Unquoted companies are increasingly offering the best potential for returns to professional investors, says James Anderson, manager of the Gold and five-star rated Scottish Mortgage Investment Trust (SMT).
After Uber’s (UBER) recent drubbing at the hand of public markets, Anderson’s comments will add to the heated debate over the value of IPOs. “Public listing is an artificial boundary – we want to break it down,” he said at a conference in London on Wednesday.
Anderson, who has managed the £7.7bn since 2000, thinks it will become increasingly difficult for investors, professional or otherwise to generate alpha – or beat the market – with listed stocks.
The 110-year old trust published its annual results on today (Thursday), which showed a rise in the NAV of 14.6% in the year to the end of March and a rise in the share price of 16.5%. Over 10 years the trust’s share price has gone up 737%.
Why does Anderson invested in unquoted companies? The companies will inevitably list anyway, but a lot of the growth and development, especially with tech companies, comes about at an earlier stage.
He got permission from the board to start including unquoted investments in the portfolio five years, when he realised how great the opportunity was. The trust can invest up to 25% of its assets in unlisted companies and currently has around 16% of the portfolio in such firms.
Among unlisted firms he invests in are a number of healthcare firms, including Grail, HeartFlow and Ginkgo Bioworks. In terms of e-commerce, he hold stakes in HelloFresh and Home24, as well UK money transfer startup Transferwise.
Spotify Took its Time
The trust bought a stake in Spotify (SPOT) in 2015 and the streaming service went public in 2018, 12 years after it founded. The firm went for a direct listing when it floated, meaning that it bypassed the banks and didn’t raise any more capital. Over the years, Spotify defied pressure from early investors to float.
Anderson adds that investment trusts, with their lower fee structure than private equity firms with their standard “2 and 20” terms, can offer much lower-cost exposure to high-growth companies.
And rather than cashing out at IPO, Anderson believes that this provides good buying opportunities for institutional investors to top up their stakes.
Scottish Mortgage Trust is one of the best performing UK funds in recent years. The share price of the trust has risen by 22% on an annualised basis over five years, according to Morningstar data.
In a statement accompanying the results, the firm said: “Scottish Mortgage is not intended to be all things for all people and is most suited to those who share its patient, long term approach to investment.”
Morningstar senior analyst David Holder says: “Management believes that many companies are able to perform better away from the intraday spotlight of quoted markets where investors and management are increasingly focused on quarterly figures to the detriment of longer-term investment and growth.”
Holder adds that the “fund managers have gained the reputation as long-term supporters of management and hence have been able to gain access to a range of unlisted opportunities”.
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