Scottish Mortgage shares rise despite sharp fall in first half returns, 11 Nov 2022 10:55

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Scottish Mortgage shares rise despite sharp fall in first half returns

11 November 2022, 10:55

- Trust lags the market over six months

- Top six quoted stocks drop 20% on average

- Managers stay focused on long-term returns

Shares in investor favourite Scottish Mortgage Investment Trust (SMT) continued their strong run this week, adding 3% to 822p even though the company’s net asset value return lagged its benchmark in the first half.

Although the Baillie Gifford-run trust’s primary focus is capital gains, the managers acknowledged ‘a small but consistent dividend is of value to many shareholders’ and raised the interim payment by 5% to 1.6p per share.

WHY WERE RETURNS POOR?

Between March and September, the trust’s net asset value fell 15% from £10.22 to £842p while the FTSE All-World Index suffered a 7% decrease.

As the managers like to highlight, six months is too short a time frame over which to judge performance whereas over five years or 10 years the trust has outperformed its benchmark by a wide margin.

Unlike other trusts or funds, Scottish Mortgage doesn’t break out its winners and losers so it is left to shareholders to do the donkey work.

In descending order the firm’s top six listed holdings, which accounted for 25% of total assets at the end of September, were Moderna (MRNA:NASDAQ), Tesla (TSLA:NASDAQ), ASML (ASML:AMS), Illumina (ILMN:NASDAQ), Meituan (3690:HKG) and Amazon (AMZN:NASDAQ).

On average, these six stocks lost more than 20% from March to September although there were large differences, with Meituan and Tesla falling less than 10% and Illumina falling as much as 40%.

Also, the managers sold down their large holdings in some Chinese technology stocks such as internet group Tencent (700:HKG), whose shares lost 37% over the period.

WHAT DO THE MANAGERS SAY?

The management report focuses, as expected, on the benefits of investing for the long term.

‘Scottish Mortgage's long-term capital appreciation has come from financing and patiently supporting the development of growth companies. It is important at times of stress to remember this founding story: corporate potential has little to do with the cycles of greed and fear in stock markets.’

Investors who buy into the managers’ buy-and-hold view will appreciate the steadfastness of their conviction and their refusal to be influenced by short-term market volatility.

‘Financing the development of long-term growth companies is not what interests most investors. To understand that you need only observe the commentary of recent months, focused on 'risk off', deleveraging and the flight to safety.

‘The market's focus has narrowed to a handful of economic variables. Stock prices react dramatically to each monthly update. This environment is off-putting, but it is not relevant to our investment decision-making.’