Podcast Summary
Investing in Disruptive Tech: Scottish Mortgage vs. ARK K: Believing in a fund's manager and investment style can lead to buying at a discount, resulting in potential bargains in closed-ended funds like Scottish Mortgage.
Scottish Mortgage Investment Trust and Cathie Wood's ARK K are similar in their focus on disruptive tech companies, but differ significantly in their performance and the way they are managed. Investors like Robin bought Scottish Mortgage after a discount due to its net asset value, believing in its manager and the fund's investment style. However, it's important to note that these investments make up only a small portion of his total portfolio. The discussion also touched upon the concept of closed-ended funds, where the value of the fund is determined by its net asset value, and buying at a discount to this value can result in a bargain.
Investing in growth and disruption: Scottish Mortgage and ARK Invest: Scottish Mortgage and ARK Invest adopt bold, disruptive strategies, focusing on growth stocks and unlisted companies. They aim to find the best company embodying societal trends and offer investors exposure to cutting-edge companies with potential for significant returns.
Both Scottish Mortgage Investment Trust and ARK Invest, led by Bailey Gifford and Cathie Wood respectively, adopt a bold, disruptive, and innovative investment strategy with a focus on growth stocks and unlisted companies. They aim to get ahead of societal trends and find the best company embodying that trend. Despite some differences, such as Scottish Mortgage's ability to buy unlisted stocks and use leverage, and ARK Invest's structure as an ETF limiting these capabilities, they both share high active shares, indicating a commitment to diverging significantly from the benchmark. This approach is attractive to investors seeking a fund manager with bold ideas and a willingness to take risks. The investment strategies of these funds are embodied in their portfolios, which include companies pushing the boundaries of science and technology, such as those sequencing entire genomes or revolutionizing space travel. Their focus on growth, disruption, innovation, and transformation sets them apart from traditional funds and offers investors exposure to cutting-edge companies with the potential for significant returns.
Identifying similar passive funds with potential better returns through tilt analysis: Analyzing a fund's investment style tilt can help investors identify similar passive funds with potentially better returns through fee arbitrage, but for funds with high active share and innovative approaches, replication through passive benchmarks may be challenging.
Understanding the investment style tilt of a fund, whether active or passive, is crucial when making investment decisions. A tilt towards growth or value can help investors identify similar passive funds with potentially better returns through fee arbitrage. However, for funds with high active share and innovative approaches to research, replication through passive benchmarks may be challenging. For instance, the Scottish Mortgage Investment Trust and ARK Invest's ARKK fund have distinct tilts towards global exposure and sector allocation. While both have a significant tilt towards healthcare, Scottish Mortgage is more global, whereas ARKK is primarily focused on North America and has a larger exposure to consumer cyclicals and tech. Cathie Wood, ARKK's founder, is known for her bold investment ideas and disdain for index funds, believing the shift towards passive funds in the last 20 years to be a misallocation of capital. Despite her fund's meteoric rise and subsequent fall, her unwavering investment philosophy remains a key factor for investors considering her funds.
Assessing the next generation of fund managers: Scottish Mortgage's success depends on the ability of new manager Tom Slater and his team to discover the next big trend or unicorn, with a potential for huge upsides but also higher risk of failure.
Scottish Mortgage Investment Trust, like Cathie Wood's ARK Invest, requires a leap of faith in the active management team due to their high active share. The risk is that the manager may retire or leave, but a well-executed succession plan and the presence of "mojo" or alpha in the new manager are crucial for continued success. Scottish Mortgage's new manager, Tom Slater, meets with managers of private companies before they list to gauge their potential. Their investments in trend-setting companies, such as Alibaba and Northvolt, have the potential for huge upsides but also come with a higher risk of failure. This fund is more suited for those who are comfortable with a lottery ticket investment approach and the excitement of potentially discovering the next big trend or unicorn.
Scottish Mortgage's Significant Unlisted Securities Might Not Be Worth the Risk for Retail Investors: Retail investors may find similar growth exposure through publicly traded stocks or funds, while Scottish Mortgage's 30% cap on unlisted securities could limit investment opportunities and force sales of listed stocks.
Scottish Mortgage Investment Trust's significant investment in unlisted securities, which make up only a third of the fund, might not be worth the risk for retail investors due to their limited access to these investments. Instead, investors could consider gaining similar exposure through publicly traded growth-oriented stocks or funds, which are often more accessible and cost-effective. Additionally, Scottish Mortgage's 30% cap on unlisted securities could limit its ability to participate in new investment opportunities or sell underperforming private stocks during market downturns, potentially leading to forced sales of listed stocks and a breach of the cap. The fund's high gearing level and debt payments also add to the risks. While Scottish Mortgage has reduced its active management fee, its competitor ARK Investment Management charges more, making the former a potentially more attractive option for investors considering these factors.
ARKK vs Scottish Mortgage: Different Approaches and Governance: While both ARKK and Scottish Mortgage aim for high returns, their approaches and levels of governance differ significantly. ARKK allows for more autonomy in investment decisions, while Scottish Mortgage benefits from an additional layer of governance due to its investment trust status.
While both ARKK and Scottish Mortgage aim for high returns, their approaches and levels of governance differ significantly. ARKK, led by Kathy Wood, operates with less oversight, allowing for more autonomy in investment decisions. In contrast, Scottish Mortgage, part of Baillie Gifford, benefits from an additional layer of governance due to its status as an investment trust. This includes a board that can control the fund manager's actions and even dismiss underperforming managers. Recently, Scottish Mortgage faced a public boardroom dispute, resulting in the departure of a nonexecutive director and the chair of the board. Critics, like Amar Bide, have raised concerns about the trust's ability to monitor illiquid investments and its reliance on an "aberrant" financial period for success. However, supporters argue that the trust's best investments come from these unlisted stocks and that the governance structure ensured the dispute was addressed publicly. As an investor, understanding these differences in structure and governance can help inform investment decisions based on personal risk tolerance and desired levels of oversight.
Scottish Mortgage vs ARC: Different Structures, Different Impacts: Despite similar growth focus, SMT's closed-ended structure and larger investments shield it from market downturns, while ARC's open-ended fund and smaller investments force it to gate stocks during crashes. However, both have suffered significant losses in recent times.
Scottish Mortgage Investment Trust (SMT) and ARC Investment Trust (ARC), despite their similar focus on growth businesses, have distinct differences due to their fund structures and investment sizes. SMT, a closed-ended fund, has the advantage of not having to engage in fire sales during market downturns, unlike ARC, which had to gate its stocks during a crash. Additionally, SMT's investments are much larger, averaging around £10 billion, compared to ARC's average market cap of around £200 million for small UK growth companies. However, both trusts have experienced significant drawdowns since early 2021, with SMT down around 50% and ARC down around 70% from their respective peaks. Despite the current market conditions, the speaker maintains faith in SMT's investment narrative and the value they're paying for the stocks, having bought after the crash. The key point is that a great company can become a terrible investment if overpaid, and vice versa. SMT has outperformed ARC over the last 5 years, but the timing of investment is crucial.
Governance concerns at Scottish Mortgage Trust: Despite recent challenges, Scottish Mortgage Trust's robust governance is crucial for its continued success as the largest investment trust in the UK, particularly in a potential market rebound.
Scottish Mortgage Trust has faced some governance concerns, leading to underperformance compared to ARC over the last five years. However, the situation seems to be turning around this year, with ARC's high beta nature suggesting potential outperformance if growth rebounds. The role of a board member involves asking deep questions and creating friction to ensure the fund manager is accountable to the shareholders. Scottish Mortgage, as the largest investment trust in the UK, particularly requires robust governance due to its size and inclusion in the FTSE 100. The recent public boardroom bust-up at Scottish Mortgage may have exposed some issues, but it's crucial for maintaining good governance and ensuring the trust continues to perform well for its investors.
Growth Funds Face Challenges Amid Market Volatility: Growth funds may struggle due to tight monetary policy, higher costs of capital, and decreased risk appetite of VCs. Focus on established growth stocks with reasonable valuations and consider closed-ended funds for stability in volatile markets.
The current market conditions, including tightening monetary policy and a higher cost of capital, may disproportionately affect growth funds. The future of growth stocks and these companies is uncertain, and it's important for investors to consider the potential for further market volatility. Growth stocks, which often rely on borrowing to invest and expand, may be negatively impacted by more expensive bank loans. Additionally, the risk appetite of venture capitalists has decreased, making it a challenging environment for growth funds. Instead of altering their fundamental nature, these funds should focus on more established growth stocks with reasonable valuations. It's important to pay attention to valuations and avoid investing in growth stocks at unreasonable prices. Another key distinction to understand is the difference between closed and open-ended funds. In an open-ended fund, units are destroyed when money flows out, requiring the fund manager to sell assets to pay investors. Closed-ended funds, on the other hand, have a fixed number of shares and do not issue new shares when money flows in or out. This can make closed-ended funds more attractive in volatile markets, as they are less affected by investor redemptions.
Impact of Fund Structure on Liquidity and Risk: Open-ended funds' share price depends on asset value, potentially leading to gating and fire sales during market crises. Closed-ended funds offer stability but risk discounts if share price falls below net asset value.
The structure of a fund, whether open-ended or closed-ended, significantly impacts its liquidity and the potential risks for investors. In the case of an open-ended fund, such as Cathie Wood's ARK, the price of the shares is directly linked to the value of the assets in the fund. However, this relationship can lead to issues during market crises when investors rush to sell, potentially leading to a fund being gated and a fire sale. On the other hand, closed-ended funds, like an investment trust, have a fixed pool of capital, and the buying and selling of shares is between existing investors. While this structure can provide stability and prevent a fire sale, it also introduces the risk of the share price falling below the net asset value, leading to discounts. Ultimately, both structures have their advantages and disadvantages, and investors should carefully consider their investment goals, risk tolerance, and market conditions before choosing an open-ended or closed-ended fund. The Woodford example serves as a reminder of the potential risks associated with illiquid investments in an open-ended fund, particularly during market downturns.
Unique investment opportunities in illiquid assets with investment trusts and closed-ended funds: Investment trusts and closed-ended funds provide access to illiquid assets and offer potential for higher returns, but they have less liquidity and transparency compared to ETFs. Carefully consider the board's composition and its ability to oversee the fund manager before investing.
Investment trusts and closed-ended funds offer unique investment opportunities in illiquid and esoteric assets, but they come with less liquidity and transparency compared to ETFs. These funds are often used to invest in sectors like infrastructure, where leverage and gearing are more effective. The presence of a board adds an extra layer of governance, but its effectiveness depends on the board's ability to push back against the fund manager. Essentially, investment trusts are companies with a board, and they can be found among the biggest sectors in stock market indices like the FTSE 100 and FTSE 250. While they offer diversification opportunities, it's crucial to carefully consider the board's composition and its ability to oversee the fund manager before investing.
