The popular investment trust has reduced exposure to three well-known technology stocks. Hannah Smith explains why.
The £16.8 billion Scottish Mortgage Trust (LSE:SMT), one of interactive investor’s Super 60 choices, has reduced its exposure to tech giants, including Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) and Facebook (NASDAQ:FB), as returns have been concentrated in “a handful of big winners”.
In its results for the six months to 30 September, trust managers James Anderson and Tom Slater explained that the increase in Tesla’s stock price, for example, has had a “dramatic impact” on the trust’s returns.
“While the company and its colourful founder attract an unusually high degree of attention, emotion and noise, the underlying return picture is far from an aberration,” the managers said. “Returns are concentrated in a handful of big winners. With far less drama, this has been the case for our holdings in both Amazon and Tencent (SEHK:700) over the past decade.”
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The trust has owned Tesla stock since 2013, and over the time it has endured large drawdowns in the share price as well as its most recent stratospheric rise. The stock is still Scottish Mortgage’s largest position, even though the duo have sold more than 40% of its shares over the reporting period to maintain diversification, in sales which raised £1.18 billion.
Some of the portfolio’s other significant winners include furniture retailer Wayfair (NYSE:W), which has benefited from a surge in demand as people spend more time at home and carry out home improvements. “While this may be a temporary, Covid-related phenomenon, the company has also moved decisively into profitability after an extended investment phase,” the managers said.
Food delivery companies Meituan (SEHK:3690) and Delivery Hero (XETRA:DHER) have also done well as the pandemic has changed spending patterns. The former has become the dominant food delivery company in China, while the latter has opportunities for local scale.
These investments are part of the theme in the portfolio to move away from giant Western platforms to other digital businesses that can scale up. To this end, the team has sold the last of its remaining holding in Facebook and made the first reduction to its position in Amazon that was not driven by diversification concerns. The managers have “huge respect for Amazon’s vision and ability to execute” but note that its $1.5 trillion (£1.1 trillion) market cap makes the path to large future returns more challenging.
In terms of positions it is building, during the reporting period the trust invested in Northvolt, which is involved in boosting European battery manufacturing capacity, and has made a commitment to electric vehicle charging station network ChargePoint.
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From the end of March to the end of September, the trust’s net asset value rose 76% compared to a 24% increase in the index. It will pay an interim dividend of 1.45p, a “modest increase” on the previous year. The board said that it recognised that “a small but consistent dividend is of value to many investors”.
Looking ahead, the managers said that this year should act as a reminder that no one can predict the future, and they have been investing with that in mind. “A clear lesson from this year’s events is that we should treat confident pronouncements about the future with scepticism. Rather than engage in such speculation, we prefer to back the companies building the future of our economy with the capital and patience they require,” they said. “Such opportunities remain plentiful.”
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