 70 diverse companies from around the world, which are united by their strong growth prospects. The managers have a patient buy-and-hold approach and aim to maximise total returns—i.e. both income and capital growth—for shareholders over the long term.

Investment Manager

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Baillie Gifford is the investment company employed to manage this trust. Founded in 1908 and employee-owned, the firm is based in Edinburgh but also has offices in London, New York and Hong Kong. It has a partnership structure, which has enabled it to retain key people, leading to an excellent record of corporate stability that has contributed to strong investment results.

The trust is co-managed by James Anderson and Tom Slater. James joined Baillie Gifford in 1983 and began managing this fund in 2000. He has a Bachelor of Arts in Modern History and a Master of Arts in International Affairs from Oxford University. Tom spent five years as deputy manager of the fund before becoming co-lead in January 2015, the same year he was appointed head of the North American equities team. Both James and Tom are partners at the firm.

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We want our shareholders to benefit from the transformational growth opportunities that abound in this era of accelerating change.

Tom Slater - Trust Manager

Investment Trust Board

The board comprises six members and is headed by John Scott as chairperson. John is a former international investment banker and was an executive director at Lazard Brothers & Co for more than 20 years. He is currently also chairperson of Impax Environmental Markets and Alpha Insurance Analysts. The remaining board members are Professor John Kay, Justin Dowley, Professor Patrick Maxwell, Fiona McBain and Dr. Paola Subacchi. Between them, they have a variety of backgrounds in business and financial services, bringing a pool of expert knowledge to the board. They meet six times a year and the company has a year end of 31 March.

The Investment Process

James and Tom look for companies that are disrupters in their own industry, with sustainable business models in excess of five years. They ignore established franchises. These characteristics tend to mean they have a high allocation to technology firms and the US stock market, although they may invest in any sectors, anywhere. James and Tom have a different investment process to the traditional methods of identifying undervalued stocks. They don’t care about valuations at the time of purchase, but rather consider a stock’s long-term prospects relative to its price. The trust may hold some companies that are not listed on a public stock market if the managers see a strong growth opportunity, although this will always be a smaller portion of the portfolio.

Risk

At roughly 70 holdings, this is quite a concentrated portfolio, considering the number of stocks available globally. As noted above, James and Tom also holds some stocks that are not publicly listed. While these can be an excellent source of returns, there are also businesses among this band that do not succeed. Both of these factors can increase risk levels. Additionally, the managers have quite a high maximum allowable gearing, which may make the trust’s performance more volatile, particularly in difficult market conditions.

Gearing

The board are committed to the strategic use of gearing, as they believe it is in the long-term interests of shareholders. As a result, they will allow gearing to drift up to 50% in exceptional circumstances, although it is normally capped at around 30%. They are also mindful that any long-term increase in the total exposure to unquoted companies may require an appropriate reduction in gearing. In the last ten years (to 31 March 2016), the gearing has been in the range of 12% to 26%, with the latest audited figure standing at 13%.

Share price discount/premium

The board would like to see the share price trade around net asset value (NAV), but they do not have any discount control mechanism in place. Owing to the nature of the investments, the trust does tend to trade at a discount to NAV. The discount range in the ten years to end March 2016 has been as low as -0.5% (which was the audited figure for year ending 31 March 2016) and as high as -14.4% in 2010.

Our Opinion

Owing to its relatively punchy positions, its holdings in unlisted companies and a gearing that can go up to 50% of the value of the investments, this trust is not for the faint hearted. However, for investors that do want exposure to higher growth prospects globally, this trust is a very well-managed option that is truly focused on funding tomorrow’s winners.

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