Trustnet Magazine Issue 23 November 2016

SCOTTISH MORTGAGE INVESTMENT TRUST SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY. TIME JUST MAKES IT TASTIER. Scottish Mortgage Investment Trust believes in investment not speculation. We painstakingly identify those companies that we believe will deliver long-term growth and then we stick with them through thick and thin, providing our investment case remains valid. In fact we like to think of ourselves as ‘owners not renters’, which is why we don’t get side-tracked by short-term share price movements. But don’t just take our word for it. Over the last five years Scottish Mortgage, managed by Baillie Gifford, has delivered a total return of 182.7%* compared to 104.7%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.45%.† / RISK/REWARD / However, since then the high yield market has risen by about 15 to 20 per cent and no longer looks as compelling. Nevertheless, Sheldon MacDonald, manager of the Architas multi-asset blended fund range, believes that there are still selected opportunities: “The default risk is being over-egged. There are more opportunities at the higher yield end, including some emerging market debt – despite the consensus view Donald Trump’s election reduces the attraction of emerging market assets.” Emerging market debt is another area that has run a long way this year after some considerable time out of the spotlight. Efstathopoulos is focusing his attentions on the emerging market local debt sector, where yields are attractive. He adds: “It is one of the only asset classes with positive real yields. Central banks are now just starting to ease policy and Purchasing Managers’ Index [PMI] data is becoming more attractive. We are entering an expansionary phase.” Emerging markets is an area also favoured by David Jane, manager of Miton’s multi-asset fund range, although he has a greater weighting in equities rather than bonds. In particular, he has holdings in Hong Kong, Singapore and Malaysia – countries, he says, with Standardised past performance to 30 September each year*: 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 Scottish Mortgage 14.2% 35.9% 27.6% 4.2% 37.0% FTSE All-World Index 17.3% 18.2% 11.8% 0.6% 31.3% Past performance is not a guide to future returns. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested. For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com Long-term investment partners *Source: Morningstar, share price, total return as at 30.09.16. †Ongoing charges as at 31.03.16. Your call may be recorded for training or monitoring purposes. Scottish Mortgage Investment Trust PLC is available through the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA, which are managed by Baillie Gifford Savings Management Limited (BGSM). BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. trustnetdirect.com The risk in many of the traditional yield options is they will move in unison should the environment change an established dividend culture. He also holds some individual emerging market government and corporate bonds. There are also opportunities among more niche asset classes. Efstathopoulos says leveraged loans offer a similar opportunity today to that offered by high yield bonds at the start of the year: “Loans are floating rate in nature and sit higher in the corporate capital structure. Spread levels don’t look expensive. They are particularly useful for investors who are concerned about inflation rising.” MacDonald is turning to alternative asset classes, prioritising those with an inflationbeating return and backed by “real” assets. These include investments such as infrastructure, catastrophe bonds and aircraft leasing. He adds: “These have a different set of risks to equity and bonds. We don’t want just one or two and believe you need to take a basket approach. We tend to take exposure through investment trusts.” Jane, for the most part, is sticking with equities, focusing his attentions away from the “bond proxies” and towards areas that have better prospects for growth and are less vulnerable to a change in interest rate expectations. He says: “Bank stocks have good yields at the moment, particularly in Europe. They should be beneficiaries of a steepening yield curve.” Jane points out the yield curve has already started to move higher at the longerdated end. He also gives a warning to those investors who believe longer-dated government bonds and similar assets are inherently “safer” than other areas. “Investors need to think about the risk and reward. If longdated government bonds are paying 0.5 per cent per year over 10 years, but the price has moved 30 per cent in six months, does it feel right in terms of the compensation for volatility?” Jane adds the pro-growth, proinflation movement in his portfolios over the past few months is even more timely given Trump’s victory, including purchases in the natural resources and materials areas. The risk inherent in many traditional yield options is they will move in unison should the environment change. This may not even be prompted by a rise in interest rates, it could simply be inflation picks up and therefore long-term expectations for interest rates rise. This would see “ priced for perfection” valuations of government bonds and bondproxy equities shift. Either way, in a climate of high inflation, investors may have to pay greater attention to reward, rather than focusing narrowly on the risk. 15

Trustnet Magazine Issue 23 November 2016 | Page 16