Congratulations to Scottish Mortgage Investment Trust (LSE: SMT), which has just become the fourth investment trust ever to ascend to the FTSE 100. It thoroughly deserves its place among the UK’s elite companies, and I would argue that it also deserves a spot in your portfolio too.
Big and beautiful
Launched in 1909, the strangely-named Scottish Mortgage is one of the small breed of venerable investment trusts that has been investing in global companies for a century or more, along with the likes of Foreign & Colonial (1868), Witan (also 1909) and Monks (1929). Far from living in the past, the investment trust is very much one for today, with top holdings including Amazon, Tesla, Facebook and Ferrari, as well as whizzy Chinese social media companies Alibaba and Baidu.
Star fund manager James Anderson overhauled the trust’s investment strategy to allow up to a quarter of its portfolio to be invested in unquoted smaller companies, a move that quickly paid off, with a 40% jump in the last 12 months. It has returned a whopping 172% over five years, against just 25% on the FTSE 100, and 83% on its global index benchmark, according to Trustnet.com. That is a remarkable return from a fund behemoth with a current market capitalisation of ÂŁ4.7bn. Who said small is beautiful? Big can be just as lovely.
Keeping up with the Smiths
Terry Smith at Fundsmith Equity, currently the UK’s most popular fund manager, is winning all the plaudits these days but even he is trailing Scottish Mortgage after returning ‘just’ 163% over the same period. Investors will be hoping that Scottish Mortgage fares better than the previous three investment trusts to hit the FTSE 100. Edinburgh was a founder constituent in 1984 but within six months was gone, never to return. Foreign & Colonial put in a similarly fleeting appearance in 2009. Alliance Trust lasted from 2008 to 2011, but was then relegated for poor performance.
Nothing lasts forever. Maybe Scottish Mortgage will also suffer an attack of vertigo, but right now the Baillie Gifford-managed fund is looking canny. This is a truly global fund, with almost half its assets in North America to benefit from barnstorming US growth. It has a weighting of just under 20% in each of the eurozone and China, where fortunes have been more mixed.
The Scottish play
It has limited UK exposure, with just 3.7% of the fund invested here. This could make it a handy diversification tool for investors wanting to spread their wings beyond the UK. It means you do not have to worry about the impact of Brexit, with the vast majority of the fund’s earnings generated overseas it has benefitted from recent sterling weakness.
However, performance could suffer if the Trump reflation play disappoints or Brexit fears prove overdone and the pound makes a sterling recovery, reducing the value of those overseas earnings. Another minor downside is that it trades at a premium of 3.3% to net asset value, although this is always a sign of success. The yield is just 0.85%, making this a long-term growth play rather than an income generator. So a hearty welcome to Scottish Mortgage, here’s to a lengthy stay among the elite.