Scottish Mortgage offers an easy way of investing in high-tech growth companies such as Amazon, Facebook and three Chinese internet stocks. Although income from the shares is limited, its long-term record on capital appreciation is good.
Investors in Scottish Mortgage Investment Trust cannot say they do not know what they are getting. The trust reiterated its strategy in last week’s half-year figures. “Scottish Mortgage is best suited to those who share its long-term approach to investing.”
This is a conviction investor, willing to hold stakes for five years or more and with only 75 holdings, the top 30 accounting for 85 per cent of all assets and the top ten for more than half. Investors who have been in for the long haul can have little to complain about.
The net asset value per share rose by 17.5 per cent over the first half, while its share price rose by 15.4 per cent. It is not easy to find a comparator for a trust of this nature, but world equity markets did little over that period in sterling terms.
Over the five years to the end of September the total return was 222.8 per cent. Net assets per share were ahead by 193.1 per cent. A passive investor would have seen about half that total return.
Scottish Mortgage, after strong share price growth over the past couple of years, is the biggest quoted investment trust. Its stable of mainly high-tech investments have been selected because they can be expected to at least double sales over a five-year period.
The trust sold out of Apple, for example, the world’s biggest company, because the managers do not expect that sort of sales progress in future. Instead they are focused on disruptors such as Amazon, Tesla, the electric vehicle maker, and three Chinese internet companies: Tencent, Alibaba and Baidu.com.
The share prices in these businesses have been especially strong over the first half to the end of September.
About 13 per cent of the fund is invested in private companies, while there is the authority to take this to 25 per cent. Among these are Spotify, the digital music service with more than 60 million subscribers, and Airbnb, the online provider of accommodation. This gives access to early-stage investments that are not easily available elsewhere.
This is a significant advantage, offering the sort of returns that would generally only be available to private equity.
Scottish Mortgage believes the next growth area could be healthcare, through the development of personalised treatments and diagnosis. This explains the investment in Illumina, a San Diego-based business that develops products for gene sequencing.
There is the facility to buy back shares to keep the net asset value aligned with the share price. The trust’s performance has tended to track that of Nasdaq though it has outperformed the high-tech US market of late.
Only 4 per cent of Scottish Mortgage is in the UK, so its geographic diversification is another advantage. There is, perhaps surprisingly, a dividend — investors have indicated they would expect some sort of income stream even if the main point in holding the shares is capital appreciation.
The payment has generally increased over the past three decades although this year’s payment is expected to be merely maintained, and the managers have indicated a willingness to make any future payments out of capital if necessary.
Scottish Mortgage will inevitably suffer if markets are in turmoil, but the shares offer exposure to growth tech stocks.
ADVICE Buy
WHY Scottish Mortgage offers an easy way of investing in high tech growth companies though the income the shares offer is limited
Aldermore
Life is looking rosy for investors in Aldermore. Especially those who bought shares in the specialist lender and savings bank back when they were trading below 150p a share last year.
The “challenger bank” confirmed yesterday that it had reached a recommended cash takeover offer of 313p a share from First Rand of South Africa. While the offer means that Aldermore’s time as a listed company is coming to an end, as buyout proposals go there is quite a bit there to keep shareholders happy. The offer represents a 38 per cent premium to the three-month average share price before First Rand came calling and a 63 per cent premium to Aldermore’s float price of 192p in March 2015.
Shareholders who bought shares back when Aldermore hit rock bottom after the Brexit vote in June are in for a particularly juicy payday as the offer represents a 200 per cent premium to that all-time low of 105p a share.
On the face of it this looks like a good offer and one that, barring a late counterbid from another party, looks likely to sail through. The Aldermore board has recommended the deal and Anacap, the private equity group which is the lender’s biggest shareholder with a 25 per cent stake, has indicated its support.
Anacap developed Aldermore from the old Ruffer Bank it bought about eight years ago. Since then it has performed solidly with its trading statement yesterday revealing that net loans were up by 12 per cent at£8.4 billion in the quarter, from £7.5 billion at the end of last year. This was driven by £2.4 billion of new lending.
When the takeover is complete, Aldermore will no longer be listed but will instead form part of First Rand, albeit as a distinct UK regulated entity with its existing management team. Aldermore says that it will be better able to expand its products and services.
Ian Gordon, an analyst at Investec said: “Aldermore’s pretty glorious 2½ years as an independently listed company appears all but over. We are assuming completion on the agreed terms within four months. Aldermore’s statement today is outstanding. What a wonderful story.”
ADVICE Hold
WHYCan soon cash in when the takeover completes
