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So near and yet so far

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15 December 2016

David Prosser explains the significance of joining the FTSE 100.

Some 107 years after its launch, Scottish Mortgage Investment Trust came within a whisker of joining the FTSE 100 Index of blue chip stocks this week, as the UK’s benchmark index went through its quarterly update. In the event, the £4.2bn closed-ended fund was pipped at the post by the packaging company Smurfit Kappa, though Scottish Mortgage could still be invited to join the FTSE 100 over the next three months if one of the constituents is taken over or falls out of the index for some other reason.

The significance of FTSE 100 membership is twofold. First, there’s a certain prestige to joining what is an exclusive club. Second, every passively-managed tracker fund following the FTSE 100 suddenly has to buy your shares.

The impact of the latter is more immediate, with the price of shares in new members of the index usually spiking sharply upwards courtesy of tracker fund demand. For an investment company, however, the prestige effect might be just as important. In a world where we are now regularly told that active asset management has had its day, there would be a certain irony in passive funds being forced to buy into an actively managed closed-ended fund.

In fact, Scottish Mortgage, like a number of its peers in the global growth sector of the investment company industry, is an exemplar of active fund management. Its rise to the brink of FTSE 100 Index membership has been built on net asset value growth of more than 150 per cent over the past five years. Those gains have come from a series of investments in US and Chinese technology companies ranging from Amazon to Baidu, as well as a number of unquoted investments; these include Skyscanner, for example, the British travel business which was sold last month to a Chinese buyer for £1.4bn.

This is active management in the true sense of the phrase – Scottish Mortgage’s managers at Baillie Gifford have followed their brief to “maximise total return from a focused and actively managed global portfolio” to the letter.

In the context of the Financial Conduct Authority’s recent review of collective funds, where the regulator concluded that far too many supposedly actively managed vehicles charge high fees for a sub-standard service that diverges little from the market and generally underperforms it, the Scottish Mortgage story is another example of how investment companies can deliver real shareholder value. Note, by the way, that the fund has ongoing charges of just 0.45 per cent a year.

It’s a shame, then, that the fund missed out on FTSE 100 membership – the accolade might not have been of much practical use, other than giving a short-term lift to the share price, but it would have represented a very public statement about this investment company’s success. Still, there is always next time.

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