Scottish Mortgage Investment Trust portfolio director Ben James has argued the headwinds the trust has faced are becoming tailwinds.
Speaking at the Dynamic Planner conference in London, James argued the £11bn investment trust is entering a period of much more favourable conditions.
Scottish Mortgage has returned a not inconsiderable 11% over the past 12 months, but has had a slow start to 2024 and is virtually flat in year-to-date terms. It has also lagged the Nasdaq and S&P 500 significantly.
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Addressing the problem of small numbers of outstanding companies dominating the market, James noted that only about 4% of all stocks that ever existed have had a major impact on markets. “The rest deliver about the same as a T-bill,” he said. “It’s the outliers that matter.”
The job of stockpickers such as the Scottish Mortgage managers is to identify the small number of companies responsible for the majority of market returns, James noted. These are companies that address huge market opportunities, have a sustainable competitive edge and a culture of success.
Whether it is the Magnificent Seven, or before that the FAANGs, markets are driven by outliers, and it is Scottish Mortgage’s job to find them and hold onto them, he continued.
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James acknowledged it has been a painful and wild ride for Scottish Mortgage shareholders in recent years. The volatility seen was largely related to the pandemic.
“There will always be some volatility, but latest period of volatility really disconnected fundamentals from share prices, and we think that’s dissipating,” he said.
The ‘triple whammy’ of headwinds is also turning around, James explained. Namely, downward earnings revisions of stocks held in the portfolio, rising interest rates and decelerating growth.
“It’s very difficult for growth stocks to do well when the market is consistently revising their estimates down,” he said, “We had that through 2022 and the first half of 2023, but in the second half of 2023 we started to see estimates go back up again.”
To support this, the interest rate rises seen during the period are likely to turn into cuts later this year, James added.
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“It’s very hard for growth companies to do well when they decelerate,” James continued. “Some of our companies in 2020 were growing north of 100% a year, There was a significant pull forward of demand.
“They have decelerated, but this is why it’s interesting; because after all the downward revisions have finished, we haven’t landed on 5% growth. We’ve landed on 40% revenue growth year-over-year. This is still exceptional growth.”
