Interactive Investor

Ian Cowie: why I bought Edinburgh Worldwide rather than Scottish Mortgage

Our columnist notes that if interest rate cuts materialise in 2024 this should favour Baillie Gifford’s high-growth investment style, which led him to buy one of its investment trusts.

25th January 2024 09:29

Ian Cowie from interactive investor

Everybody knows how the former high-flyer Scottish Mortgage (LSE:SMT) has seen its share price halve since Guy Fawkes night three years ago, but I have a capital idea for a lesser-known investment trust that might yet go up like a rocket.

With the benefit of hindsight, the retirement in April 2022 of SMT’s star fund manager, James Anderson, now looks like the best-timed departure since fellow Scot, Sir Alex Ferguson, quit Manchester United in 2013. Neither outfit has ever revisited its former glories, with SMT shares briefly touching £15.68 on 5 November 2021, before plunging to trade around £7.60 this week.

Never mind the past, what about the future? The good news is that SMT is not only one of Britain’s biggest investment trusts, with total assets of £13.5 billion, but also one of its best, despite dismal short-term negative returns”.

Underlying holdings are led by the Dutch manufacturer of machines to make semiconductors, ASML Holding NV (EURONEXT:ASML); followed by the Covid vaccine-maker Moderna Inc (NASDAQ:MRNA) and the graphics processing unit group NVIDIA Corp (NASDAQ:NVDA).

Rising tension between America and China is an ill wind that should blow ASML a power of good; gene sequencing is turning science fiction into commercial fact for MRNA; and artificial intelligence (AI) is boosting demand for NVDA’s GPU microchips. So there is plenty to get excited about with SMT’s top three stakes.

Less happily, nothing dates as fast as fashion and when yesterday’s hot trust falls from favour it can take a long time to recover. The reason is that there are a lot of unhappy people who paid a premium to buy SMT above net asset value (NAV) in its glory days, and that overhang of shareholders with burned fingers will continue to depress sentiment. Twice shy and all that.

On a brighter note, Mr Market has switched from fearing ever-higher interest rates to hoping for rate cuts, possibly starting with an US Federal Reserve reduction as soon as March. That reversal should favour SMT fund manager Baillie Gifford’s house strategy of seeking extraordinary companies that may pay no income at present but might deliver stratospheric capital growth in future.

Step forward, Edinburgh Worldwide (LSE:EWI) Investment Trust, another Baillie Gifford binary bet” - or, in plain Scots, “hit or miss” stock. Its biggest holding, representing 9.6% of the £747 million fund, is SpaceX, the self-descriptive outfit that successfully launched its 300th rocket into the heavens earlier this month.

SpaceX owns Starlink, which has 5,000 small satellites now in low earth orbit (LEO), bringing broadband internet to everywhere on this planet. Just a couple of weeks ago, they began to extend their service to mobile phones.

Without wishing to seem starry-eyed, SpaceX is one of the biggest companies in the world that is not yet listed on any stock market, and Starlink could be its most exciting private equity business with the potential to replace every internet service provider (ISP) on this planet.

If that sounds far-fetched, when was the last time you made a fixed-line telephone call? Who would have foreseen today’s telecommunications a quarter of a century ago?

Technological innovation is a bit like bankruptcy; it happens slowly at first, and then suddenly. While most business and domestic computers continue to rely on copper wires for their connectivity, Starlink claims to have 2.3 million “active customers” - an increase of 300,000 on the total three months earlier.

Exponential growth like that could lead to exorbitant pricing one day and so I was happy to pay £1.52 for EWI shares that cost just £1.50 now. Don’t say I only tell you when it is too late!

Other interesting EWI assets include the drone-maker AeroVironment Inc (NASDAQ:AVAV), and the online groceries delivery group Ocado Group (LSE:OCDO). A decade ago, I had never heard of drones, but who drags their shopping back from the supermarket now?

Against all that, it is only fair to point out that EWI is the worst performer in its Association of Investment Companies (AIC) ‘Global Smaller Companies’ sector over the last decade, five years and one-year periods with rotten returns of 74%, minus 10% and minus 16%. Even SMT did better than that, with total returns of 273%, 62% and 3.9% over the same three periods.

Both Baillie Gifford funds deserve praise for very attractive yearly ongoing charges of 0.34% at SMT and 0.63% at EWI, as measured by the AIC methodology. If only other high-profile fund managers were as keen to pass on economies of scale to shareholders.

But stock selection is likely to be far more important than charges at both these growth-seeking trusts. Let’s hope recent past performance is really not a guide to future returns. Here and now, I aim to take comfort and draw courage from the Royal Air Force motto: per ardua ad astra - through adversity to the stars!

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Edinburgh Worldwide Investment (EWI), as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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