When the Scottish Mortgage Investment Trust grew sufficiently large to enter the FTSE 100, its managers made a virtue of their connections with the stars of the technology and academic universe.
And when the share price of the trust rose sharply, much of this was a consequence of investments in large technology companies.
However, since interest rates began to rise in the US its performance has gone into reverse. Meanwhile, a boardroom spat about the level of scrutiny placed on fund manager Tom Slater and his colleagues at the trust's management company, Baillie Gifford, has caused a blizzard of publicity and controversy to engulf the trust.
The situation raises questions over the long-term prospects for Scottish Mortgage investors. Some of the recent criticism was about whether the fund managers are challenged enough about their process, and the length of time many of the directors had been on the trust’s board.
This was crystallised by Amar Bhide, a recently departed director of the trust, who claimed that Scottish Mortgage’s managers have become too attached to certain themes and ideas.
Slater, who is now the lead manager of the trust, which was more than £13bn in size at its peak, has told a story about how he was disturbed by a call from Elon Musk, the chief executive of Tesla, Space X and others, while in the process of bathing his child. Both Tesla and Space X are significant investments in the funds managed by Slater.
The manager got to know some of the biggest names in Silicon Valley after spending a period of time there at the behest of his Edinburgh-based employer.
Meanwhile, James Anderson, the recently retired joint manager of Scottish Mortgage, liked to discuss the books he was reading, the academics with whom he was on friendly terms, and how all of this fitted into the investment process for the trust.
Some might suggest that this served Scottish Mortgage well.
The trust’s share price topped £15 in November 2021, due to the prevailing low interest rate environment, coupled with optimism around the reopening of global economies after the pandemic, meant many investors were keen to own stocks that would generate the bulk of their returns in the future, particularly in sectors with connections to mavericks such as Musk or to cutting-edge academics.
But subsequently higher interest rates and inflation since the start of 2022 have sent Scottish Mortgage shares spiralling downwards to £6 as investors ponder whether the trust’s board and Baillie Gifford are prepared for a world likely to be very different to the one in which the trust’s fortunes soared.
Lack of investment experience
The main thrust of Bhide’s criticisms, himself a professional academic, were that there was a lack of investment experience on the trust’s board.
He also questioned whether Baillie Gifford had sufficient resources to invest in early-stage private companies, something that had become the hallmark of the trust in recent years after it divested from established tech names such as Alphabet to invest in what they hope will be the winners from the next generation of technological change.
