THE TEAM behind Baillie Gifford’s £8 billion Scottish Mortgage Investment Trust has revealed the contribution unquoted companies have made to its long-term performance after reporting that the portfolio outflanked its benchmark index by almost eight percentage points in the six months to the end of September.
Over the half-year period the trust made a net asset value total return of 19 per cent against growth of 11.3% in the FTSE All-World Index.
Noting that managers James Anderson and Tom Slater caution against taking a short-term view of investment performance, trust chairman Fiona McBain said that in the longer period between June 2010 and September this year the trust’s unquoted investments had collectively returned 419%. The portfolio as a whole made a total return of 344% and the index returned 163% over the same period.
Ms McBain said that Chinese e-commerce giant Alibaba, which listed on the New York Stock Exchange in 2014, was the biggest contributor overall, growing by over 1,000% since the trust first invested in it in 2012.
While noting that taking positions in early-stage businesses has been a good source of returns for Scottish Mortgage, Ms McBain said that from the point of view of Mr Anderson and Mr Slater being able to develop relationships with the managers of these companies is of added benefit if they do go on to list.
Looking at music-streaming business Spotify, which went public earlier this year, Ms McBain said that forming a relationship with founder Daniel Ek in the years prior to the flotation “may be at least as important to generating long-term returns for Scottish Mortgage shareholders from here”.
“The managers have frequently commented on the benefits of being able to develop relationships in this way with those at the companies which are driving significant changes in their industries,” she said.
“For private companies, such insights are not available to purely public equity investors, yet, for example, understanding the business model and growth of Airbnb is crucial to thinking about the future of the hotel and broader travel industry, as well as that particular company.
“Hearing the thoughts of Jack Ma at Alibaba, both before and after the IPO in 2014, has been critical to understanding the development of the consumption economy within China.”
That said, Ms McBain noted that to date the returns the trust has made from unlisted investments have been “unduly good” and that over the long term “only a handful will really drive the returns”.
In addition, not all unlisted businesses will end up floating, with takeovers such as Ctrip’s buyout of Scottish technology firm Skyscanner putting an end to the trust’s involvement with the company.
“To date, there have been very few of the private companies where the managers have sold the position and these have all been the result of takeovers,” she said.
“The return of 40% in one year (2015/16) for Skyscanner, due to its takeover by Ctrip, might have seemed respectable in isolation, but was in fact disappointing as it capped the investment’s upside. The same can be said of the investments in Chewy and Flatiron.”
Looking ahead, Ms McBain said the managers agree with Alibaba chairman Jack Ma that even though the global economy is in “a state of turmoil” at the moment, “monumental challenges give rise to monumental opportunities”.
“In the long run, only businesses which retain this flexibility to change direction thrive,” she said.
The trust, which focuses on long-term capital growth as opposed to income, will pay an interim dividend of 1.39p, which remains unchanged from last year.
As at the end of September Scottish Mortgage’s shares were trading at a premium to net asset value of 2%.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here