The Scottish Mortgage Investment Trust (SMT) have issued their Annual Report and AGM Notice. Readers who hold this trust will not need reminding that it has shown a remarkable performance over the last few months. That’s when the stock market has been decimated by the Covid-19 epidemic and the share prices of many other similar trusts and of the companies they hold have fallen sharply.
Last year SMT achieved a total share price return of 12.7% to the end of March and in the current year it achieved a share price increase of 23% to the 12th May. How has it achieved this return? Primarily by holding “hot” stocks like Tesla, Amazon.com, Illumina, Tencent and Alibaba to name the top five holdings. Over a third of the current holdings are unlisted ones. They claim the flexibility to invest in such companies “has been an important driver of returns over the last decade”. I do not dispute that but they are now proposing to change the “investment policy” of the company to raise the maximum amount that can be invested in such companies from 25% to 30%, based on the proportions when invested (that is why they have managed to already exceed that figure).
Is this a good idea? Should investors support it? Bearing in mind the travails of Neil Woodford where the funds he managed had large numbers of unlisted holdings, is it wise one has to ask?
Personally, I do not think it is and will be voting against. I am not suggesting that Baillie Gifford, nor the individual fund managers they employ, will make the same mistakes as Woodford. Just that valuing unlisted companies is a different matter to that of listed companies where there is always a market price. In addition unlisted holdings are very illiquid in nature. Disposing of them can be very difficult. Private equity investment trusts often trade at a considerable discount to their net asset values for those reasons, while SMT currently trades at a premium of 2%.
Retaining the existing limit would prevent more unlisted investments being made, unless some of the current unlisted holdings are disposed of, but that may be no bad thing given the current market enthusiasm for them.
I also note that Prof. John Kay is retiring from the board after serving since 2008. Much as I admire the wisdom of Prof Kay, I welcome this change. I hate to see directors of trusts serving more than 9 years and ignoring the UK Corporate Governance Code, as they so often do.
LSE RNS Announcements. I use the London Stock Exchanges free service to deliver RNS announcements via email. This morning it suddenly changed to a new format without prior notice. The first such notice I received was not in the best format in several ways. Wasted space in a right-hand margin, and no way to print just the announcement text and not the excess.
The second announcement I received just led me into an incomprehensible dialogue. I have sent them a couple of complaints.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
This is one occasion on which I disagree with Roger, and I shall be voting to increase Scottish Mortgage’s limit on unlisted investments to 30%.
There is, as SMT have reported, an increasing tendency for disruptive companies to raise funds privately and to seek a listing only at a much later stage in their development (or never).
SMT is pretty much the only investment trust that is able to invest in these businesses at a very low cost – venture capital trust costs, declared and hidden, are truly shocking – and it has built up a phenomenal track record for choosing its unlisted investments successfully.
I could choose plenty of other low-cost global investment trusts if I wanted to stick with listed companies. SMT, however, is unique, and I’d be more than happy to stick with them even if their limit on unlisted investments rose to 90%, rather than 30%.
Roger makes a comparison with Neil Woodford’s foray into unlisted companies.
There’s a key difference: Neil Woodford simply wasn’t very good at this (to put it gently).
The other key difference was that Woodford Equity Income Fund was open-ended, which made it disastrously inappropriate for unlisted investments. When investors very wisely sold units, Woodford had to sell shares in the underlying holdings in order to pay those investors back, which forced him to progressively sell off the listed investments, leaving the fund in an increasingly impossible position as the redemptions continued but the remaining investments were largely unlisted and unsaleable.
There is a very important lesson to be learnt from this disaster: never invest an open-ended fund in unlisted companies.
But it’s irrelevant to Scottish Mortgage.
I also have a holding in Syncona, a life sciences investment trust that is mostly invested in early-stage unlisted companies. If Syncona were open-ended, I wouldn’t touch it with a bargepole.