Scottish Mortgage discusses competitive pressures faced by big Chinese internet companies – Over Scottish Mortgage’s (SMT) half-year period to 30 September 2019, the trust’s total return NAV increased by 3.2%, less than the 9.9% return generated by the FTSE All-World Index. This represented a rare period of underperformance by SMT. The longer term performance record remains good. Over five years the NAV has gained 137.5% versus 86.5% and over 10 years it has increased by 415.1% against 204.4%.
Big internet platforms under threat
SMT say there is gathering evidence of cracks in the dominance of some of the internet platforms that we have invested in both heavily and successfully in the last decade. This is mainly true in China where the threat to incumbents has come neither from regulators nor public discontent but from extraordinary dynamism. The major casualty has been Baidu (once a very significant SMT holding) and the major disruptor has been Bytedance. SMT does own shares in the unquoted Bytedance.
In the manager’s report accompanying the results, SMT adds: “The contrasting relative fortunes of Baidu and Bytedance are not isolated examples of a divergence between quoted and unquoted competitors. Contrary to the mood of the moment our experience has been that in both underlying progress and valuation, our unquoted companies are generally outperforming their listed counterparts. It is common knowledge that there are high profile examples of unquoted or recently listed companies that have suffered serious problems but it seems to us that generalising from these distinctly colourful sagas is misguided. The flaws of their business models were not impossible to identify. Although we are wary of treating our unquoted assets as a separate portfolio our experience remains encouraging. In aggregate since our first unquoted investment on 2 June 2010 to 30 September 2019 the return of all the stocks that we initially owned in unquoted form (whether now listed or not) has been 445.3% versus 341.4% for Scottish Mortgage overall and 183.8% for the FTSE All-World. In specific developments, two still unquoted companies, Ginkgo Bioworks (synthetic biology) and You and Mr Jones (digital advertising) have enjoyed substantial business progress and consequent valuation increases whilst the now quoted Meituan and HelloFresh continue to reverse initial market scepticism in impressive fashion.”
SMT on unquoted investing
“This seems the appropriate moment to stress as strongly as we can that we believe that our ability and willingness to invest in unquoted companies at scale and globally as part of a portfolio offering high overall liquidity is critically important to both our future returns and to the unique proposition Scottish Mortgage can offer to individual shareholders. We are convinced that the long term risk taking, essential to economic and social progress, is continuing to migrate to private markets and at an accelerating pace. It’s important that all our shareholders, from the smallest holders to the very largest, have access to such innovative enterprises and the enduring real value which they create. That we offer this whilst our ongoing charges have edged down once again (to 0.36% of average assets over the rolling twelve month period to the end of September) seems to us to be a worthwhile achievement that is not a common characteristic of the industry in general or managers of unquoted equities in particular. We have no intention of being deterred from this philosophy of investing or from driving charges lower.”
SMT: Scottish Mortgage discusses competitive pressures faced by big Chinese internet companies