Manchester & London leaps but lack of Tesla limits Scottish Mortgage challenge

Not owning surging shares in electric car maker was the main difference between Manchester & London and its big global rival in the last financial year.

We’ve dubbed Manchester & London (MNL ) in the past as a ‘Scottish Mortgage lite’ for its shared interest in technology-backed disrupters such as Amazon (in which it has an unusually large 20% weighting), Alibaba, Tencent and Netflix. However, in its latest financial year the £235m portfolio has struggled to keep up with its great £14bn global investment trust rival due to its avoidance of this year’s stellar stock Tesla.

More positively, in the 12 months to 31 July MNL delivered a total return on net assets of 12.8%, trouncing its MSCI UK Investable Market benchmark which plunged 19.6%.

Over half of that return (7.2%) came from technology stocks, whose sharp rises in the coronavirus pandemic have helped push its underlying net asset value (NAV) and share price by over 16% this year. 

Impressive as that is, it pales against the Baillie Gifford flagship Scottish Mortgage (SMT ) whose NAV has rocketed 77% and share price leaped 71.6% this year, stretching its longer-term lead over MNL. The latest statistics from the Association of Investment Companies show that over the five years to 1 October, SMT tops the Global investment trust sector with a 323.5% total shareholder return.

MNL fund manager Mark Sheppard shouldn’t feel too bad though as the trust - in which he is a controlling shareholder with a 52% stake - lies second out of 16 global trusts with a 214% return. The average gain was 151%.

Sheppard blamed the lack of exposure to Tesla and Apple for the trust failing to keep up with the collective march of Nasdaq-listed US technology stocks in the 12-month period.

Although the pound’s strength, gaining 7.6% against the dollar over the year to 31 July, created a ‘headwind’ for performance, the fund manager admitted the bigger issue was not holding the two tech giants. 

Although SMT sold its exposure to Apple a couple of years ago, its Baillie Gifford fund managers James Anderson and Tom Slater are long-standing and loyal backers of Tesla and its founder Elon Musk and has been a winner from the more than 700% increase in the shares over the past year, whereas MNL has missed out.

‘We have zero exposure to both these stocks and for a number of months now these two combined have represented a material element of the contribution to the Nasdaq’s positive performance,’ said Sheppard.

‘In July, their combined contribution represented 116% of Nasdaq’s gain. In August that contribution was 45%.’ 

Sheppard said when the fundamentals of Apple are analysed ‘you see that earnings growth has been relatively pedestrian versus megatech stocks and earnings forecasts have been deteriorating while the stock has more than doubled’.

‘These negative jaws between the earnings estimates and the share price are a sell signal for obvious reasons,’ he said, adding that it was a similar story at Tesla.

Despite the omission of Tesla and Apple in the portfolio, technology was still the best performing sector in MNL over the year, delivering 56% of the NAV total return.

Microsoft accounted for over half of this sector return,’ said Sheppard. ‘Other material positive performers included Adobe, Saleforce.com, Nvidia, Mastercard, and Visa.

‘Paypal was the only material negative contributor due to the timing of the disposal.’

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