An example of this is the trust’s recent decision to take small stakes in four Chinese or "China related" stocks, and it is hoped at least one will benefit from substantial growth.
The stocks are Baidu, a Chinese search engine and ctrip, which specialises in internal tourism in China, as well as foreign trips. New Oriental Education is a private provider which offers distance learning, and footwear retailer Belle International already operates 600 outlets in China and is a play on growing domestic wealth, according to Baillie Gifford marketing director, James Budden.
Scottish Mortgage’s manager James Anderson’s belief that emerging economies are likely to present some of the best companies going forward is also reflected in its top ten holdings, which include Brazilian oil company Petrobras and miner Vale. However, the trust maintains that it uses a bottom up stock picking approach.
Budden said, for example, that Petrobras was included because of its large reserves and ability to drill them rather than because it is Brazilian. However he expects allocation to Asia and the Pacific regions in particular to increase because the trust’s managers expect the growing influence of China and surrounding countries to increase, meaning this is where good companies with a strong domestic market will be found.
As of 30 September the trust had a 12.9 per cent allocation to Asia Pacific and a 14.5 per cent allocation to emerging markets. Its largest geographic allocation was North America accounting for 26.4 per cent.
The trust admits that its approach, which has resulted in a portfolio which bears little resemblance to its benchmark the FTSE All World Index, will results in periods of considerable under performance, as evidenced over the last 18 months, as well as outperformance.
The trust’s net asset value (NAV) fell 45 per cent and its share price fell 42 per cent in 2008, in contrast to a 30 per cent fall for the FTSE All World, according to WINS. However over the six months to 9 November the trust made a NAV return of 17 per cent, against the global growth sector average of 14 per cent and FTSE World ex-UK return of 10 per cent, according to WINS.
Over three months, Scottish Mortgage has returned 14, against the sector average’s 10 per cent and FTSE World ex-UK’s 8 per cent.
In addition, over five years it has returned 62 per cent against the sector average of 64 and FTSE All World ex-UK’s 36. Over five years Scottish Mortgage’s share price has risen 70 per cent.
In NAV terms over five years Scottish Mortgage is joint second best performer in the global growth sector with Gartmore Global which also returned 62 per cent. Jupiter Primadona has the best NAV return over five years with 64 per cent.
WINS said it believes Scottish Mortgage will outperform in the long-term but will suit investors who can take a long-term view and endure higher volatility – the trust’s substantial allocation to emerging markets means it shares some characteristics with emerging markets trusts.