Volatility and Taking the Long View

Whether the weather be fine or whether the weather be not, we’ll weather the weather, whatever the weather, whether we like it or not.

Volatility and why investors should not be overly concerned by it, can best be demonstrated by studying the mighty Scottish Mortgage Investment Trust run by Baillie Gifford which forms part of Irongate’s bespoke stockbroking portfolios. Since last November its share price has dropped by 29%. Speaking at a webinar on Thursday, Lawrence Burns, co-manager said “I completely get that any amount of volatility is difficult to stomach”, but that it was not unusual for the high conviction investor in some of the fastest growing companies to suffer big falls.  The Trust also plunged in value in early 2020 before doubling in value by year end. In 2008 the Trust lost nearly two thirds of its value during the Credit Crunch before rising twenty-fold to today’s value.  “If you want long term returns you have to accept a bumpy ride” he goes on to say pointing to the ten falls of more than 30% the Trust endured investing in Tesla. Shares in Elon Musk’s Tesla have risen 1,664% over the last five years.

Tesla is Scottish Mortgage’s fourth largest holding behind Moderna, whose breadth and scalability of its mRNA technology platform holds the greatest promise in detection and treatment of diseases such as ‘Flu, HIV, Zika, cancer and many more;  the semi-conductor designer ASML , one of the most important companies you have probably never heard of but provides the building blocks of innovation; and the gene sequencer Illumina that has transformed the costs and speed at which gene sequencing can be performed and has compiled around 80% of all genome information in the world in a given year.

Burns acknowledged that the impact of rising inflation had discouraged investors from growth stock which had led to the sell-off in the sector on the basis that long term earnings become less valuable resulting in investors rotating to cheaper dividend paying value stocks. However, he cautioned against letting short term macroeconomics cloud investment decisions. Being long term is behaviourally challenging, the difficulty is not identifying the growth companies of tomorrow, but to hold onto them through the bumpy periods.

Plenty of their winners in 2020 saw their share prices reverse in 2021. But in many cases their operational success continued. Zoom’s share price fell by over 40 per cent over the year while revenues grew at more than 30 per cent year-on-year. Other examples of strong sales growth being rewarded by share price falls included Spotify, Delivery Hero and Zalando. Investor sentiment can be fickle, savage, and short term.

Scottish Mortgage recently took on US$400 million of new debt to back more transformational growth companies and help their existing companies expand. Gearing is used by investment trusts to boost long term shareholder returns. This should generate a return over the costs of the loans but in the short term it can make their shares more volatile and likely to underperform in a falling market. This increases borrowing to around 13% of Net Assets.

Despite the sharp retreat in their share price the trust remains top if its Global sector over three, five and ten years with returns of +130%, +224% and +792% respectively. (FE Analytics to 26/01/2022) as well as having outperformed the MSCI ACWI over the same time periods.

Volatility is all par for the course. Good businesses are not immune to outside pressures but those that can demonstrate that they are differentiators and have pricing power will do well in all environments.

An article by James Scott-Hopkins, Managing Director, Irongate

The value of an investment can go down as well as up.

You may get back less than you invested.

Past performance is not a reliable guide to future performance.

The opinions expressed are those of Irongate, this material is not a recommendation, or intended to be relied upon as a forecast.‍