Scottish Mortgage has been one of the big winners in the investment company sector through 2020 to date, as its disruptive portfolio of companies has helped it return 56.3% compared to its MSCI FTSE All World benchmark’s 3.3% gain.
David Brenchley spoke with the Baillie Gifford-run trust's corporate strategy director Catharine Flood about its investment process and how it has navigated choppy markets.
After impressive performance in Scottish Mortgage's previous full-year, leading to the company exceeding £10bn in market capitalisation, how do you assess the past 12 months?
Given we try to invest on a five-years-plus time horizon, the path of any given 12 months at any point is far less important to us. We are really encouraging people to evaluate us on that longer-term timeframe that we are investing over.
We are not trying to predict the near-term path of share prices, but we think the deep structural shifts among the companies in our portfolio have been accelerating over the last 12 months, particularly through lockdown.
Not everybody who has had to use these services for the first time in lockdown will continue using them at the same rate. But the question is, at what level have you seen a structural acceleration? It is not true either that people that have used it and experienced the convenience are going to go back to never using it.
How have managers James Anderson and Tom Slater navigated that market turmoil with their long-term horizon in mind - have they been topping up existing holdings or adding new positions?
If a particular company gets beaten up on exterior concerns that we think are overblown relative to its operating performance, then we will look to turn the volatility to our advantage. But there is not just one side to that investment decision; for anything we want to buy, we have to sell something.
In times of stress, often the hardest but the best thing to do is nothing in terms of trading. What is of value is being supportive because all companies are facing challenges.
What we tried to do was be constructive owners. We were writing to management teams and saying ‘we will support you'. Sometimes it is as soft as just expressing that support, but it can cement your long-term relationships, which can be very valuable in understanding what they want to do with their businesses in the long term.
In times like these, the best thing to do is sit and watch what is actually happening and have that humility to acknowledge that you cannot say what is going to happen. You are balancing the risks with the potential payoff.
And many of your portfolio constituents will have benefited from the lockdowns implemented worldwide...
For us, it is really about Amazon, for instance, not just being a digital retailer, but an infrastructure in a world where you cannot just go to the shops. They have seen an extraordinary rise in demand for their services. They are being a responsible business owner in that they are increasing salaries, hiring people and investing heavily in their own business.
Alibaba is another big holding wherein their services have seen a real uptake, but they have also thought about that wider responsibility. They have been supporting small and medium sized enterprises that use their chief platform [by allowing them to] access finance at low or even zero interest rates in some cases.
Another one of our holdings in China, Meituan, recently peaked at [delivering] 30 million meals a day, and they are now aiming for 100 million users a day by broadening out the services they offer and expanding their addressable market.
Meituan has been looking at how they can reassure people using their services by testing the temperatures of the delivery drivers, and they have been rolling out some of their autonomous robots so you remove as much human-to-human contact as possible.
It is quite possible that you will see a greater differentiation in a post-lockdown world between those who have been good corporate citizens [and those who haven't].
We have seen this pattern before: back in the Global Financial Crisis, Amazon saw an uptick in the number of people using its platform because it offered customers, who were at that time ever-more price sensitive, a cheaper way to buy the same goods.