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LONDON (Alliance News) - Scottish Mortgage Investment Trust PLC on Friday said that Wall Street's "destructive" short-termism has played a role in keeping modern companies away from the public markets in favour of generating their own cash and raising capital in the private market, and the trust and its investment manager hope to benefit through a reputation for "patient long term investing".
With its half-yearly report for the six months to September 30 showing a 10.9% decrease in net asset value, and the stock falling by 9.7% int he same period, the investment trust told investors to consider performance over a longer period. It boasted a 77% total return for its net asset value over the last five years, and 104% for the share price. An unchanged interim dividend of 1.38 pence per share will be paid, the trust said.
Managed by investment manager Baillie Gifford, the investment trust, which has its origins in Edinburgh, the capital city of Scotland, has nothing whatsoever to do with mortgages, although it does have a stake in Housing Development Finance Corp, a housing finance provider in India.
The trust's portfolio at the end of the opening six months of its current financial year emphasised its status as a global equities investor.
At that stage the value of its top holding, online retailer Amazon.com Inc, was GBP377.4 million and represented 10.6% of the trust's assets.
Tesla Motors Inc, the electric cars company co-founded by Elon Musk, who also played a big role in building payments company PayPal, was the fourth-largest investment in the trust's portfolio at that stage, with the stake valued at GBP177.1 million and worth 5% of the trust's assets.
As well as holding high-profile internet and technology stocks such as social media platform Facebook Inc, search engines Google Inc and Baidu Inc, and iPhone maker Apple Inc, the investment trust owns more traditional companies, such as life insurer Prudential PLC, Spanish bank Banco Santander and aerospace company Rolls-Royce Holdings PLC.
And when Chinese e-commerce giant Alibaba Group Holding Ltd went public with what was the largest initial public offering of all time in September 2014, Scottish Mortgage saw its early stage investment in the company rocket.
On Friday, the trust said that since Alibaba's IPO on the New York Stock Exchange, which valued the e-commerce company at USD168.0 billion, there has been an acceleration of a trend that has seen companies delay listing on a public stock exchange until much later in their development, in favour of raising capital in the private markets.
"This is an extremely important shift for growth investors who primarily invest in the public equity markets, as it results in a loss of access to a considerable period of value creation in these exciting growth companies," Scottish Mortgage said.
The trust said that many modern companies are able to finance their development through their own cash flows by the time they're large enough to go public. Because of their emphasis on technology, such companies are "capital-lite" and are not as reliant on publicly raised funds.
Scottish Mortgage said that a "significant number" of new companies under consideration for investment by Baillie Gifford have at least one founder-owner as part of bigger management teams, something which has become more prevalent in the existing portfolio. According to the trust, people with ownership of the businesses they have founded want to operate on a "sustainable multi-year growth basis".
"The destructive short term demands of Wall Street in particular around quarterly earnings targets for public companies, combined with the lower capital requirements of many of these businesses, have contributed to this trend to raise capital in the private market, rather than through an earlier listing on a stock exchange. Instead companies are seeking to partner with a relatively small number of investors who share their long term horizon," Scottish Mortgage said.
"Scottish Mortgage and Baillie Gifford have developed a reputation for patient long term investing, which is a real asset in this regard."
There are other benefits arising from Scottish Mortgage's structure: "Scottish Mortgage's closed-end nature is particularly well suited to investing across the capital structure, as the portfolio does not have a predefined lifespan and can continue to hold its stake in a business when it chooses to list on a public market, acting as a proper long term partner and providing stability through the challenging period around any future initial public listing, to the benefit of all concerned."
New investments made over the six months to September 30 include Home24, a European online furniture retailer developed by Rocket Internet; Airbnb, a website designed to help people rent accommodation from local hosts; and Funding Circle, a peer-to-peer lender.
Scottish Mortgage said that the increasing representation of unlisted companies in its portfolios should be seen as part of a "wider shift" in corporate financing markets, not a change in the investment manager's approach. "These are not immature venture capital style businesses, but established, often highly cash generative companies, typically with valuations well over USD1.0 billion, which would have previously been accessed through the public equity markets," the trust said.
Shares in Scottish Mortgage were up 1.7% at 269.65 pence on Friday morning.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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