Scottish Mortgage Ups Exposure to Unlisted Tech Stocks

Scottish Mortgage is seeing the greatest growth opportunities in unlisted technology stocks and has board approval to add these long-term plays to the portfolio

Emma Wall 23 May, 2016 | 3:09PM
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Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Scottish Mortgage's Catharine Flood.

Hello, Catherine.

Catharine Flood: Good Morningstar, Emma.

Wall: The so Board have recently approved a decision for there to be more unlisted stocks in Scottish Mortgage. What made this decision happen?

Flood: So, this is not us changing what we do as investors. This is about reacting to the way that some companies want to engage with the capital markets. We've found over the last 18 months, two years that there has been an increase in really established businesses that are generating revenues and cash much earlier on which means they have the flexibility to remain private for longer.

So, as growth investors it's important that we get access to them and the structure of an investment trust gives us the flexibility to do that in the closed-ended pool of capital that we have to invest while giving our shareholders the benefit of trading their shares on the exchange.

What's important in this area is really having a reputation for being long-term investors. Here it really matters that we've owned Amazon in size for 10 years; that gives us access to Jeff Bezos; holding our Facebook allocation through the difficult period following the initial public offering is noticed not just by Mark Zuckerberg who then gives us time to speak to him about his long-term vision for the company but also by the management of these companies that are coming up doing something different that you can't access in the public markets.

So, for example, we own Airbnb, which is a very different challenger to the hotel industry. We own digital music content makers Spotify. These are one-off businesses that we think are truly attractive doing something new in established industries that you can only access if you have the flexibility to take private holdings. And this really matters for our shareholders and for those looking to take growth companies seriously from their established beginnings right through their growth phase.

Wall: Does that say something about the market cycle, the point in the market cycle that we're at then that you are having to increasingly look to these disruptive technologies, these newer startup companies because you're not finding the growth that you'd like to in the larger established FTSE 100 companies?

Flood: No, I don't think it does. That's been the surprise for us. These companies are not new. They are relatively established. They are generating revenues, the household names that I've mentioned. We certainly do have large public companies. We own Amazon, Facebook, Google that your listeners will be all familiar with. They are very much at the forefront of where we see growth. But these are businesses that are generating cash don't need the pressures of the public markets.

And this important because the pressure to make quarterly earnings targets can be very destructive to companies that want to run their business for 5 and 10 years and want to make their capital allocation decisions based on that and not meeting these arbitrary short-term targets. But typically a presence of a founder/owner who thinks in terms of that life span of (his), and want shareholders on the register who will be patient investors in businesses, not short-term speculators on share prices and having our reputation for doing just that built up by owning Amazon and Facebook gives us a reason to say to these companies, we've done the hard yards elsewhere, we can do the same for you.

Wall: It sounds like you are a very engaged shareholder. Are you an activist shareholder? What's the strategy for these unlisted companies? Is it to take them IPO and beyond?

Flood: We're not an activist shareholder in either the sense that we will look to campaign to change a company. We are not an activist shareholder in that we're looking to give advice to companies on their operations. These businesses are at a stage beyond that. We are doing what we do right across our shareholdings be they public or private.

We want to engage with management and understand what their long-term vision is for the business so that we can understand where the prospective returns for our own shareholders might come because in the time horizon that we have of five years and beyond for Scottish Mortgage, management who don't agree with that, who take a short-term approach, can kill what is a very good opportunity. And in the context of markets that are increasingly short-term and the way that they evaluate a business' prospects, we see being taking that differentiated approach is really very important.

Wall: Catherine, thank you very much.

Flood: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Scottish Mortgage Ord899.40 GBX-0.40Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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