Scottish Mortgage urges caution after strongest ever yearly return

It was a record year for Scottish Mortgage. Kyle Caldwell reports on performance and trading activity.  

Scottish Mortgage (LSE:SMT) posted the strongest ever yearly return in its 112-year history in the 12-month period to end of March.

The global trust, which focuses on companies that have a technological edge over competitors, posted a net asset value (NAV) total return of 111.2% and a share price rise of 99%. In contrast, its benchmark – the FTSE All World Index – returned 39.6%.

Scottish Mortgage’s returns comfortably outpaced competitors. The sector average for global trusts over the same time period was 76.8% and 72.2% for NAV and share price returns.

The trust points out “shareholders saw the strongest ever return produced by the company, surpassing the returns delivered during the company's expansion post the Great Depression and, more recently, in the aftermath of the Global Financial Crisis. As a result, the company reached new market capitalisation highs during the year, closing at just over £18 billion.”

Tom Slater, joint manager of Scottish Mortgage, who will become lead manager from next April when fellow joint manager James Anderson retires from fund management, sounded a note of caution and urged shareholders to judge performance over longer-term time horizons.  

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He says: “We are focused on the long term. We do not believe that our returns in any given year convey much information about the strength or otherwise of our investment approach. Far longer periods are required to make such an assessment.

“We would caution against elation after the past 12 months, just as we would counsel against misery following unprofitable years.”

Slater adds that it is the accomplishments of the entrepreneurs the trust backs that is driving underlying wealth creation for shareholders.

He points out that there have been a small number of big winners for the trust over the one-year period, which have had a “dramatic impact on investment returns”. Tesla (NASDAQ:TSLA) was the standout stock, with its phenomenal share price rise (it was up over 700% in 2020) leading Scottish Mortgage to take profits to reduce its weighting in the portfolio so it could maintain diversification. Tesla accounted for 36.7% of the 111.2% NAV returns over the year.

Around 80% of Tesla shares have been sold, but Elon Musk’s firm remains a favoured holding and was the fifth-largest investment at the end of March.

In terms of overall portfolio activity, it was a busier than usual period for the trust – with several new companied added.

Slater picked out Northvolt, an unlisted company led by a former Tesla engineer, and ChargePoint (NYSE:CHPT), which is one of the world's largest electric vehicle charging networks, as two of the new holdings. He says both companies fit into the trust’s focus “on finding other companies that will build the post-carbon economy”. 

Transport and logistics is another area of increased focus, with Ocado (LSE:OCDO) and GoPuff, another unlisted business, added to the portfolio. “Ocado's grocery offering is performing strongly and profitably in the UK and there is increasing interest from grocers around the world in implementing its technology. GoPuff is seeking to replicate the traditional convenience store with a delivery offering, which has proved popular on US university campuses and is expanding into a more general setting,” says Slater.

Notable sales over the past year have been Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG), as well as reductions in Amazon (NASDAQ:AMZN).

“These companies generate prodigious cashflows and have grown at a remarkable rate,” notes Slater. He adds: “For us, the questions now are around how they deploy their resources in the future and retain their growth credentials at vast scale. We think Amazon still enjoys the broadest set of opportunities, but we are wary that Jeff Bezos stepping back from the CEO role may reduce the company's appetite for bold experiments.”

There were two other pieces of good news for shareholders. First, the dividend was increased by 5.2% to 3.42 pence. Second, the ongoing charges figure was reduced from 0.36% to 0.34%, as Scottish Mortgage passed on economies of scale to shareholders.

Share price wobble since mid-February

In mid-February, Scottish Mortgage was caught up in the technology sell-off, triggered by concerns that inflation would rear its ugly head at the same time as the global economy accelerates – the ‘reflation trade’.

In theory, this is a more favourable backdrop for value stocks that are more cyclical and economically sensitive. As a result, investors have been questioning the valuations of growth stocks, which has led share prices to fall.

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The share price is currently around 1050p, higher than its low point for 2021 of 950p in early March. However,  this is below its peak for the year, which was 1415p in mid-February prior to the wider tech sell-off.

Ewan Lovett-Turner, head of investment companies research at Numis, notes that this “repricing does not come as a huge surprise”.

He adds: “Investors may be questioning whether higher inflation and potentially [higher] interest rates spell the end of the over decade-long run for growth-oriented stocks, and a repricing does not come as a huge surprise. We take comfort that the managers have not rested on their laurels and have made significant portfolio disposals in companies where they no longer believe there is potential for explosive growth, even though many of these remained stock market darlings.”

Lovett-Turner points out “there is always something a little uncomfortable about holding Scottish Mortgage because it is offering something different to other investments” but nonetheless he sees “significant value in the portfolio”.

The author owns shares in Scottish Mortgage (LSE:SMT), alongside other investment trusts and funds.