VALUE OR GROWTH? A Tale Of Two Scottish Funds

There are two Scottish funds listed on the London Stock Exchange, which I would like to focus on in this article. They both have similar names, yet their investment strategies differ considerably. The first of these two funds, The Scottish Investment Trust, is a contrarian value fund. Whilst the second fund, the Scottish Mortgage Investment Trust, is a growth fund.

The Scottish Investment Trust (SCIN) is over 130 years old and was first established in Edinburgh in 1887. Since 2015, the fund has been managed by Alasdair McKinnon with a focus on blue chip dividend paying companies that are out of favour. McKinnon takes a contrarian view to investing avoiding sectors that are hot and investing in companies that are undervalued and where sentiment is poor. The rationale being that when sentiment turns, the value of the companies increase as investors begin to pile in. To be clear, contrarian and value investing don’t mean simply investing in any old company that is down and out and going through a turbulant period. It is important that the company has a margin of safety to ride out any difficult period thus protecting it from having to raise emergency cash and/or ceasing to remain a going concern. It is also equally important that the company has healthy cash flows and a decent track record of this. The amount of cash that a company generates from its operations is a crucial metric and sometimes overlooked. A low P/E (Price To Earnings) ratio is one thing and a significant metric in indicating whether or not a company is overvalued, yet it doesn’t tell the whole story. The level of cashflow generation indicates how much cash a company is generating and the more cash it generates, the more of a financial buffer it has, especially if it’s total operating margins are not very high. It is also important to monitor a company’s total liabilities and how manageable and sustainable they are.

As of 30th April 2020, the largest holdings in SCIN’s portfolio included large gold mining companies such as Barrick Gold and Newmont Mining, large pharmaceutical companies such as Roche, Pfizer and Gilead Sciences and other assorted value blue chips such as United Utilities, Japan Tobacco, BT and Chevron. The gold mining companies have been in the portfolio for sometime. Recently gold has performed very strongly and it’s likely to continue. McKinnon, like myself, is of the view that major fiat currencies run the risk of being debased. Since the last financial crisis in 2008, we have been living through a period of very low interest rates and easy money. The present COVID-19 crisis has only exacerbated this as central banks have reduced interest rates even more and printed unprecedented amounts of money to prop up national economies in the wake of this crisis. Add to this the staggering levels of global government, corporate and household debt and you have a rather fragile situation. McKinnon’s thesis for having exposure to gold is as a form of insurance against this extraordinary macro environment and the real future risks and consequences it carries. He is also no fool by investing only in the biggest and most geographically spread global mining companies with low production costs. Whilst it is true that gold may not currently be unloved, I would still consider it a contrarian investment as it represents, to a degree, a lack of faith and trust in central banks and governments. It is also considered unfashionable. I would argue that newer supply-capped digital cryptocurrencies such a Bitcoin are more fashionable and hotter than gold. Especially amongst younger investors who generally overlook gold and other precious metals as a store of value.

McKinnon deliberately stays away from sectors that are hot and fashionable such as the technology sector. SCIN has absolutely no exposure to FANG (Facebook, Amazon, Netflix, Google) stocks or any other hot tech/startup stocks. The closest thing to tech in the portfolio are it’s holdings in boring and undervalued blue chip communication service companies such as BT, China Mobile, Verizon and Deutsche Telekom. McKinnon believes that the tide will turn regarding the high valuation of many technology companies, as unlikely as this may currently seem, and that value stocks, for a long time overlooked and underperforming compared with their growth counterparts, will prevail in due course.

The Scottish Mortgage Investment Trust (SMT) is currently the most valuable investment trust by market capitalization listed on the London Stock Exchange. As of today, it has a total market cap in excess of £10bn and over the last decade has performed extremely well. The primary reason for its impressive performance has been it’s exposure to all the FANG companies plus a number of other tech investments that have recently done exceptionally well. For example, the fund has a substantial holding in Tesla, whose share price has more than doubled since the beginning of this year. Generally speaking, tech shares have done very well since the COVID-19 induced lockdown measures were put in place over the last few months and the share price of SMT is trading at all time highs.

SMT, like SCIN, is also a very old investment trust with a hundred year plus history having first been established in 1909. It is currently jointly managed by James Anderson and Tom Slater. Anderson has been managing the trust for 20 years with Slater joining him in 2015. Their focus is purely on growth and investing in companies of the future. SMT is everything that SCIN is not. SCIN adopts a Benjamin Graham style value investing strategy. SMT does not embrace this type of strategy and even questions it. This is highlighted in a series of interesting essays written by Anderson and published on the fund’s parent Ballie Gifford website entitled Graham Or Growth?. I highly recommend giving them a read as it provides one with unique insights into Anderson’s way of thinking and by extension the investment philosophy and strategies of SMT.

It is true that growth investing has greatly outperformed value investing since the last financial crisis more than a decade ago. At the very start of 2009 the Russell 1000 Growth Index (RLG) was around 360 points. Today it is almost 1820 points. In this time the RLG index has grown more than 500%. That is highly impressive. By comparison the Russell 1000 Value Index (RLV) was around 446 points on 1st January 2009. Back then the RLV index was higher than the RLG index. The same cannot be said today with the RLV index almost 1,105 points. The RLV index has grown less than 250% during this period. Whilst this is certainly not a poor return, it doesn’t hold a candle to the RLG index’s 500% plus return.

Regardless of which side of the fence I am on regarding value or growth investing, it cannot be denied that both Anderson and Slater are highly skilled and visionary managers with a highly impressive track record for picking winners. It is much harder to quantify growth stocks than value stocks via traditional metrics and methods of fundamental analysis. If one were to just use just those methods when investing, one would have passed on investing in Amazon, Alphabet or Tesla in the early stages of their listings in the public markets. It takes more than just the tried and tested strategies of the past to value these companies and Anderson’s essays make this very clear.

However, it is just simply not the case that all new and exciting tech companies are ‘crushing it’. There have already been some casualties. The one that springs most to my mind has been the downfall of workspace company WeWork. Before the issues of the company came to the fore, it had a valuation of $47bn even though it had vast amounts of debt. Today, it’s worth far less at around $3-4bn. One of the largest investors in the company is SoftBank whose Vision Fund took a massive hit. Fortunately, SMT and its parent company Baillie Gifford, never built up a stake in WeWork over the years, but it could have easily happened here.

The recent WeWork debacle is one of a number reasons that make me nervous about having too much exposure to SMT right now irrespective of its stellar performance. As much as I respect the vision and foresight of Anderson and Slater, I worry that their fund could come a cropper some time down the line if a number of the holdings in the SMT portfolio underwent similar write-offs in value like WeWork. One of the fund’s holdings, Tesla, is probably the most polarised and hyped publicly traded stock in the world today. I have a great respect for its founder Elon Musk, who is a highly driven and exponentially thinking visionary. There is no doubt in my mind that he is special. However, the company could very easily experience a similar WeWork style crisis. No matter how highly I rate Elon, the financial fundamentals of Tesla are fragile and the share price could dive spectacularly in the event of a major existential crisis. This would create a huge dent in the value of SMT, as its Tesla holding currently represents a chunky 10% of the entire portfolio. Together with Amazon (which also represents 10% of the total holdings), it is one of the largest holdings in the SMT portfolio.

McKinnon is very wary of the present high valuations of tech companies and has citied the WeWork situation as a clear and present danger. In a post from December 2019 entitled Peak Unicorn?, he refers to the overvaluation of these exciting multi-billion dollar valued unicorn story stocks as a ‘disruption’ bubble, which has been propped up by an environment of cheap money and will not end well.

The last ten years have been very good for growth and technology stocks, yet it remains to be seen whether the next ten years will be equally magnanimous.

 

By Nicholas Peart 

Published on 27th May 2020

(c)All Rights Reserved

 

CITED ARTICLES:

https://resoluteoptimism.bailliegifford.com/will-the-mean-revert/

Peak Unicorn?

 

Image: tripsavvy.com

 

Touring The Local Pubs Of Glasgow

Earlier this month I visited and stayed with a couple of friends of mine in Glasgow. I had an absolutely stellar time over there. Yet one integral aspect of what made my time in Glasgow truly memorable was visiting some of the city’s local boozers. In this article I will be selecting some of these pubs which I particularly enjoyed.

 

 
Kelly’s Bar

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This pub is a proper authentic Irish boozer located off Polokshaws Road south of the city centre and an important part of Glasgow’s traditional and historic Irish community. My friends both took me there on my first night in Glasgow after we had a delicious vegetarian Indian feast at nearby Ranjits Kitchen. As we all ordered pints of Tenants a stocky Irish lad was playing songs on his acoustic guitar. Many of the songs were traditional Irish songs with a smattering of pro IRA ditties thrown in for good measure. You can take it or leave it, I suppose. But I like this pub. Not many outsiders venture here. There is nothing ostentatiously hip or pretentious about this place and if you want a cheap pre or post curry pint, you could do far worse than rock up here. Most of the time the pub is refreshingly devoid of big crowds except when Celtic are playing.

 

 
Saracen’s Head

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The Saracen’s Head, or ‘Sarries Head’ as its better known to locals, is a notorious Glasgow pub directly opposite the Barras market and very close to the Barrowlands concert venue. As I was ordering our drinks, I was mulling over whether to order a separate glass of the infamous Glasgow brew called Buckfast Tonic wine. The guy serving me was three parts Billy Connolly and two parts Gregor Fisher. He gave me a strong look to break my indecision and said, ‘ya cannoe gorra Glasgow and no av a wee bita Buckfast lad’. It seemed I had no other choice in the matter.

 

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At the Saracen’s Head pub with my Tenants and Buckfast

 

My friends and I found a corner of the pub to sit down. There I was with my Tenants in one glass and deep crimson Happy Shopper cassis in the other. I approached the Buckfast like it was a glass of black mamba venom. This toxic liquor was absolutely vile. I badly needed a kale, kiwi, cucumber – you get the picture – one of those uber healthy raw juices to cleanse by desecrated internal body after this legendary assault.

 

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Not feeling the Buckfast

 

 


The Star Bar

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The Star Bar is located on the corner of Pollockshaws and Eglinton streets. On the surface this is an unassuming and nondescript place. But once you open the doors and enter you are immediately catapulted into a genuine and uncorrupted slice of Glasgow. All the Rab C Nesbit stereotypes are pungent here. Yet this place exudes warmth. My principle reason for coming here was to sample their 3 course meal for only £3! I have never heard of anywhere else offering such deal. I loved the sound of it and I thought it would be rude not to resist.

 

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I couldn’t say no

 

The landlord was monumentally friendly to an outsider like myself and even offered me a free half pint of Carling as I was about to order my drink. A salt of the earth person with a heart of gold. I was very touched. My starter came in the form of canned minestrone soup. I could handle it, almost.

 

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Course One: Canned minestrone soup

 

Then for my main I received a Scots pie with fat green beans and boiled potatoes. This was by far the most ‘wholesome’ part of the three course meal even if the pie and mince inside was about as processed as processed pies got but you would have to be a real wolly to complain considering the price. And besides, I would be dead offended to be served anything remotely representing ‘gourmet’ quality here.

 

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Course Two: Scots pie with potatoes and green beans

 

Finally for dessert (or ‘sweetie’ as the landlord called it) I was served green jelly, tinned fruit and cream in a small tin cup. This was more challenging. I could handle the fruit but not the rest.

 

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Course Three: Green jelly, canned fruit and cream

 

 

 

The Brazen Head

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Further up Pollockshaws road and past the Star is the Brazen Head. I was expecting a gritty, rough and tumble affair judging by some of the online reviews I’d read. The Sunday Times even wrote an article on it entitled ‘Inside the Gorbals hardest pub’. Yet I was unexpectedly surprised to discover a rather pleasant and friendly Celtic Irish pub. On the other hand it was verging on dead when I was there save for two or three long timers. Perhaps I should go there when the football is on to give this place a more realistic assessment? I found a corner at the far end of the pub nestled amongst a galaxy of Celtic memorabilia. The widescreen plasma TV was on mute as I quietly drank my pint of Guinness.

 

 

The Alpen Lodge

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Around central Glasgow station are a number of down and out local boozers which are unlikely to ever make an appearance in a Lonely Planet guidebook. The Alpen Lodge is one of those places. Here it is semi packed yet everyone mostly keeps themselves to themselves. There is absolutely nothing remarkable about this pub but if you want to visit an authentic Glasgow boozer, albeit uncomfortably voyeuristically, you can do far worse. After a while I just wanted to get the hell out of here. Out of all the pubs I had visited in Glasgow, it was here where I felt the most self conscious. Yet as I drank my pint of Tenants in haste, I discovered a very enlightened poem on the wall next to me entitled Smiling which began…

‘Smiling is infectious,
you catch it like the flu,
When someone smiled at me today,
I started smiling too…’

I read the entire poem and immediately felt more relaxed and at ease. I savoured the remainder of my pint.

 

 

The Laurieston

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Saving the best til last, The Laurieston is the granddaddy of all the pubs I’ve mentioned. An institution and a unique and untouchable gem of Glasgow. What a place! On the outside it could be mistaken for a typical council estate drinking den. This pub is similar to the Star Bar in some ways. Both places exude legendary Glaswegian warmth and are as authentic as pubs get. Yet whereas the Star Bar projected a fatigued and rather downbeat vibe, here the energy is infectious. What’s more, all kinds of people come here; long timers, football fans, students, local trendies and even a smattering of tourists like myself. It was on the awesome recommendation of my Glasgow based friends that I first became aware of this place. This pub has been in the family for decades who, amazingly, have so far resisted any offers to sell the place. The family who own the Laurie are very proud of their pub and I feel a change in ownership could potentially dent a great part of what makes this pub truly special.

 

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Inside the Laurieston 1

 

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Inside the Laurieston 2

 

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At the Laurie sipping my pint of Guinness

 

As my friends and I sip our pints, I venture over to the jukebox which is free. There is a large selection of songs much of which are from old 60s, 70s and ‘Now That’s What I call Music’ compilations. I select Blondie, Thin Lizzy, The Troggs and Status Quo before I return to my friends and my pint of the black stuff.

 

 
By Nicholas Peart

26th October 2016

(All rights reserved)

Photographs from The Barras

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The Barras*

The Barras is a popular weekend market in Glasgow in Scotland and the biggest in the city. It is located in the East End district and right by the famous Barrowlands concert venue where many well known bands and singers have played.

The genesis of the market goes back to the early 20th century where traders would be selling their products from handcarts (‘barras’).

Many different types of items can be found here. It is a great place to hunt for bargains. You may get lucky and find a rare vinyl record for a few coins or a scarce out of print book or perfectly fitting tweed jacket in excellent condition for a fraction of its real value.

Most of all, it is the atmosphere and energy here which is the main draw for me. If I find something I really like for a good price, that is a bonus.

After the market, head down to the nearby Saracen’s Head pub (or ‘Sarie’s Head’) for a Tenants and (if you are feeling a brave) a Buckfast tonic wine.

 

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Text and Images by Nicholas Peart

18th October 2016

(All rights reserved)

*Image source: yelp.com