Shares in Scottish Mortgage Investment Trust (LSE: SMT) have rallied since the beginning of the year and are trading at an all-time high. Investors who purchased Scottish Mortgage shares at the start of 2020 are sitting on very attractive gains.
It is not hard to see why the investment trust has delivered stellar returns. As at 31st October 2020, Scottish Mortgage’s two largest holdings were Tesla and Amazon. Both stocks have performed well through the global pandemic.
The £16bn investment trust is a portfolio of global stocks. Scottish Mortgage is predominately (83%) invested in public stocks with the remaining 17% in private companies. There is also a bias towards US companies through its investment in technology stocks.
Scottish Mortgage is jointly run by two fund managers, James Anderson and Tom Slater, who have built an impressive performance track record. Over the past five years, the investment trust has delivered a staggering return of 304% versus its benchmark, the FTSE All-World Index of 81% (as at 31st October 2020).
Scottish Mortgage is the flagship investment trust of the asset manager, Baillie Gifford. Both Anderson and Slater are experienced investment professionals and have a long tenure with the fund house.
Anderson and Slater are not afraid to take some big stock positions. The top 10 holdings account for 51% of the total portfolio value. The largest holding of Tesla at 11% makes me nervous. Tesla shares have had a stellar run and the inclusion of the company in the S&P 500 will be music to shareholders.
While I am apprehensive about the large exposure to Tesla, I believe it would be somewhat silly for the fund managers to reduce their holding now. Here’s why.
The decision to include Tesla in the S&P 500 means that all the passive funds which track the index will need to buy the shares in substantial quantities. This bulk buying means that Tesla’s share price is expected to continue to rise in the short term.
The prudent pair
Although Scottish Mortgage has a large position in Tesla, what gives me comfort is that the fund managers are prudent. Earlier this month Anderson and Slater took some profits by reducing their position in Amazon from 10% to 7% for a reason other than diversification purposes. They have backed the US internet giant for a decade and now question the stock’s ability to maintain its rapid share price growth.
The investment decision was prompted by Jeff Bezos, Amazon’s founder and CEO selling one million shares and netting £2.3bn earlier this month. The pair have previously trimmed their exposure to Tesla but I would expect them to lock in further profits after the inclusion of the company in the S&P 500.
I can’t deny Scottish Mortgage’s impressive performance. I like the investment trust but emphasise that investors must be aware of the fund managers’ large stock bets. With Scottish Mortgage I am buying the investment expertise of Anderson and Slater. As long as my portfolio is diversified, I would be comfortable buying it even at the current price.