Scottish Mortgage: Why this crisis favours growth stocks

Growth stocks have generally fared better than value stocks during the coronavirus pandemic, helping Scottish Mortgage Investment Trust during the worst of the stock market falls. Tom Slater, the trust’s joint manager, explains why

The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

Tom Slater of Scottish Mortgage Investment Trust has seen crises come and go. They’ve mostly led value stocks to outperform their growth counterparts.

Not this time.

The difference, Slater points out, is that the crisis had nothing to do with economic conditions. Its unprecedented circumstances have favoured growth companies, forcing change on existing industries and causing us to rethink entirely how we interact. 

“If you can’t go out and meet people face-to-face, then you want to use consumer internet technology companies to socialise”, he suggests. “If you can’t go into the office to work, then I think the tools of remote working become really important. You also see an acceleration of some of the big trends that have been driving these changes.”

While acknowledging that some of the moves and practices may unwind once normality returns, he is equally convinced that others will become more ingrained.

“The video conferencing market has been tiny for years, because the equipment was very difficult to use and the experience was really poor”, he says before highlighting the unparalleled growth in business over recent months for the video calling company, Zoom, a Scottish Mortgage holding. “We’ve seen an explosion in demand for services, but post-lockdown, as you start to see things moving to a more normal framework, I think people who’ve become much more familiar with the service will start to say, ‘do I need to travel to this meeting or could I do it via Zoom?’”.

Financial markets typically suffer from extreme events that create sporadic spikes in volatility, he suggests. However, today’s problems have arrived more suddenly and are unquestionably deeper than those of the past.  

“We haven't, as a society, shut down the economy voluntarily before”, he points out. “Instead of trying to predict the path from here, we focus much more on whether we’re investing in companies that are flexible, that are resilient, and that can be robust in the circumstances being thrown at them.”

Seeking affirmation that the trust holds the right companies has kept Slater busy over recent weeks.

“I think it’s a really interesting prompt to test your conviction in an investment case. Have events been playing out as you hoped, is the company doing what you wanted?”, he says. “You want to make absolutely sure that your capital is invested in your highest-conviction ideas. 

“But you also want to be investing in the companies that you think are able to contribute positively to society through these difficult environments. You want to be investing in the companies that are going to come out of this stronger.”

He offers the example of the trust’s largest holding, Amazon, saying, “They’ve recruited 100,000 new employees in the US, they pushed up wages for their employees during this period, and that’s enabled them to service the increased demand that they’re experiencing. They’re prioritising away from the full breadth of selection and focusing on essential items.

“And those are exactly the things that as a society we’re wanting them to do through this period, and they are exactly the sorts of things that a company with their balance sheet strength, their position in the market ought to be able to deliver, to be part of the solution to what we’ve experiencing.”

The current situation has also highlighted long-term trends in healthcare. Here, Slater has focused stock selection on companies that offer solutions in complex areas such as genomic and molecular understanding of disease. Holdings include Vir Biotechnology, which was a private company when Scottish Mortgage first invested but has subsequently listed on public stock markets. It is seeking to develop vaccines and treatments for infectious disease, and could potentially be part of the answer to the pandemic.

Vir’s transition from private to publicly-listed company could be repeated by other unlisted holdings, which can represent up to 25 per cent of the Scottish Mortgage portfolio. These companies are normally valued on a three-month cycle but market uncertainty means that timescale has been tightened to provide reassurance against concerns that the trust’s recent outperformance relative to plunging indices has been distorted by the unlisted holdings.  

“In between those three-month points, another trigger for looking at the valuation can be significant developments. And the very dramatic swings in the markets that we’ve seen absolutely fall into that category because you’ve seen such a rapid change in the valuation of listed peers. We use that as a prompt to revisit the valuations of our private companies”, Slater explains. “They will be adjusted to reflect current market conditions. And so we capture on a real time basis the significant moves in markets and the valuation of our invested companies.”

Doing so is reassuring for Slater as it means there are no nasty surprises hidden from view. It could also give shareholders more grounds for confidence in uncertain times.  

You can listen to Baillie Gifford’s podcast Short Briefings on Long Term Thinking at bailliegifford.com/podcasts. 

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This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.

The Trust has a significant exposure to unlisted investments. The Trust’s risk could be increased as these assets may be more difficult to buy or sell, so changes in their prices may be greater.

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