Technology, healthcare and energy storage are the most important areas to buy into for investors who want to make exceptional long-term returns, according to the managers of the Scottish Mortgage Investment Trust.
Investors should focus on the “predictable drumbeat of deep underlying progress” rather than worrying about the short-term “cacophony of the stock markets”, they said.
In Scottish Mortgage’s interim report, managers James Anderson and Tom Slater said they had ramped up the trust’s exposure to healthcare stocks in recent years, rising from 11.6% of the overall portfolio a year ago to 21.4% today.
The largest holding is Moderna, which they said had been the “greatest contributor” to this change. Added in December 2020, shares have risen 127% so far in 2021.
The firm was one of the major companies to produce a Covid vaccine, helping the world to “escape the tragedies and confinement of the past 18 months”.
However, it is also writing code in the form of RNA to program human cells. Anderson and Slater said it is this technology that holds the greatest promise, as it targets diseases such as flu, Zika, HIV and cancer among others.
In addition, Recursion Pharma and Tempus are utilising machine learning, looking at data to enhance drug discovery and cancer treatment.
Ewan Lovett-Turner, head of investment companies research at Numis Securities, also highlighted that a new position had been taken in 10x Genomics which analyses single cells and “complements Illumina’s next generation sequencing”.
Outside of healthcare, the trust has followed suit with other Baillie Gifford managers in defending the Chinese technology stocks, which have been hit hard this year.
The Scottish Mortgage managers said: “The question of how to regulate big tech platforms continues to challenge law-makers across the globe. China has taken to this task with particular vigour and has demonstrated far greater speed and forcefulness in approach than elsewhere.”
This has caused a sharp decline in the share prices of a number of the trust’s largest holdings, such as Tencent and Alibaba, which are down 19% and 30.3% respectively.
Performance of indices in 2021
Source: FE Analytics
“Technology businesses are having to adapt to a rapidly altering regulatory environment while at the same time there has been a push for the rewards of China's growing prosperity to be more evenly distributed. Together these shifts have negatively impacted the share prices of many of our Chinese holdings,” they said.
However, the “underlying progress” of the companies remains “surprisingly strong”, with both Alibaba and Tencent continuing to grow revenue in excess of 20% whilst other China names such as Meituan and Pinduoduo are growing “considerably faster”.
Despite the weakness in its China stocks, the Scottish Mortgage trust has made 26.1% in 2021 – the second highest in return in the IT Global sector – building on an impressive 2020 when the trust made 110.5%.
Performance of trust vs sector and benchmark in 2021
Source: FE Analytics
Lovett-Turner said its long-term returns have been more impressive, with the trust making 1,198.9% over the past decade, almost double the second-best trust – Lindsell Train – and four times more than the FTSE All World index.
“We believe the management team has repeatedly shown it has the ability stay ahead of the market in identifying key growth trends which has driven the exceptional long-term performance,” he said.
This has included moving on from previous winners such as Facebook and Alphabet, as well as significantly reducing its position in Amazon.
“For a traditional investor, there can be something a little uncomfortable about holding Scottish Mortgage, because it is offering something different to other investments, but we believe that this has significant value in a portfolio,” said Lovett-Turner.