Where next for Scotland’s biggest company?
Ask a cross-section of Scots ‘what is our largest company?’ and for years the most popular responses would feature the big behemoths of banking, insurance, oil and energy and engineering. Weir Group, Aggreko, Scottish and Southern Energy, Aberdeen Standard Investments and Royal Bank of Scotland headed the list.
But there is one Scottish-based company that now dwarfs these and in recent years has soared to become one of the greatest investment successes of all time. Ten years ago it barely featured in the roll call of Scotland’s biggest companies. Today its stock market capitalisation of £14.1 billion puts Weir Group (£3.2 billion) and Standard Life Investments (£5.3 billion) in the shade. It now exceeds Royal Bank of Scotland – re-christened Natwest Group – (£13.7 billion) and Scotland and Southern Energy (£13 billion)
Step forward Edinburgh-based Scottish Mortgage Investment Trust, managed by Baillie Gifford. Over the past decade, it has broken out of the broad-based and diversified equity trust mould to concentrate on high tech stocks at the forefront of innovation. The story is well known – but it is still a mystery as to how exactly it has achieved such singular success when other funds are also heavily invested in the tech sector.
For many, this was a high conviction gamble and one that would reduce SMIT to a specialist niche investment fund that would settle on the periphery of the investment universe. Instead, it has come to dwarf the entire sector.
Two questions haunt all this. First is whether it should be regarded as a conventional public company at all. It is neither a manufacturing or services company in the conventional sense. Rather, it is a portfolio of holdings in other companies and to this extent is mirrors the fortunes of other quoted businesses. Should it thus be in an index of conventional companies?
Second – and of increasing concern to the trust’s investors – for how long can this stellar performance continue? Already there are warnings that SMIT is riding a highly overvalued tech bubble – similar to the dot.com bubble of the late 1990s – and will succumb to a sharp and severe correction.
Little wonder investors are feeling edgy. Growth of late has been breathtaking. The Scottish Mortgage share price has risen by 71.8 per cent in the past six months, by 138 per cent over three years and by just over 300 per cent in five years. Just five successful stock selections account for more than 30 per cent of its performance for the last five years. High conviction stock-picking best summarises the SMIT success story. Investing in high tech stocks has enabled Scottish Mortgage to soar. But these companies are also widely held by many other funds.
So what makes Scottish Mortgage and other Baillie Gifford funds different to others at the top? Conviction is the answer. The holding that stands out compared to other funds has also been one of the biggest contributors to performance: Tesla.
Only eight funds in the IA Global and IA North American sectors hold positions in the electric car manufacturer, and six of them are Baillie Gifford-managed funds. Indeed, Baillie Gifford is one of the biggest shareholders in Tesla after chief executive Elon Musk.
Stewart Heggie, investment specialist at Scottish Mortgage Investment Trust, said that while Tesla has clearly made a significant contribution particularly over the last 12 months, this ‘overnight’ success has in fact been “years in the making”.
“The Baillie Gifford funds have a very strong growth style, which doesn’t just look at the fundamentals of a business but the opportunities they can see within those companies,” explained Adrian Lowcock, head of personal investing at investment platform Willis Owen.
“This has resulted is in some very high conviction investments and indeed some extremely large positions in their favoured stocks.”
He added: “Most of the Baillie Gifford funds are not outright technology funds but the team has identified companies which have utilised technology to disrupt and challenge established businesses. It is this disruption theme which has helped drive those company share prices and Baillie Gifford funds.”
Baillie Gifford’s role in private markets, funding and identifying companies before they go public could be spilling over into their ability to identify public companies early on in their growth.
Looking forward, Heggie said that while the likes of Amazon, Facebook and Alibaba have been strong contributors in the past, he sees a new wave of companies emerging such as Zalando, Shopify and Stripe “who by focusing on the merchants rather than the end-users, are providing them with the tools to grow their businesses”.
Baillie Gifford’s US equity strategy specialist Ben James said that Baillie Gifford’s approach has boiled down to finding just a few “exceptional growth” companies that can become multiples of their size, holding them in scale, and patiently riding out any volatility over five-to-10 years.
He explained: “We invest in this way because we know that the returns of the stock market over the long term are dominated by a tiny fraction of companies If we can identify at least some of these outliers early on, and capture their asymmetric long-term returns, we can more than offset any mistakes we make along the way. It takes more patience than most in our industry exhibit to invest in this way.”