A trust for the ages, from the start of the car to China in the fast lane

Investing in fast-growing companies has proved a smart move

Investment trusts tend to perform well when markets are risin (Getty Images)

Scottish Mortgage Investment Trust was launched in 1909 to offer mortgages on rubber plantations set up to meet the demand for car tyres. Today, the aim is still to benefit from long-term investment themes, but by investing directly in companies worldwide.

The trust’s managers, James Anderson and Tom Slater of Baillie Gifford, prefer to hold on to their investments for at least five years. They like to focus on identifying companies growing faster than the rest of the market and on those with a sustainable competitive advantage. This approach has served them well.

Dominating the portfolio for some time has been the emergence of China as an economic superpower. When China was growing strongly as a result of heavy investment in infrastructure, commodity and resources-related businesses across the globe boomed. Around five years ago, the trust had greater exposure to this area.

Spending on infrastructure has since slowed and consumption is emerging as the primary driver of the country’s growth. The managers have therefore focused their exposure more recently on businesses such as Kering, owner of a number of luxury goods brands.

Another key theme is the growing dominance of all things internet related. The “technology” label covers areas from data management and mobile devices to biotechnology. A number of the trust’s technology holdings also overlap with the China theme. For instance, it has large positions in Alibaba, a large online shopping business in China, and Baidu, a Chinese internet search-engine provider.

Mr Anderson and Mr Slater feel that the way in which they identify investment opportunities differentiates them from the majority of their peers. Rather than rely on quantitative screening or specific metrics in valuing a company, they look at factors such as how fast it is growing, how it manages its cashflow, and whether the company management deliver on their promises.

As an example, Amazon is a current top 10 holding. It has barely made a profit in all the years it has been trading, but the online retail giant has established a number of cash-generative business models. While it is currently reinvesting this cash in growing existing services and expanding into new areas, there is an expectation of substantial returns to shareholders in the future.

One of the advantages that the structure of an investment trust has over open-ended funds (or unit trusts) is the relative ease with which it can invest in unquoted companies. The managers of Scottish Mortgage make use of this flexibility and currently hold around 10 per cent of the trust in unquoted firms. They focus on well-established companies with proven business models and a low requirement for physical assets, such as businesses offering cloud-computing software. Given the size of Baillie Gifford, the managers often get to take a closer look at these businesses before other investors.

This is a concentrated portfolio, with the top 10 holdings accounting for 50 per cent of the trust, while the top 30 account for 80 per cent. This means that at times performance can be volatile. But this shouldn’t concern investors who think in the same long-term manner.

The strong performance of the trust’s underlying investments and increasing investor demand have led to a strongly rising share price over the past few years. Its popularity with investors means it has been trading at a premium to its net asset value for much of the past year.

However, trusts aren’t always as closed-ended as you may think. In order to control the premium, the company has been issuing new shares throughout the year. This helps keep the trust trading closer to the accumulative value of the underlying holdings.

This is an investment for tucking away in the bottom drawer. The trust’s modern themes could take several years to reap any rewards, so it would make an ideal investment for children. They are no doubt better at understanding technology than my generation and it could spark interest in the companies behind their whizzy gadgets and gizmos.