Scottish Mortgage (SMT ) deputy fund manager Lawrence Burns has appealed to investors shocked by the six-month halving in the investment trust’s share price to remember the volatile, but ultimately successful, performance of its best stock, Tesla.

Burns said Tesla’s 63-fold increase in the past decade had easily made Elon Musk’s electric car company the biggest contributor to the top-performing global fund’s 540% total shareholder return in the 10 years to 31 March.

Tesla’s closest rivals in the £11.3bn portfolio, micro-processor designer Nvidia and e-commerce giant Amazon, had multiplied 19 and 18 times respectively under Scottish Mortgage’s ownership, he told investors in Edinburgh yesterday, highlighting failed stocks such as Intarcia and Home 24 where the trust had made smaller but outright capital losses.

With hindsight, the Baillie Gifford fund manager said Tesla had proved a fantastic share to back, and yet there had been dark times when its success had seemed far from assured.

Tesla had tumbled 40% in its first year after the trust’s lead fund manager Tom Slater and former co-manager James Anderson first invested in 2013. There had been seven occasions since then when its shares had dived more than 30% and two periods when the peak-to-trough ‘drawdowns’ had exceeded 50%, said Burns, who was appointed to the trust a year ago when Anderson first announced plans to retire this April. 

Ultimately, however, none of this upheaval had detracted from Tesla’s long-term importance as a top stock, which is why Burns used it to argue why investors should hold on and not sell out of Scottish Mortgage at close to a two-year low.

‘We’re not blind to the shareholder pain,’ he said, after the unravelling of much of Scottish Mortgage’s historic pandemic gains since November, when fears of rising inflation and interest rates prompted a vicious selloff in the high growth stocks many Baillie Gifford fund managers like to buy. But the manager added: ‘Enduring big drawdowns is just something that happens.’

Underlining the point, Burns (above) said: ‘Giving up on Tesla in one of the drawdowns would have been catastrophic for Scottish Mortgage shareholders.’

James Budden, Baillie Gifford’s sales and marketing director, had earlier kicked off the company’s first investment trust conference in five years, by telling investors, ‘we didn’t anticipate the scale of the volatility in the past couple of years’. This started with the 2020 pandemic crisis and ended with the war in Ukraine which further stoked the flames of inflation and threatened a global recession that has cast questions over the prospects of internet companies and technology disrupters.

The high-conviction growth approach of the partnership’s funds and investment trusts has served investors well over the long term. However, it has come unstuck this year with its flagship Scottish Mortgage slumping 42%, and stable mates such as Schiehallion (MNTN ), Edinburgh Worldwide (EWI ) and Baillie Gifford US Growth (USA ) suffering similar declines in a slump that has shaken Baillie Gifford fund managers and exposed its staff to calls from angry investors and advisers who bought in near the top and suffered big losses.

The firm’s Pacific, China, UK, Europe and two Japan trusts plus Monks (MNKS ), its other global closed-end fund, have not escaped either, with their shares sliding between 24% and 41%.

Budden said the stock market’s rejection of growth stocks had been ‘extreme’ and had prompted Baillie Gifford fund managers to review their holdings. ‘We’ve re-examined our beliefs and our companies’ prospects and their resilience,’ he said, with some positions sold where necessary.

In general, though, there had been few portfolio changes, Budden said, with most of Baillie Gifford’s long-term global growth companies deemed to be in a strong position to pass on rising input costs.

He stressed this was not ‘a denial of reality or complacency’, but reflected ‘our belief that strong operational performance [of holdings] will once again be reflected in share prices’.

‘The great dislocation will end, and our shareholders’ patience will be rewarded,’ he added.

Slater (above) later elaborated, saying that companies like drugs developer Moderna, SMT’s top holding, which has crashed 70% since its peak last August, had not given up the operational progress made during the last two years as the world turned online and relied on Moderna’s Covid jab to escape coronavirus. 

‘In fact, many are continuing to grow well,’ he said pointing to Moderna’s exciting potential to expand its MRNA drug discovery platform into tackling HIV, flu and even cancer.

Slater surprised some in the audience saying it was ‘not obvious that stocks were expensive’ last year when the US market’s valuation peaked at over 30 times company earnings. Questioning valuation-based approaches, he reiterated his and Burns’ view that their mission was to identify the best long-term growth companies and not judge short-term moves up or down in share prices.

He urged investors to take the advice of Charlie Munger, the right-hand man of Warren Buffett at Berkshire Hathaway, who he said recommended people ‘invert a problem’ when faced with a challenge such as a bear market crash. ‘Is healthcare less likely to personalise?’ Slater asked of the increasingly important theme of medical innovation in Scottish Mortgage.

‘Are we more likely to use fossil fuels?’ in response to the energy crisis caused by the global recovery from Covid-19 and exacerbated by the war in Ukraine and sanctions against Russia, he questioned.

‘No,’ he answered. ‘Then it doesn’t make sense to make wholesale changes to our portfolio.’