Scottish Mortgage Investment Trust Plc
Results for the Six Months to 30 September 2019
We are determined long term growth investors. We continue to believe that the opportunities available today are compelling. We have not become pessimists. But none of this resolute optimism is to deny that there are and will always be periods of underperformance. We have endured such a period over the last six months. Since the end of March our net asset value per share, with debt at fair value ('NAV'), rose but only by 3.2% compared with 9.9% for the FTSE All-World Index (both in total return terms). As is often the case, this has been exacerbated by the shares falling to a discount from the premium that has been the case for most of our recent history. The longer term performance record remains good. Over five years the NAV has gained 137.5% versus 86.5% and over 10 years it has increased by 415.1% against 204.4% (both against the index).
Although shareholders are well-aware that our focus is on the generation of long term increases in capital values we, in turn, are aware that a small but consistent dividend is of value to many investors. The Board is therefore recommending an unchanged interim dividend of 1.39p. This is despite a 18.5% fall in earnings on this occasion.
Portfolio
Whilst the short term oscillations of markets frequently contain little meaning and much noise, we always endeavour to winnow through events to discern if beneath emotions and market positioning there have been structural changes that we should reflect in our portfolio. The last six months have seen markets become so concerned at the current low levels of global economic growth and political harmony that the equities of preference have been those perceived to possess minimal sensitivity to the perils of stagnation. This is, though, no more our preoccupation than the equally common perception of twelve months ago that US economic growth was so formidable that interest rates would rise remorselessly.
But we must acknowledge underlying concerns where they exist. The most significant may be gathering evidence of cracks in the dominance of some of the internet platforms that we have invested in both heavily and successfully in the last decade. This suggests that their longevity may be more questionable than we thought. But there is an irony here. It's not in the US that these fissures have emerged despite market nerves provoked by regulatory and media scrutiny. Instead the issues have been in China. The threat to incumbents has come neither from regulators nor public discontent but from extraordinary dynamism. The major casualty has been Baidu (once a very significant holding) and the major disruptor has been Bytedance. That we own a holding in the unquoted Bytedance is some compensation.
The contrasting relative fortunes of Baidu and Bytedance are not isolated examples of a divergence between quoted and unquoted competitors. Contrary to the mood of the moment our experience has been that in both underlying progress and valuation, our unquoted companies are generally outperforming their listed counterparts. It is common knowledge that there are high profile examples of unquoted or recently listed companies that have suffered serious problems but it seems to us that generalising from these distinctly colourful sagas is misguided. The flaws of their business models were not impossible to identify. Although we are wary of treating our unquoted assets as a separate portfolio our experience remains encouraging. In aggregate since our first unquoted investment on 2 June 2010 to 30 September 2019 the return of all the stocks that we initially owned in unquoted form (whether now listed or not) has been 445.3% versus 341.4% for Scottish Mortgage overall and 183.8% for the FTSE All-World. In specific developments, two still unquoted companies, Ginkgo Bioworks (synthetic biology) and You and Mr Jones (digital advertising) have enjoyed substantial business progress and consequent valuation increases whilst the now quoted Meituan and HelloFresh continue to reverse initial market scepticism in impressive fashion.
Unquoted philosophy and commitment
This seems the appropriate moment to stress as strongly as we can that we believe that our ability and willingness to invest in unquoted companies at scale and globally as part of a portfolio offering high overall liquidity is critically important to both our future returns and to the unique proposition Scottish Mortgage can offer to individual shareholders. We are convinced that the long term risk taking, essential to economic and social progress, is continuing to migrate to private markets and at an accelerating pace. It's important that all our shareholders, from the smallest holders to the very largest, have access to such innovative enterprises and the enduring real value which they create. That we offer this whilst our ongoing charges have edged down once again (to 0.36% of average assets over the rolling twelve month period to the end of September) seems to us to be a worthwhile achievement that is not a common characteristic of the industry in general or managers of unquoted equities in particular. We have no intention of being deterred from this philosophy of investing or from driving charges lower.
Outlook
We are emphatically optimistic about the aggregate and underlying progress of our companies and therefore our portfolio. We see no evidence that the dim global economic conditions or the unappealing international political environment are undermining the tectonic shifts and structural advances driven by broadening and accelerating technological progress. We look forward to putting this case to investors in the months and years ahead.