If they saw it, the two men who manage the Scottish Mortgage Investment Trust are unlikely to have been bothered much by an article on Tesla published by Bloomberg last month, which counted how much cash the electric carmaker had spent while the piece was being read.
Even this month’s strange conference call, in which Elon Musk, Tesla’s billionaire founder, dismissed analysts’ questions about details of the company’s finances as “boneheaded”, is unlikely to have shaken the “resolute optimism” philosophy through which Scottish Mortgage takes positions that flaunt established market wisdom.
Even the fact that about a quarter of Tesla’s stock is on loan to short-sellers, suggesting that the share price may fall, has elicited merely a shrug from the trust. After all, Tesla is its fifth largest holding and the manager has been buying the shares since they were quoted at between $30 and $40. At the moment, they trade at about $300.
If Scottish Mortgage is confident in its way of doing things, its investment in Amazon, its largest holding, has given it good reason. Building its position over more than a decade, the trust started to buy the ecommerce group’s stock when it traded for less than $50, against about $1,600 today.
While Scottish Mortgage, which is run in Edinburgh, is a great fan of Silicon Valley and has taken big bets on America’s so-called Faangs — Facebook, Amazon, Apple, Netflix and Google (the only Faang it does not own is Apple) — it is also taking a big punt on their Chinese equivalents. It owns stakes in Alibaba, Tencent and Baidu, respectively China’s biggest ecommerce platform, main social media platform and largest internet search provider. The fund manager also has a holding in Nio, a Chinese electric car manufacturer that has yet to list its shares but has ambitions to match and exceed Tesla. To this end, 15 per cent of Scottish Mortgage’s £6.6 billion fund is invested in unquoted businesses.
Handing so much of investors’ money to businesses that are not throwing off cash and are consuming much in the pursuit of global domination means that dividends are not a priority. In its annual results yesterday, Scottish Mortgage said that it had generated earnings per share of 1.2p, better than the previous year’s performance of 1.07p but hardly high-income stuff. The trust’s total annual dividend has been set at 3.07p per share, a little over 2 per cent on the year.
So if it’s income you’re after, Scottish Mortgage is not the answer. Instead, the fund is about absolute returns, which, after a 25 per cent rise in net asset value over the 12 months to the end of March against 2.9 per cent in its benchmark FTSE All Share index, it is delivering in spades.
That said, when things go wrong for Scottish Mortgage, which is invested purely in equities, they go very wrong. In 2008 and 2009 the trust’s net asset value and share price fell by about 40 per cent; at its nadir, the stock traded at a 12 per cent discount to NAV, compared with a small premium today.
In fairness, Scottish Mortgage admits that there may be times that its portfolio will fall out of favour and that it does not have any hedging in place to prevent this. The question is whether you agree with this approach. Betting on the twin horses of big technology and a constantly growing China has guaranteed winnings until now, so Scottish Mortgage looks like a sure bet if you believe that its present business model is ultimately sustainable.
Advice Hold
Why The trust has delivered of late, but caution is required
Mothercare Were Mothercare in labour, it would now be in extreme distress (Deirdre Hipwell writes). The pain, moreover, would be shared by both the company and its long-suffering shareholders.
The maternity and childrenswear retailer has been in a seemingly never-ending turnaround for years. A succession of chief executives have promised a healthy delivery of transformation initiatives, only to leave — generally having achieved none of their main aims.
Meanwhile, a punter who bought shares in Mothercare at 384¾p in July 2013 and neglected to sell is now sitting on stock worth less than 19½p a pop yesterday. That’s a 94 per cent decline.
In 2013-14, Mothercare’s underlying pre-tax profit was £9.5 million and this week it is expected to report profits at the lower end of a £1 million to £5 million range. Hardly anyone can remember when it last paid a dividend.
David Wood, the latest chief executive and a turnaround executive who has worked at Tesco and Kmart, is fighting to save the business. On Thursday, Mothercare will report another disappointing set of annual results, driven largely by a difficult performance in Britain and some key overseas markets, and will announce a plan for a “comprehensive restructuring and refinancing package”. This is likely to include new bank facilities, an underwritten equity issue and short-term capital, probably on expensive terms. The retailer will also announce plans for a company voluntary arrangement, an insolvency process where it can shut stores and cut rents at the landlord’s expense. Mothercare probably wants to close at least 40 stores — previously it has set a long-term goal of reducing its UK estate from 137 stores to between 80 and 100.
The question, however, is whether reducing its rent roll will actually help it to turn around its fortunes in the long run. This is a retailer that still needs to cut its operational costs while facing an ever-increasing threat from online operators and intense pricing competition on the high street. Consumer sentiment remains volatile.
For punters who bought in when the stock was riding high and watched its value collapse, it may be that the best course of action is to hang on. For everyone else, this is a stock that is best avoided.
Advice Avoid
Why Risky turnaround means this is only for the adventurous
