25 Jun 2010 | Business

Scottish Mortgage Signposts

James Anderson, manager of Scottish Mortgage Investment Trust, talks about the signposts the trust has followed over the last five years.

"For the Scottish Mortgage Investment Trust, the last 12 months have demonstrated the dangers of undue attention to annual performance data. Last year 2008/9 we seemed to be terrible investors but this year 2009/10 we appear brilliant*. All this comes about with the same process, the same portfolio shape, overwhelmingly the same investments and the same people. We are not conscious that we have become any cleverer this year. We resolutely focus on a five year performance horizon*.

Frequently markets are simply absurd. The notion that Scottish Mortgage should judge itself by endlessly benchmarking itself against their erratic behaviour is one that we completely reject. Our task is to build wealth for shareholders over long periods of time with indices simply as a background guide to our basic competence over the decades. Overall we think that we have done quite a reasonable job but this is for our shareholders to judge.

Over the last five years Scottish Mortgage has followed three solid signposts which have served its investors well. Looking to the next five years we see little reason to step away from our path.

The first of these signposts is that the rise of China (and to a lesser extent other emerging economies) is transforming the global economic scene. It is easy to underestimate the awesome pace and the scale of development within China. We think that China is now home to an entrepreneurial fury that is leading to the creation of great individual businesses. In the years ahead we think it probable that individual private Chinese ventures will provide much of the innovation in the world. There has already been a marked structural shift in our Scottish Mortgage portfolio from state owned behemoths towards youthful and ambitious businesses. In China we are finding companies with open ended growth opportunities, competitive strengths and focussed strategies that would have appealed to us wherever in the world they might have been be found over the last 100 years.

The second signpost is the contention that stock markets underestimate the power of technological change in exaggerated revulsion to the bubble of 1998-2000. In the future one of the most challenging issues for us is that the success we have enjoyed by investing in Amazon, Apple, Google, Nintendo and Baidu has been such that these giants are increasingly clashing with each other as there are comparatively few other pools of profit left to destroy. We are wary of coming to definitive views as to the likely course and consequences of these internecine struggles, as we have great respect for the abilities of all involved. The combination of the increasing pace and complexity of technological change, the almost instant geographical reach of innovation and the highly appealing returns that the winning companies earn mean that we are willing to accept such clashes as an inevitable drawback of businesses with great growth opportunities.

The third signpost is that Western financial systems are dangerously flawed. What improvements there have been to Western finance seems to be coming from outside pressures. Capital requirements are somewhat less indulgent than in the past, the intellectual mood does appear to have shifted against extreme market fundamentalism and governmental and legal activism is at least plausible. We regard it inevitable that any process of re-regulation will have flaws, but we still believe that this is a small price to pay if the systematic risks to the world economy posed by excessive gearing, ill-considered risk analysis and untrammelled greed in the financial sector can be brought under control. As a result we will continue to have limited holdings in Western financial stocks.

Despite recent global financial shocks, we are convinced that the world offers a wealth of opportunities. We think that the global economy is more solidly based, indeed more exciting, and more capable of dragging untold millions out of poverty than at any stage in history. Naturally events and accidents can occur and stock markets will always be prone to vigorous oscillations, but we tend to see such occurrences as distractions from a fundamentally optimistic picture. If this is right and if Baillie Gifford carries out their task as managers competently then the prospects for Scottish Mortgage shareholders ought to be bright indeed."

*For up-to-date performance information go to www.scottishmortgageit.com

Standardised Past Performance

31/03/05 - 31/03/06	31/03/06 - 31/03/07	31/03/07 - 31/03/08	31/03/08 - 31/03/09	31/03/09 - 31/03/10
60.3%	5.9%	12.5%	-39.5%	76.6%

Source: Morningstar, share price bid to bid, net income reinvested

Past performance should not be used as a guide to future performance.

Author: James Anderson
James graduated BA in Modern History from Oxford University and after postgraduate study in Italy and Canada he gained a MA in International Affairs in 1982.  He joined Baillie Gifford in 1983 becoming a Partner in 1987.  James is a member of the Investment Policy Committee and became Chief Investment Officer in 2006. James has been manager of Scottish Mortgage since April 2000.

The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

This article contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research.

Please remember that changing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount originally invested.

The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.  Investing in emerging markets may cause greater fluctuations in the value of the Trust compared to investing in established markets.