Luck has certainly played a part in this column’s success with Manchester & London investment trust, which we tipped in March 2017. The 109pc rise we have enjoyed since then is at least partly due to the enormous recent popularity of anything related to technology.
The trust caught our eye back then because it had some similarities with Scottish Mortgage but was trading at an attractive discount of 21pc, while its more prominent rival tended to trade at a premium. The gap, we felt, was too wide.
Today we’ll look at whether M&L would still make a good alternative to Scottish Mortgage; the merits of the latter trust in its own right will be assessed in a Sunday Questor column shortly.
The first thing to say is that the opportunity represented by the gap between the two trusts’ discount has disappeared.
M&L’s discount has dwindled steadily from that figure of 21pc in 2017 to stand at just 1.2pc last night. Scottish Mortgage is also at a discount – admittedly of only 1pc, but a rare enough occurrence nonetheless for Britain’s biggest investment trust.
Another difference between the two funds at the time of our original tip was that Scottish Mortgage had far more exposure to China than its rival: it had 18.8pc of its assets in the country, whereas M&L’s exposure was minimal at 1pc. This too has changed: M&L now has 28.9pc of its money in China and Hong Kong.
Scottish Mortgage’s exposure to China, by contrast, has crept up only to 21.2pc, although that is a less up to date figure from its annual report for the year to March.
There are other important differences. Scottish Mortgage famously invests in unlisted stocks and more generally in companies of all sizes, whereas M&L exclusively holds large listed firms.
M&L also takes bigger bets – very big ones in fact. Its largest holding at the end of August, Amazon, accounted for 18.1pc of the trust – one of the highest percentages Questor can recall in a conventional trust as opposed to one run, for example, on “activist” lines. Four other stocks each accounted for more than 10pc of the fund.
According to Scottish Mortgage’s most recent fact sheet, dated July 31, only one stock made it into double digits: Tesla at 13.4pc. However, since then the fund has trimmed its stake in the electric carmaker, whose shares have climbed dramatically this year.
Normally such large positions on the part of M&L would ring alarm bells for Questor, especially in view of what we wrote in March last year about the large exposure of another trust, European Opportunities, to one stock, Wirecard, the German payments firm and former stock market darling that later went spectacularly bust.
We advised readers to sell European Opportunities on the basis that its decision to hold 16.1pc of its money in Wirecard at one stage was rash.
We do feel less concerned, however, when the stocks on which M&L has made such large bets are – in addition to Amazon – Alibaba, Alphabet, Microsoft and Salesforce. Questor does not see any of those names following Wirecard into oblivion.
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M&L also states that it will not invest more than 15pc of the fund (on a gross basis) in one stock at the time of investment, so the fact that Amazon now accounts for more than that proportion of the trust is down to a rise in its share price.
M&L is, not surprisingly in view of those large positions, the more concentrated fund: it has 24 holdings to Scottish Mortgage’s 91.
If we had to summarise the differences between the two trusts we would say that M&L is more of a straightforward bet on the tech giants that everyone has heard of whereas Scottish Mortgage, while it too owns today’s big names, also puts a lot of effort into finding those of tomorrow.
A decision on whether to hold M&L hinges on the prospects for those big names. Expensive though they have become, this column believes that technology will continue to dominate ever larger swathes of the economy and that the dynamics of the industries in that many of these firms operate support a “winner takes all” outcome.
While the opportunity for a bargain that we spotted in 2017 has gone, we will therefore hold M&L, although we will remind readers of the risks posed by those very large bets.
Questor says: hold
Share price at close: 638p
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