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Beating the market is the aim of active mutual funds, and yet, no more than 20% achieve that objective consistently in the long term. Hence, finding managers that have overperformed is an exception, rather than the rule. And two of those exceptions are James Anderson and Tom Slater, who jointly manage the Scottish Mortgage Investment Trust.

The fund “is an actively managed, low-cost investment trust, investing in a high conviction global portfolio of companies with the aim of maximising its total return over the long term”, as described by Baillie Gifford, the asset manager in charge of the fund.

As its own name suggests, the fund is a trust, that is, a public listed company, traded in the London Stock Exchange and with a fixed number of shares (closed-ended) (see What is an investment trust?, by J.P. Morgan). As such, it is opened to both, institutional and retail investors, and can be bought through a broker as any other stock.

As I mentioned above, this fund is an exception within the industry, with a total return of 287.8% in the last 10 years (the share price return has been 334.7%), which is equal to 14.5% CAGR. The index against which it is compared is the FTSE All World Index (GBP) total return, that yielded a 10% CAGR in that period. In the last 5 years, the fund has outperformed every year, except the year 31/03/2015 – 31/03/2016. In a nutshell, the performance of the trust can be summarized as follows.

Performance Scottish Mortgage Investment Trust

Source: Own elaboration with data from Baillie Gifford

The trust has a really long history, as it was created in 1907 (for more info about the history see here), although it was in the year 2000 when James Anderson took over the management. Morningstar categorizes the fund as Global Large-Cap Growth Equity and it has five stars in the famous Morningstar rating. Assets under management in March 2017 were £6.7 billion and are invested only in equity assets.

The portfolio of the fund in March 2018 was allocated mainly in North America (47.6%), followed by Europe (28%) and Asia (24%), according to Baillie Gifford, with Amazon as the main investment (9.9% of the fund). Tencent and Alibaba are the second and third positions of the fund, which is relatively concentrated: the first 10 positions amount for more than half of the portfolio, while the 5 main investments weight more than a third. The fund, in addition, holds various non-listed companies such as Airbnb or TransferWise, although they amount, in total, for 14.6% of the portfolio. The main part, therefore, is allocated to the so-called growth companies, which is in line with the investment philosophy.

Any company is analysed considering the potential growth, the strength of its competitive advantage and the capital allocation strategy. Furthermore, the selection of companies follows a bottom-up process, being the fundamentals the key driver (instead of the weight in the benchmark or the fit in the portfolio) of any investment decision. Additionally, there is no any ex-ante asset allocation by region or industry.

The management considers that there are three trends for the future to consider: e-commerce and internet communications, healthcare and luxury electric vehicles. The portfolio is a consequence of these ideas. On top of the first three positions mentioned above, associated with the internet world, the fourth stock in the portfolio is Illumina, a biotechnology company. The fifth investment, with almost 5% of the portfolio is the controversial Tesla. Some other relevant investments are Inditex, Ferrari, Netflix, NVIDIA, Facebook or Alphabet. The whole portfolio can be seen here.

In summary, the Scottish Mortgage Investment Trust is one of the best funds in terms of historical performance. However, the portfolio is concentrated in the companies that have outperformed in the last 10 years, including the so-called FANGs. If these companies continue doing well and beating market expectations, the trust is going to overperform in the following years as well. However, if the economic growth weakens and the stock market downturns, the fund could suffer more than the index as the valuation of the companies held is based on future growth. The underlying investment philosophy makes sense but overpaying is always a risk.

The content is not intended to be a personal recommendation. Opinions are those of the author and may be mistaken. For investment advice, seek a qualified investment professional.