The History of Scottish Mortgage Investment Trust

An insight into the history behind the Scottish Mortgage Investment Trust by John Newlands. How a trust launched in 1909 amid the rubber boom fuelled by soaring demand for tyres, Scottish Mortgage is now the UK’s largest investment trust.

In December 1908, a young Scots rubber planter, Alastair Macgregor, came home on leave from Malaya with a problem. One ready to listen was the family solicitor, the 27-year-old Carlyle Gifford, younger partner in the legal firm Baillie & Gifford WS.

Macgregor described his and other plantations’ cashflow difficulties. Land was purchased, cleared and planted with rubber trees, followed by a long wait until the sap could be tapped.

As it happened Gifford’s partner, Lt Col Augustus Baillie had been a director of the Third Mile Rubber Company since 1906. He was well aware of the City fortunes made from rubber speculation in the car boom, but The Straits Mortgage and Trust Company, launched by the legal firm’s newly created investment arm Baillie & Gifford in 1909, chose a different path.

The plan was to offer mortgages secured against the plantations themselves, a time-honoured model to which Gifford added an innovative twist: the right of conversion into ordinary shares, in other words, the lure of a share in the future prosperity of the rubber industry.

The trust’s first balance sheet produced in 1909 showed subscribed capital of just over £50,000. Gradually it acquired a broader range of holdings including The Cuban Telegraph Company, The Chilean Northern Railway and, in 1910, its first investment in the US, the Tacoma Land Investment Company of Washington State.

With diversification away from Malayan plantations came a change of name, reflecting the trust’s sturdy Edinburgh base, but a cause of confusion ever since. In 1913 the company became The Scottish Mortgage and Trust Company Limited.

With substantial reserves built up over its first 20 years the trust came off relatively well in the Great Depression, and in the early 1930s it diversified across both fixed interest securities (48 per cent) and domestic and overseas equities. Top 10 holdings included Shell, manufacturers Turner & Newall, Calcutta Electric Supply and Margarine Unie (later Unilever).

Amid rumbles of another war, the managers presciently switched course again, coming out of Continental Europe to the US, with the percentage of European holdings dipping from 18 per cent in March 1932 to only 4 per cent by the time Hitler invaded Poland. As the war progressed, most of the trust’s dollar holdings were requisitioned by HM Government in exchange for issues of war loans. Most of the residual European holdings were worthless by 1945.

Rigorous postwar exchange controls continuing into the late 1940s meant that the trust’s portfolio was heavily skewed towards domestic securities, with an 80 per cent weighting in the UK and a mere 6 per cent in the US. However a significant return to the US in the 1950s was one of the most successful moves in Scottish Mortgage’s history. Aided by borrowing, the net asset value per share multiplied more than six-fold between 1950 and 1965.

The currency controls hampering overseas investment were swept away by the Thatcher government in 1979. Scottish Mortgage put this new-found freedom to good use. Within two years, exposure to US equities increased by a quarter to 40 per cent, with broadly the same in the UK and 14 per cent in Japan and the Far East.

The abrupt end of the tech boom in 2000 marked the start of a painful three-year bear market in which share values fell sharply. Not the easiest moment for James Anderson, a Baillie Gifford partner since 1987, to take up the manager’s mantle in 2000.

During this testing period the chairman Sir Donald MacKay initiated a major strategic review, carried out by Anderson and the board. The conclusion? The trust should aim to maximise long-term total return from a focused, actively managed truly global portfolio. Performance would be judged over rolling five-year periods, encouraging a long-term view. In the 10 years that followed, Scottish Mortgage would undergo radical change, coming to be dominated by Anderson’s high conviction positions in transformative, often internet- and technology-based, companies across the globe. Early examples included Amazon, Google and the latter’s giant Chinese equivalent Baidu.

Anderson’s 21-year tenure, latterly in partnership with Tom Slater, has been a phenomenal success story, marked by the trust’s entry into the FTSE 100 index in March 2017. As of September 2021, the trust’s share price cumulative return from the beginning of 2000 was 2,720 per cent.

Slater, co-manager since 2015, has summed up Scottish Mortgage’s enduring purpose: “To identify the world’s most exciting growth companies and where we find them to be very long-term, supportive owners, to allow that return to accrue to our shareholders … regardless of whether a company is public or private or where it happens to be headquartered.”

This modus operandi, unencumbered by weightings and benchmarks, given powerful intellectual support by influential board members such as Professor Sir John Kay, has allowed its managers to spot and – long before the herd – invest in some extraordinarily successful companies. The trust and its shareholders reap the benefits of scale won by its success, allowing running costs to be kept low and shares to be easily bought and sold. The ability to envision a different future, foreshadowed by Carlyle Gifford at the dawn of the age of the motorcar, continues in Scottish Mortgage’s relentless probing for next generation growth companies. These are the ones riding – often fomenting – forces of exponential change: healthcare’s data revolution, the rise of China, the future of energy and transport. But for all the accumulated history, to Baillie Gifford’s flagship trust, in Anderson’s words, “the future matters an awful lot more than what’s happened in the past”.

Scottish Mortgage Investment Trust is included in the Irongate Bespoke Equity Portfolio

An article by John Newlands, financial historian and an authority on investment trusts.

Published November 2021 by Baillie Gifford via their website.

Past performance is not a guide to future returns.

The value of shares in Scottish Mortgage, and any income from them, can fall as well as rise and investors may not get back the amount invested. Investment markets and conditions can change rapidly.

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.