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Significant drawdowns are a normal part of long-term investing, the deputy manager of the Scottish Mortgage Investment Trust has said.
In his manager review in the trust’s annual report, Lawrence Burns said what makes long-term investing difficult is it is rarely a straight line.
“Genuine long-term investing requires not just patience but the ability to endure periods of intense discomfort,” he said. “We have experienced such discomfort often with our holdings.”
Burns highlighted how Tesla was first purchased by Scottish Mortgage in January 2013 and fell 40 per cent that first year, followed by falls of 30 per cent or more on seven occasions.
The trust also suffered from a near-90 per cent drawdown experienced by Chinese electric car maker NIO in the year following its IPO, though has now seen a “tremendous rise”.
“We therefore know that significant drawdowns are a normal part of long-term investing,” Burns said.
Scottish Mortgage 10-year performance
Source: FE Fundinfo
Portfolio changes
The trust’s performance has sagged this year, with its share price falling nearly 40 per cent since the start of the year.
In the annual report, Burns highlighted how Covid vaccine-producer Moderna has experienced a 70 per cent fall from the highs of last year.
He said the market focus has been on the longevity of Covid vaccine revenues, however Scottish Mortgage think that this is overlooking the progress being made to apply the company’s mRNA technology to a wider range of issues such as flu and cancer.
“It is hard to argue significant value is being placed upon that broader potential platform when the company is valued by the market on a mere five-times earnings and has nearly one-third of its market cap in cash,” Burns said.
He added the trust has used the falls in share price to add to its holding, funded in part by reductions to Amazon and Tesla.
Annual past performance to March 31
| Year | 2017 | 2018 | 2019 | 2020 | 2021 |
| Scottish Mortgage Investment Trust performance | 21% | 16.5% | 12.7% | 99% | -9.5% |
Source: Scottish Mortgage, Morningstar (share price total return, sterling)
Burns said there will still be times that the reaction to some drawdowns will still be to conclude that the investment case is not developing “as hoped”.
He said this was the case with German biotechnology company CureVac, which Scottish Mortgage held for six years.
“The lack of progress in multiple clinical trials compounded with several disconcerting management changes led us to ascribe a substantially lower likelihood of success and we therefore divested last summer,” he said.
Burns concluded that the trust’s managers would rather endure painful drawdowns than “too readily abandon the companies and founders that have the potential to deliver the rare outlier returns we seek”.
“We remain deeply enthused by some of the long-term changes we are seeing in the world and the companies bringing those changes to life.
“The continuing digitisation of our society, the intersection of biology and information technology and the much-needed energy transition, each offer tremendous long-term structural opportunities.”
sally.hickey@ft.com
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