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Hello, I'm Kyle Corwell and this is On

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The Money, a weekly look how to get

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the best out of your savings and investments.

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In this episode, we're focusing on

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those that are, in my view,

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the biggest household names with retail

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investors looking to back a professional

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fund manager. And they are Scottish

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Mortgage, Funds with Equity

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and Funds managed by Nick

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Train, including Lindsay Train, UK

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Equity. When

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investors buy an actively managed fund

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run by a professional investor known

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as a fund manager, they're buying

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in the hope that that fund

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manager will outsmart the stock market

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index over the long term. Of

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course, there are no guarantees that this

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will be achieved. And at the moment,

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all of those funds that I've just

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mentioned have had a difficult couple of

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years. We're going to be looking back

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at why performance has come off the

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boil and then look ahead to what

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needs to happen for performances for all

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three to improve. Joining me

1:05

to give his expert insights is friend

1:07

of the pod, Sam Benstead. Sam

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is our bond specialist at II,

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but alongside myself, he regularly interviews

1:14

for managers and he stays on

1:17

top of the world of fund

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and investment trust investing. So

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Sam, let's take each in turn. Let's

1:24

start off with the best performer of the bunch over

1:26

the past year by a long way. And

1:29

that is Scottish Mortgage, whose lead manager

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is Tom Slater. So could

1:33

you look back first, Sam, and explain why

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Scottish Mortgage has had a very big slump

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that it's not yet recovered from? So

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it hit a share price peak of over

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£15 on the 5th of November,

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2021. And

1:48

at the time of this recording, the shares are priced at

1:50

over £9 per share. Yeah,

1:53

I'd love to. So I think first, let's

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just go into how Scottish Mortgage invests, because

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that's key to understanding why performance

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has been so poor over

2:01

the past three years. I mean, over a

2:04

year it's looking quite good actually, but it

2:06

seeks to find innovation winners, so companies which

2:08

can then go on and change their industry.

2:11

So it's not just a simple technology

2:13

fund, I would call it an innovation

2:15

fund. So that means companies in the

2:17

biotech sector and other ones in the

2:19

consumer sector as well, like Amazon or

2:21

Ferrari or Netflix, that actually you might

2:23

not expect to find in a technology

2:25

fund. But the problem is a lot

2:28

of these companies can be very expensive,

2:30

offensively valued because investors think their potential

2:32

to grow profits in the future is

2:35

extremely exciting. But during times

2:37

when interest rates rise, that actually puts pressure

2:39

on these types of stocks, which promise profits

2:41

way out into the future and

2:44

pushes money into safer assets that pay a

2:46

lot of money today. So for example, the

2:48

bond market when interest rates rise. So

2:51

given the speculative nature of some of

2:53

its shares, things like drone delivery, biotech,

2:55

computer chips, it's been a

2:58

really, really tough time for the investment

3:00

trust. But on top of that,

3:02

it has about 30% invested in unlisted

3:05

companies. And that's also played a role

3:07

in the discount widening caused by the

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share price falling. So when

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you have these unlisted companies, it's actually up to

3:14

Bailey Gifford itself, with the help of

3:16

third parties to put a valuation on them. They're

3:18

not valued by the stock market, by the public

3:20

stock market daily. And investors actually said, you know

3:22

what, I don't think the valuation you're putting on

3:25

these companies should be as high

3:27

as you say it is, we're going to sell

3:29

the shares, create a discount and put our own

3:31

valuation on these stocks. So those 53 unlisted

3:34

positions, 27.1% of

3:36

the fund at the moment, have also been a

3:39

factor in the share price falling quite a

3:41

lot. But as I said before, the

3:43

one year returns have actually been quite good. So

3:46

up 28% over one year. And that compares with

3:48

19% for the FTSE or

3:50

world index and 17% for

3:52

the typical global trust. But if

3:54

you look back three years, that includes the periods

3:56

when interest rates started rising, the shares are down

3:58

26%. and

6:00

payments firms such as Wyze, as

6:03

well as other areas. Sam,

6:06

you touched on the skepticism

6:08

around evaluations of the unlisted

6:10

holdings. So in total,

6:12

there's 53 unlisted stocks

6:14

with SpaceX, the

6:17

biggest largest unlisted holding.

6:20

Do you think it's this area of

6:22

the portfolio that it needs some sort

6:25

of positive event, like an IPO on

6:27

these companies publicly listing to

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make investors more confident about

6:32

the overall valuations for the

6:34

whole unlisted company part

6:36

of Scottish mortgage? Yeah, definitely. So

6:38

a big IPO could be a

6:40

catalyst for renewed confidence in the

6:42

valuations that Bailey Gifford is putting

6:44

on its unlisted companies. Like

6:47

you say, SpaceX is the

6:49

largest unlisted firm. So

6:51

recent reports said that it could

6:54

be looking to raise money at a $200 billion valuation in

6:57

private markets up from 180 billion recently.

7:01

So that would show that actually, Bailey

7:03

Gifford could be undervaluing its

7:06

private investments. And I think the one big

7:08

one, it'll actually signal more private companies to

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come to market an IPO. Stripe

7:13

is the big payments processor that Bailey

7:15

Gifford also owns in Scottish mortgage, which

7:17

could be a good IPO candidate. On

7:20

just like renewed sentiment, I'd also highlight

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that Scottish mortgage has made quite a

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lot of mistakes as well. And it

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seems to be correcting these, which

7:28

I think would be good news for the share

7:31

price. So it's backed out of a lot of

7:33

Chinese shares. There's so lots of shares in Tencent

7:35

and Alibaba and also Illumina, the gene

7:37

processing company has now been removed from the

7:39

investment trust. And that was one of its

7:41

largest positions. So it seems to be

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readjusting its portfolio a little

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bit towards more mainstream companies.

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So two recent additions to the fund have been META,

7:53

formerly known as Facebook, and

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also TSMC, the computer chip

7:57

manufacturer. So I feel like

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the managers actually. It's not that they're taking

8:01

less risk, but they've become a bit more

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mainstream in the companies that they're willing to

8:06

own, which has actually been a great investment

8:08

decision and could be good news for sentiment.

8:11

Overall, I'm more optimistic than pessimistic in

8:13

terms of the outlook for Scottish mortgage.

8:15

I think obviously at some point we

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don't know when, but the next move

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for interest rates will be down rather

8:22

than up. So that'll

8:24

surely be a tailwind for

8:26

its strategy. Of course,

8:28

Scottish mortgage and the other funds we're

8:30

going to talk about, managed by Teddy

8:33

Smith and Nick Train, they're not making

8:35

macro calls. Instead, they're looking at the

8:37

fundamentals of a business. The

8:39

buying companies that they think will

8:41

stand out from the crowd and potentially

8:44

be long-term winners. However, the

8:46

wider macro backdrop does have an

8:48

influence, so every investor should think

8:51

about that as well in terms of their

8:53

holdings and when it's a good time to

8:55

have exposure to a certain fund or an

8:57

investment trust. Another thing

8:59

I like is the share buyback program.

9:02

They've had a big discount Scottish mortgage

9:04

and the board is moving to try

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and address that. I'd

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certainly welcome other large

9:10

investment trusts that have the means

9:12

to buy back their own shares,

9:16

to act accordingly and to buy back their

9:18

own shares because I think it's all well

9:20

and good. The full managers say

9:22

in the portfolio is cheap and now is a

9:25

potential good time to buy the strategy, but

9:27

if you're not buying your own portfolio as well at the same

9:29

time, then that message is

9:31

not as strong an argument for me.

9:35

What's your thoughts on your overall outlook for

9:37

Scottish mortgage? Have you got anything further to

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add? Yeah, I'd add to the share buyback

9:41

story and I think, like you said, that's

9:43

good news. It shows that the board is

9:45

very pragmatic and actually previously the managers had

9:47

said that the best use of their capital

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is to buy stakes

9:51

and exciting businesses rather than buy back its

9:53

own shares. So obviously they've changed

9:56

their tune on that, which is good news.

9:58

It shows that that's good news. their

24:00

poise over time. He's very

24:02

bullish though, isn't he Sam, in terms

24:04

of the outlook for the UK equity

24:07

market and also for his portfolio. Could

24:09

you talk us through why he's bullish

24:11

and what your thoughts are on prospects

24:13

for Linzell Chain UK equity going forward?

24:15

Yeah, he is bullish, but fund managers

24:18

are always bullish on their portfolios or

24:20

markets. So you've got to be a

24:22

bit wary of that. They are trying

24:24

to sell their fund to you. But

24:27

I think with the UK, he does have

24:29

a case. He said the UK market is

24:31

pregnant with opportunity. He's highlighted

24:33

the takeover bids, the recent bids for

24:35

UK companies are showing that there's value

24:37

there and foreign investors are actually recognizing

24:39

that. He's also optimistic about

24:42

the prospects of some of its

24:44

biggest positions. So he said that

24:46

in the large cap space, Rellex and Sage

24:49

could double or treble profits over the next

24:51

decade or more. And among smaller companies he

24:54

owns, he said fever tree and right move

24:56

could do the same thing. He's also shifted

24:59

a bit more money into technology and data

25:01

shares. So this is for his

25:03

investment trust, but the open-ended fund is managed in

25:05

a similar way. Train calculated that in early 2020,

25:07

about 30% of the portfolio was invested

25:11

in first-class data or technology assets, but

25:13

that figure is now 55%. However, I conclude

25:18

that if you're after technology shares, the UK

25:20

market isn't the best place to be. And

25:23

if you're after world leading

25:26

valuable brands, the UK market

25:28

has a few, but so does

25:30

the US and so does Europe. So

25:32

actually limiting yourself to that small group

25:34

of companies doesn't make too much sense.

25:36

I think Fundsmith Equity probably does a

25:38

better job at owning those world leading

25:40

companies just because it can invest in

25:43

more markets. Whereas the UK is

25:45

perhaps best suited for value

25:47

investors or investors looking for income.

25:50

On the other hand, Train's record is

25:52

fantastic and there's obviously a lot of

25:54

cheap companies in the UK at the

25:57

moment and when a fund manager's returns

25:59

are hitting the headlines,

26:02

it could be a sign that actually pessimism has

26:04

gone too far and a turnaround is around the

26:06

corner. So it may not be a bad time

26:08

to invest. Ultimately, again,

26:10

it'll come down to the stock

26:13

picking. I think interest rate

26:15

cuts would in fairly help Nick

26:17

Train's strategy, but it's all

26:20

down to whether Nick Train's 20 stocks

26:22

that he's picked will be long-term

26:24

winners. In the

26:26

past, they have been, but whether they will

26:28

be in the future, nobody knows. One thing

26:30

I'd say is that you've got to be

26:33

comfortable that this is a very concentrated portfolio.

26:35

The top 10 holdings, they account for 80%

26:37

of the overall fund. So

26:39

I think it's important that this

26:41

fund is paired with other UK

26:44

funds that are more diversified and

26:46

that this is not your only

26:48

exposure to the UK stock market.

26:50

Because if a couple

26:52

of his stock positions, particularly his top

26:55

holdings, do perform badly over a short

26:57

time period, then that will drag the

26:59

overall fund performance down a lot more

27:02

than other funds that say have 50

27:05

or 60 stocks. Thanks

27:07

to Sam, and thank you for listening to this episode of

27:09

On The Money. If you enjoyed it,

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find more information and practical pointers on

27:32

how to get the most out of

27:34

your investments on the Interact

27:36

Investor website at ii.co.uk.

27:40

And I'll see you next week.