Scottish Mortgage Investment Trust: five-year returns on the FTSE 100

As the FTSE 100 comes tantalisingly close to the striking the symbolic 8,000-point watermark, it’s worth noting that this success can be connected primarily to two investment factors.

First is the stick, where growth stocks have been hammered by tightening monetary policy, and second is the carrot, where FTSE 100 oil, bank, and mining stocks have benefitted hugely from rising interest rates, sky-high oil and gas prices, and historically elevated hard commodity prices.

This leaves Scottish Mortgage (LON: SMT) as somewhat of an outlier on the UK’s premier index, focused on investing in ‘the world’s most exceptional growth companies,’ with most of these in tech.

FTSE 100: Scottish Mortgage shares

Parent Baillie Gifford suffered its worst ever fall in assets under management in 2022, with AUM falling from £336 billion to just £223 billion by the end of last year. However, it’s worth noting that only £20 billion of this fall can be attributed to client outflows, with the majority driven by valuation decreases in its portfolio companies as the asset bubble driven by ultraloose monetary policy popped.

Long-term investors may worry that with James Anderson’s retirement after 22 years as fund co-manager, the team’s stock-picking skill may have taken a hit. Co-manager Tom Slater recently admitted that the Trust experienced a ‘humbling year’ in 2022, with shares falling by 46% in the year. For context, SMT aims to beat the FTSE All-World Index, which only lost 7.3%.

Slater also noted that the FTSE 100 company was ‘slow to recognise the significance of the shattering in SINO-US relations’ and further acknowledged the mistake in thinking that pandemic-induced changes in consumer habits would last.

However, it’s worth noting that the company still has 14.9% of its investments in Asia — in companies including Meituan, Tencent, and Bytedance — and despite regulatory spats, Ukraine, Taiwan, the treatment of Uighurs, and now the spy balloons, imports and exports between the two countries hit a record $690.6 billion in 2022. And with ‘zero-covid’ lockdowns apparently over, this figure could well rise in 2023.

Of course, at 749p, Scottish Mortgage shares remain down 29% over the past year, and more than 50% since their record high in November 2021. However, the Trust aims to best the All-World over a period of five years, warning that the volatility of its growth approach makes it sub-optimal for short-term traders. By this metric the Trust is doing well, up by 63% over the past five years.

With a global recession imminent in the wake of tech company job cuts, rising interest rates, volatile geopolitics, and falling consumer confidence, it’s worth remembering that these medium-term macro events are less relevant for long-term holders investing in the tech of tomorrow.

Moreover, SMT is trading at a huge 14.9% discount to its constituent assets. Long-term investors may look to the historical performance of the Trust, which has outperformed in the past — though of course this is no guarantee of future returns.

Private investments advantage

Outside of EIS-qualifying companies, which are themselves hard for many UK retail investors to access, it’s very difficult to gain exposure to early-stage private companies, as these are by their nature not listed.

Scottish Mortgage is the exception to this rule, holding shares in 52 separate private companies equivalent to 30.7% of its overall holdings, and it’s these companies which attract investors with a healthy risk appetite. Indeed, Chair Fiona McBain has previously extolled Anderson’s decision to invest in private companies as ‘one of the trust’s most important strategic initiatives to date.’

Even if you are able to invest in private companies, conducting proper research is also fairly difficult as they have no requirement to issue quarterly results. While this means they can make better long-term decisions that can be unpopular with short-term returns-focused investors, it also mean that SMT investors have to rely on the Trust’s research team to pick the winners. Fortunately, it has a strong track record, investing in the likes of NIO, Alibaba, Spotify, Wise, and Amazon over the years.

Perhaps its most lucrative early investment was in Tesla, for just $6 per share in 2013, which was key to being admitted to the FTSE 100 only four years later. It’s worth noting Anderson’s comments on this decision before retiring, that ‘Tesla was already past the technological and practical challenges…what we needed was time. Not many investors can have that luxury.’

However, of SMT’s top 10 holdings comprising 43.7% of the portfolio, luxury brand Kering is the only non-tech stock. Combined with the fund’s tendency to use gearing to maximise returns, further volatility through 2023 seems likely.

However, analysts estimate that circa 75% of Scottish Mortgage’s shares are held by UK investors, drawn in by both its ability to invest in private businesses, the consistent success rate, and exposure to international markets through a UK-listed company.

And as long as they stay invested for the long term, investors may consider the current share price correction a solid FTSE 100 buying opportunity.

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