Edinburgh Worldwide Investment Trust
Edinburgh Worldwide is the often overlooked younger sibling of Monks and Scottish Mortgage, the two big investment trusts in the Baillie Gifford stable. It was launched 20 years ago and has a market value of £350 million, so ranks as a comparative upstart compared with the £1.6 billion Monks, set up in 1929, or the £6 billion Scottish Mortgage, which began life in 1909.
Yet its performance puts it right up there with its larger and better-known stablemates. In the five years to January 2018, it produced a thumping return of 163.1 per cent, putting it fourth of the 24 funds in the global investment trust sector, just behind Scottish Mortgage, in third place, and just in front of Monks, in fifth.
Douglas Brodie, who has been with Baillie Gifford since 2001, took over as lead manager in 2014 and has added some extra punch to the trust’s already adventurous approach. He fishes in a global pool of more than 30,000 stocks for businesses with the greatest potential for rapid growth.
His long-term investment perspective means that he doesn’t feel obliged to pay too much attention to quarterly earnings reports or traditional valuation measures, such as price-earnings ratios. Mr Brodie focuses instead on a company’s market potential and if he judges that to be attractive he is willing to pay a high price. This approach is reinforced by the fact that a third of the portfolio is not yet profitable, so traditional valuation techniques would be of little use. The trust represents a big bet on the industries of the future, with healthcare and technology stocks making up more than two thirds. Stock selection is helped by Mr Brodie’s academic background in life sciences.
The top three holdings offer a flavour of the type of advanced technology that the trust invests in. Market Axess Holdings is an electronic bond-trading platform, Alnylam Pharmaceuticals aims to use gene editing to silence disease-causing genes, while Lendingtree is an online lending exchange. Perhaps the best-known top ten holding is Tesla, the electric vehicle and energy storage company. Mr Brodie is confident that Tesla can carve out a significant slice of the market and the company embodies his belief that, if you don’t invest in the disruptor stocks, you will end up holding a portfolio of the disrupted.
True to the idea of holding stocks for the long term and squeezing the maximum potential from a company, the trust’s approach is to run winners, meaning that stocks such as Tesla and Market Axess have returned many times the cost of the original investment in them. Big wins have heavily outweighed the losses from a small number of failures.
To minimise failures in early stage businesses, the trust avoids investing at the testing phase, waiting until the commercialisation phase, when the technology is established as sound but the market has not yet priced in its full potential. Even so, there will be periods when the market’s view of the trust’s holdings will be out of sync with those of its managers. The recent global market sell-off triggered an especially sharp fall in the trust’s share price.
Its emphasis on innovation, backing companies in their early stages and growth potential, sets it apart from other investment trusts. Edinburgh Worldwide is a high-risk play on innovative businesses, with a pronounced weighting to America, which accounts for more than 50 per cent of the portfolio, and to smaller companies (including three unquoted companies). If you are prepared for that risk, you could reap substantial rewards.
ADVICE Buy
WHY This is an unashamed bet on the future that could pay off handsomely, though you should be prepared for a bumpy ride
McCarthy & Stone
On the face of it, there is little to doubt the long-term growth of McCarthy & Stone. The retirement housebuilder is the biggest player in its field, controlling 70 per cent of the market, while demand for its homes is only likely to grow as the elderly population in Britain increases. Unfortunately, it has a hidden weakness.
The FTSE 250 company said in December that its profits could fall significantly this year if it failed to win an exemption from the government’s plan to reduce ground rents on new long leases to zero. This exemption is looking increasingly unlikely.
Over the summer the government decided that it was time to act tough on the issue of ground rents. Media reports revealed that the customers of several housebuilders had not realised that the freeholds to their homes had been sold on to private companies. Some customers were bound to a contract that doubled their ground rents every decade for the next 50 years. The government said that it was banning the sale of new houses on a leasehold basis and was setting all ground rents on long leases at zero. To the shock of many, especially McCarthy & Stone, this included ground rents on newly built flats. That is a problem for the retirement housebuilder, which sells its freeholds to third parties — trading an income stream from ground rents for an upfront payment. About £33 million out of a total expected profit of £108 million for 2018 could be wiped out if the rule goes ahead. Its shares dropped 14 per cent after the announcement in December to 146p. They were trading yesterday at 148p.
McCarthy & Stone — which is also exposed to the slowdown in the secondhand market, as its customers usually have to sell their own home before moving into a retirement property — believes that it will be made exempt from the ban. Clive Fenton, chief executive, also has said that the rule change would lead to the group building fewer homes as it affected how much it could pay for land, while buyers would balk at significantly higher selling prices. The government is unlikely to respond well to such veiled threats.
ADVICE Sell
WHY Plan to reduce ground rents on long leases to zero and slowdown in secondhand market is likely to hit profits
