The Scottish Mortgage Investment Trust (LSE:SMT) is one of the biggest investment trusts listed on the London Stock Exchange, but it doesn’t invest in Scottish mortgages. Here are five things you need to know about one of the heavyweights in the UK investment trust universe.

Scottish Mortgage Investment Trust cheat sheet

This is the biggest general global investment trust in the UK. That means it is not sector specific, and its manager can buy and sell shares in companies all over the world. It follows a growth strategy, looking for companies that stand a good chance of appreciating considerably in value, rather than a portfolio filled with the usual blue chip stocks.

Longevity counts for SMT

At The Armchair Trader we like funds and investment trusts that have fund managers who have remained at the helm for a long time. In the case of James Anderson, he has been running the Scottish Mortgage Investment Trust since 2000. Recently he has been assisted by Tom Slater. The Scottish Mortgage Investment Trust is one of the range of investment trusts offered by UK fund manager Baillie Gifford.

Conviction – putting money to work where it counts

The Scottish Mortgage Investment Trust pursues a high conviction investment strategy – that means a lot of money is being allocated to relatively few companies, even though the SMT has over 70 companies in the portfolio at any one time. Anderson has 10 companies in the portfolio that account for more than half of the value of the investment trust. This includes big Chinese names like Alibaba and Tencent. What it also means is that LSE:SMT is wedded to the China investment story and bad news here will affect its price.

Moving into unquoted stocks

The SMT has managed to persuade its shareholders to allow it to invest more money in unquoted companies. Originally it was limited to 15% of the portfolio but last year shareholders voted to raise this to 25%. This is understandable given Anderson’s focus on the technology sector, as some of the most exciting companies in this universe are now eschewing an IPO and there is an increasing number of so-called unicorns (unlisted tech companies with valuations in excess of $1 billion). However, this also serves to raise the SMT’s risk profile while reducing liquidity, as unquoted companies are harder to exit from.

Investors are testy about Tesla

The Scottish Mortgage Investment Trust owns more than £400 million of Tesla stock, making Anderson the company’s second largest shareholder after Elon Musk. He has been taking a great deal of heat for this. There are many hedge funds lined up on the short side of Tesla who would like to see Anderson – and Musk – fail. Tesla has been spouting bad news recently, however, unexpectedly poor results at the end of October.  An estimated 6.8% of the value of the SMT is in Tesla.

Not enough cash for dividends?

There is also speculation in the Square Mile that the Scottish Mortgage Investment Trust will have to mine its own cash reserves if it is going to pay a full year dividend. The emphasis on technology stocks, which admittedly have helped to power its share price this year, means also that there is less cash coming into the investment trust from the companies it holds. The likes of Tesla and Facebook do not pay dividends, but many SMT investors would like to see one. The board of SMT will either have to cut the dividend, which will be an unpopular move, or dip into capital profits and the revenue reserve.



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10th November 2017
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