Private investor forum: galloping horses and tough tortoises

As with any investment, your capital is at risk. Any income is not guaranteed and can fall as well as rise.

The Ferrari and the phoenix. Claire Shaw, portfolio director of Scottish Mortgage Investment Trust, began her presentation with a double metaphor of longevity and resilience.

Referring to a recent podcast featuring Ferrari chairman John Elkin and Reed Hastings, founder of Netflix – both companies held by Scottish Mortgage (SM) – Shaw noted how Elkin had noticed that only 45 out of a million companies survive for more than a century. Hastings referred to the concept of a “phoenix” company – built for the long term with resilience and adaptability.

Shaw compared Scottish Mortgage to a phoenix, emphasising its 116-year history and enduring mission to support exceptional growth companies.

SM’s job, she said, is to identify, own, and support the world’s most exceptional growth companies, both public and private, for the long term. The Trust’s structure, she said, offers shareholders a unique proposition: the ability to gain exposure to private companies via a low-cost, liquid vehicle traded on the FTSE 100. A key theme is the importance of private companies in modern portfolios, noting that they represent a $5tn asset class.

The right ingredients

Shaw outlined five attributes defining Scottish Mortgage’s distinctive DNA:

• The search for outliers: The Trust focuses on companies that exhibit disruptive innovation because change drives growth.
• Private company exposure: Scottish Mortgage democratises access to private markets, which are traditionally expensive and exclusive.
• No geographical limits: The Trust’s investment strategy isn’t limited by regions and markets, allowing it to capitalise on opportunities worldwide.
• Long-term: SM’s ability to survive numerous market cycles, global catastrophes and manifold economic challenges is a testament to its enduring success.
• Asymmetry of returns: exploiting the potential for unlimited upside while losses are capped at the initial investment.

Shaw gave examples of successful investments, such as those of NVIDIA and Tesla. SM made over 100 times its initial investment in NVIDIA despite the stock’s volatility. Its early investment in Tesla also yielded significant returns. Shaw emphasised the importance of patience and a long-term perspective, noting that the line of progress is rarely straight.

She emphasised the importance of converting new ideas and technologies into successful businesses, highlighting the profound rewards available. She noted the contrast between short-term market distractions and long-term structural growth trends, asserting that “company innovation matters much more in the economic cycle.” The market’s short-term focus, she said, often overlooks the impact of disruptive technology.

Scottish Mortgage seeks companies either disrupting existing industries or creating new ones. Shaw described the power of a great business as one that can “reinterpret the industry” it operates in. SM’s investment approach involves imagining the world in ten years and asking “what if?” rather than fixating on “what is.”

This approach requires a certain degree of comfort with uncertainty and a willingness to embrace unconventional investment cases.

Company case studies

Shaw provided imaginative examples of future possibilities from the Scottish Mortgage portfolio, such as Joby Aviation’s flying taxis, Zipline’s drone deliveries, Solugen’s efforts to decarbonise the chemicals industry and Upside Foods’ innovation in cultivated meat, which she described as “real meat made without the animal” and “burgers without the butchers.”

Emphasising Scottish Mortgage’s determination to invest in the future, not the status quo. Shaw emphasised that the portfolio includes the “next generation of winners,” companies that may not yet be household names but are poised to create future profit pools. The Trust’s unique structure allows it to invest up to 30 per cent in private companies, with current holdings including SpaceX, ByteDance, and Stripe.

Shaw acknowledged the “roller coaster” volatility that Scottish Mortgage shareholders have endured. The highs of 2020 were followed by a steep drawdown, attributed to a “triple whammy of headwinds” in 2022-2023, including unprecedented interest rate rises and the unwinding of pandemic-driven growth. But, she said, the last year has seen headwinds turn tentatively into tailwinds.

She noted that the average revenue growth of Scottish Mortgage’s top 10 public companies is 40 per cent, while the top 10 private companies boast 80 per cent growth. Shaw emphasised that this should be recognised as “exceptional growth,” not just GDP plus.

Surviving and thriving

Returning to the phoenix metaphor, Shaw highlighted Scottish Mortgage’s long-term resilience, noting its endurance through numerous market crashes and economic crises over a century. This is not an investment trust, she said, that is focused on instant gratification or quick returns but on long-term growth and resilience.

What then is the purpose of Scottish Mortgage? Shaw reminded the audience that it’s to own the world’s most exceptional growth companies, be open to new possibilities, and invest in change and the people driving it. She quoted Tom Slater: “Our approach will never consistently be in favour, and we shouldn’t deviate it to avoid those short-term headwinds.” Shaw emphasised that patient ownership of growth companies is always challenging, but it’s also essential for long-term success.

Over to SAINTS

In his presentation on the Scottish American Investment Company, or SAINTS as it’s usually known, investment specialist Seb Petit distinguished the company’s approach from that of Scottish Mortgage. SAINTS, he underlined, focuses on dividend growth, the wonders of compounding, and companies that are gradual but unrelenting in their approach to dividend increases.

“Scottish Mortgage is all about outliers, disruptors and fast growth. SAINTS is much more about dividend, compounders and steady growth,” he said. The two strategies, he suggested, complement each other perfectly.

Petit outlined the trust’s philosophy, investment approach, and current portfolio, emphasising two main objectives: delivering a high and dependable income to shareholders and growing income and capital in real terms over the long term. He noted that “dividend growth has been far ahead of inflation for SAINTS shareholders,” highlighting the success enjoyed since Baillie Gifford became manager in 2004.

SAINTS’ structure, as he described it, is straightforward. Most assets are in a global equities portfolio, and about 10 per cent are invested in a property portfolio managed externally. This portfolio, he noted, aims to “provide a diversified source of income.”

A remarkable record

One of SAINTS’ central claims to fame is its remarkable record of dividend payments since 1937. This record is primarily one of annual increases, with no cuts since 1938, the year of the Munich Crisis. As Petit said, “Dividend for 2024 was announced three weeks ago... it marks the 51st year of consecutive dividend increases to shareholders.”

He suggested that statistic says it all about SAINTS’ extraordinary resilience through various crises, allowing it to maintain a 3 per cent premium over UK inflation in dividend growth.

It’s all down, Petit stressed to the magic of compounding, which he declared “the eighth wonder of the world.” Because the trust invests in companies focusing on dividend growth rather than yield, it can pick out the “relentless compounders” and those with the most resilient dividends. “Strong dividend growth is a powerful signal of compounding,” he said, linking it to investment managers’ confidence in future earnings growth.

This approach works best, of course, with extended time horizons, and Petit pointed out that SAINTS has an average holding period of eight years. “We’re very long-term investors,” he stressed. This distinguished the trust from most market participants. A trust with 50 to 60 quality compounders, along with the property portfolio, is well-placed to serve clients seeking dependable income, attractive total returns and a wish to avoid too much volatility. Seb concludes, “Scottish Mortgage will make you dream. SAINTS will make you sleep well at night.”

Endurance, not scale

To illustrate the kind of steady compounder SAINTS likes, Petit showed a chart comparing the performance of RWE, a German utility company and software giant Microsoft, to illustrate the importance of dividend growth over yield.

In 2011, RWE offered a 7.4 per cent yield, while Microsoft offered 2.4 per cent. Seb reflects that at first glance, that contrast might present what “seems like a straightforward choice for an investor to make,” but the steady rise of the Microsoft dividend and the erratic on-off performance (or non-performance) of RWE clearly showed that investing in Microsoft was undoubtedly the right decision.

RWE had to cut and suspend dividends, while Microsoft delivered steady earnings and dividend growth. Over the period, Microsoft’s total income was more than double that of RWE despite starting with a lower yield. The conclusion? “Dividend growth is much more important than dividend yield.”

Petit noted that finding long-term compounders was easier said than done, noting, “The average lifespan of a company is now less than 20 years.” In this age of short-termism, CEO tenures average less than five years. All the more important, he said, to look for management with a long term focus.

The main ingredients

To find future compounders, SAINTS focuses on

• Growth: Dividend growth should stem from earnings growth. Companies should have a “competitive moat,” often through innovation. Seb cites Taiwanese chipmaker TSMC as an example, noting their “relentless innovation” in semiconductor manufacturing.
• Resilience: Companies must withstand crises, as some shareholders rely on consistent income. Seb states, “We don’t want that income to fall dramatically just because there is a bad year out there.”

Drawing together his themes, Seb emphasised the importance of financial strength and low cyclicality in the companies SAINTS invests in. He used Coca-Cola as an example, noting that despite the pandemic’s impact, Coca-Cola’s earnings fell only 8 per cent in 2020, and it managed to raise its dividend by 2.5 per cent. This resilience was due to a strong balance sheet, which allowed Coke to retain employees and rebound effectively in 2021 with a 20 per cent increase in earnings per share.

“That resilience is key to ensuring the compounding of dividends in the next decade.”

Another critical factor is management with a long-term focus. Petit cited L’Oréal, where top managers have an average tenure of over 18 years, fostering long-term decision-making. He also stressed the importance of capital discipline, ensuring that cash flows prioritise growing dividends over potentially value-destroying acquisitions.

It’s an approach, he said, that contrasts with that of “Mr. Market.” The figures reveal the truth. In the SAINTS story, the trust is the enduringly prosperous tortoise, while Mr Market tends to chase the unreliable hares.

Words by Colin Donald

Past performance

Scottish Mortgage Investment Trust 

Annual discrete performance to 31 March each year (%)

Morningstar, FTSE. Total return in sterling. *FTSE All-World Index

Past performance is not a guide for future returns.

Scottish American Investment Company

Annual discrete performance to 31 March each year (%)

Morningstar, FTSE. Total return in sterling. *FTSE All-World Index

Past performance is not a guide for future returns.

Dividend performance to 31 December each year

Source: Baillie Gifford & Co.

Important information

Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

Scottish Mortgage has a significant investment in private companies. The Trust’s risk could be increased as these assets may be more difficult to sell, so changes in their prices may be greater. 

The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.

Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority and are based at: Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

A Key Information Document is available by visiting bailliegifford.com

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