Remove ads

Introducing the LemonFools Personal Finance Calculators

Scottish Mortgage and the Eighth Wonder

Closed-end funds and OEICs
Luniversal
Posts: 48
Joined: November 4th, 2016, 11:01 am
Been thanked: 240 times

Scottish Mortgage and the Eighth Wonder

#222239

Postby Luniversal » May 16th, 2019, 8:48 pm

Scottish Mortgage Trust (SMT) filed its annual report to Mar. today, prompting me to update an old Motley Fool exercise-- called 'Thirty Years A-Growing'-- which includes this pacesetting IT.

The objective is to test a number of big, old, mainstream growth- or income-oriented trusts as vehicles for capital accumulation over an extended span, such as all or most of a working lifetime. Would reinvesting dividends from these supposed stalwarts produce in time a worthwhile pot for retiral? Think of it as a simple, lowish-risk, method of tapping what has been called the eighth wonder of the world, compounding: the snowball effect which (one hopes) results in accelerating gains as the finish line nears.

The starting date was whichever trust's financial year began in 1983. A sum of £37,000 was assumed to be committed, before dealing costs which have been realistically simulated (they have tended to fall with the onset of online trading). Each annual haul of dividends, paid in two or four instalments, was accumulated until it was used to buy more shares at the price ruling at the FY end.

Why a £37,000 gross investment? It equates before inflation to the £75,000 used for standard illustrations of High Yield Portfolio results. Too much for a youngster to have saved, said some TMF critics; but £37,000 was about one-third of my net worth in 1983. And how I wish I had bet that much on one IT for real-- especially that one. For after 35 years, Scottish Mortgage would have expanded from an initial 375,561 shares bought at 9.64p equivalent in Apr. 1983 to 712,780 shares worth 512p apiece at Mar. 31, 2019: total value £3,649,431, almost a 100x increase.

The snowball has done its stuff, enhancing a winning streak by the managers. In four years the futurism of James Anderson and his Baillie Gifford crystal-ball-gazers, plus the Eighth Wonder, almost doubled the pot's value. Between 1987 and 2015 City of London (CTY), a very different kind of fund, would have beaten it every year, but SMT has streaked ahead as the latest infotech boom has left the value style hanging fire.

SMT faced more ups and downs than trusts such as CTY. Its small and latterly curbed income stream meant the pot's worth varied more than with income-seeking plodders-- during the global financial crisis it crashed by two-fifths in one year. But no bad falls occurred afterwards, and only nine, year on year, in the life of this snowball.

Should I now prefer safety, I could cash my chips and reinvest in a spread of juicier items for, say, an average yield of 5% against SMT's 0.7%: upwards of £180,000 pa in spending dosh, or £150,000+ if 'derisked' using an income reserve. If I had trousered SMT's modest payouts to spend on wild living, the initial £37,000 would be worth a paltry £1,923,386 at Mar. 31, but I would have received £332,000 in income to dissipate while waiting for the presentation clock and the payoff.

This backward jobbery is just for fun, friends, as Hughie Green used to say of the clapometer vote on Opportunity Knocks!.

It takes no account of tax: in the early years before Personal Equity Plans and ISAs or cheap SIPPs, the swelling capital gain would have been difficult to shelter fully when switching-out time beckoned. Nice as headaches go, admittedly.

Also, of course, it is shameless cherrypicking hindsight to single out SMT; most trusts would not have come through the years since Maggie's heyday nearly as effulgently. Nevertheless, the toothsome figures give some idea of what can be done by sticking to one's last.

To go to the opposite extreme: had you the bad luck or judgement to bet your £37,000 on British Assets, now Aberdeen Diversified Income & Growth (ADIG), it would have grown to a mere £525,065 by Sep. 2018: a compound annual growth rate (CAGR) of 8.1% pa against SMT's 13.5%.

ADIG has committed most idiocies in the playbook, such as chasing already-expiring fashions in stocks, fooling around with mandates and benchmarks, over-distributing dividends and slighting growth of revenue, chopping and changing managers, refusing for long spells to acknowledge its sickness. Yet by Sep. 2018 it was set to pay out £23,000 pa and rising: a less than calamitous outcome for a pensioner from a £37,000 grubstake, even one wagered a long time ago.

CAGR for eight trusts over the 34-year timeframe averaged 10.5% pa. I will try to post a fuller accounting when all have reported their 35-year results. Not that any is likely to beat Baillie Gifford on the bawbees.

ADrunkenMarcus
Lemon Slice
Posts: 527
Joined: November 5th, 2016, 11:16 am
Has thanked: 51 times
Been thanked: 121 times

Re: Scottish Mortgage and the Eighth Wonder

#222271

Postby ADrunkenMarcus » May 17th, 2019, 7:41 am

Many thanks for sharing this.

Much appreciated and a good example of a high quality global equity investment trust producing life changing returns over the long haul.

Best wishes

Mark.

Lootman
Lemon Half
Posts: 5373
Joined: November 4th, 2016, 3:58 pm
Has thanked: 28 times
Been thanked: 872 times

Re: Scottish Mortgage and the Eighth Wonder

#222292

Postby Lootman » May 17th, 2019, 8:54 am

Luniversal wrote:Why a £37,000 gross investment? It equates before inflation to the £75,000 used for standard illustrations of High Yield Portfolio results. Too much for a youngster to have saved, said some TMF critics; but £37,000 was about one-third of my net worth in 1983.

It's great that your net worth was £111,000 at such a young age, and I would never begrudge anyone who had such luck and fortune. But that was a breathtakingly large sum for a young person to have had back then, especially since taxes had been very high up until just a few years before. I can only assume it was some kind of inheritance, gift or other form of parental largesse.

And the problem with that is that it is a wholely unrealistic sum to start out with for anyone else here. It makes the numbers impressively large but all for naught since nobody here (except you) started out that rich. Moreover with that amount you could have invested in almost anything and put your feet up. It doesn't serve your purpose to pick numbers that make you look unduly privileged and blessed. Frankly you could have bought gilts, taken zero risk, and still coined it in.

To put your number in context, I was no pauper myself back then. I worked in the City and in 1983 I bought a 5-bedroom house in a leafy part of North London. The cost was just a little over 37K: It was actually 44K. So your initial investment here is almost the equivalent of owning a 5-bed house in North London with no mortgage at an age of, say, 30. Put another way, your starting net worth was the equivalent of three such houses owned free and clear. It's like starting out today with £4 million at age 30. Outside of Silicon Valley that rarely happens.

Not impossible, but why diminish your analysis (which I assume to otherwise be accurate) with such an unrealistic starting point? Even 10K would have been a lot but at least it is plausible and makes the maths easier.

bluedonkey
2 Lemon pips
Posts: 192
Joined: November 13th, 2016, 3:41 pm
Has thanked: 143 times
Been thanked: 38 times

Re: Scottish Mortgage and the Eighth Wonder

#222327

Postby bluedonkey » May 17th, 2019, 10:33 am

Luni,

What's your view of the outlook for ADIG?

BD

Luniversal
Posts: 48
Joined: November 4th, 2016, 11:01 am
Been thanked: 240 times

Re: Scottish Mortgage and the Eighth Wonder

#222445

Postby Luniversal » May 17th, 2019, 12:09 pm

Lootman wrote:
Luniversal wrote:Why a £37,000 gross investment? It equates before inflation to the £75,000 used for standard illustrations of High Yield Portfolio results. Too much for a youngster to have saved, said some TMF critics; but £37,000 was about one-third of my net worth in 1983.


It's great that your net worth was £111,000 at such a young age, and I would never begrudge anyone who had such luck and fortune. But that was a breathtakingly large sum for a young person to have had back then, especially since taxes had been very high up until just a few years before. I can only assume it was some kind of inheritance, gift or other form of parental largesse.

And the problem with that is that it is a wholly unrealistic sum to start out with for anyone else here. It makes the numbers impressively large but all for naught since nobody here (except you) started out that rich. Moreover with that amount you could have invested in almost anything and put your feet up. It doesn't serve your purpose to pick numbers that make you look unduly privileged and blessed. Frankly you could have bought gilts, taken zero risk, and still coined it in.

To put your number in context, I was no pauper myself back then. I worked in the City and in 1983 I bought a 5-bedroom house in a leafy part of North London. The cost was just a little over 37K: It was actually 44K. So your initial investment here is almost the equivalent of owning a 5-bed house in North London with no mortgage at an age of, say, 30. Put another way, your starting net worth was the equivalent of three such houses owned free and clear. It's like starting out today with £4 million at age 30. Outside of Silicon Valley that rarely happens.

Not impossible, but why diminish your analysis (which I assume to otherwise be accurate) with such an unrealistic starting point? Even 10K would have been a lot but at least it is plausible and makes the maths easier.


(1) I have never had any capital but savings from earnings. No handouts.

(2) I did not buy a property until the early 1990s. Never been in debt.

(3) I have never held a high-paying job, but in 1977-84 my salary was boosted by freelance work. I was single without dependents, but that is a choice. Many do not start a family in their 20s.

(4) The FIRE school has demonstrated that those who live frugally and without debt can achieve financial independence, at a modest level, after 10-15 years' full-time work, as I did.

(5) My investments were boring, low-risk stuff such as long gilts, equity unit trusts and cash deposits, with no unforced selling and emphasis on income. Amateur picks with no overarching theory or objective. I woke up one day in 1984 and found I could meet basic living costs from investment income, despite the high inflation and taxation of the previous decade.

My experience, of dogged recycling, was a crude approximation of the IT experiment, though most of the growth in my net worth arose from saving a large part of earnings.

(6) Results of reinvesting in ITs are pretty scalable. Purchase commission and stamp on the annual ploughback are the only expenses. A starting capital of £10,000 would produce <=£1m and an income of ~£50,000 pa on transfer to a portfolio yielding 5%.

People are unwilling to defer gratification despite leading longer and healthier lives than ever before. They might be surprised at the results of deferring indulgences for a few years. It is another aspect of compounding's miracle.

However, if you think FI is down to 'luck and fortune', you will probably need both to prosper.

Luniversal
Posts: 48
Joined: November 4th, 2016, 11:01 am
Been thanked: 240 times

Re: Scottish Mortgage and the Eighth Wonder

#222452

Postby Luniversal » May 17th, 2019, 12:24 pm

bluedonkey wrote:Luni,

What's your view of the outlook for ADIG?

BD


Its latest shape reminds me of the definition of a camel: a horse designed by a committee. I see no more compelling reason for it today than at any time in living memory.

It was discarded by me in 2010 when the Basket of Ten became the Basket of Eight (as was Shires Income, another doggy) and has not blossomed since. The last time net assets per share grew by more than 5% faster than the All-Share Index was in 1999-2000; the dividend CAGR over the decade to Sep. 2018 was minus 3.9% after inflation, for which a forecast yield of c. 4.5% hardly makes up.

Perhaps Aberdeen's cover-all-bases brief will fix ADIG's tendency to capital burn and revitalise it, but that house is not doing too well at present.

Lootman
Lemon Half
Posts: 5373
Joined: November 4th, 2016, 3:58 pm
Has thanked: 28 times
Been thanked: 872 times

Re: Scottish Mortgage and the Eighth Wonder

#222453

Postby Lootman » May 17th, 2019, 12:26 pm

Luniversal wrote: if you think FI is down to 'luck and fortune', you will probably need both to prosper.

Everyone rides their luck to some extent. 1983 was a lucky starting date for you as it heralded a 35 year bull market. It easily might not have done. Or without the Falklands, Foot might have beaten Maggie. Either way your strategy might have failed. But I take your point.

I think you may be a little older than me but I probably could have retired by the age of 40 except that I married and had children. I rather gather that you did not and that certainly would enable an earlier retirement. As do things like living at home with one's parents as an adult. So yes, FI in your thirties is possible, although not everyone wants to make such sacrifices and live so frugally.

Even so, at least in terms of London house prices your starting net worth for 1983 has a present-day equivalent of about 4 million as previous noted. I think you should at least acknowledge that 111K was a vast sum by the standards of most 30 year olds back then. Interestingly it also shows that a London house might have done better than Scottish Mortgage, given that it would also have housed you AND would have been CGT-free to sell.

Ho hum :)

Hariseldon58
Lemon Slice
Posts: 333
Joined: November 4th, 2016, 9:42 pm
Has thanked: 16 times
Been thanked: 140 times

Re: Scottish Mortgage and the Eighth Wonder

#222567

Postby Hariseldon58 » May 17th, 2019, 8:38 pm

With respect to the starting value of £37,000 in 1983.

I doubt that is equivalent to £4,000,000 in todays money in general terms, BofE inflation calculator suggests nearer £125k

I was interested in Lootman's housing experience, impressive growth.

I bought a house (jointly with a colleague) in Slough in late 1983 for £32,000, a modest 3 bedroom end of terrace house. (Emphasis on the modest ! about 800 sq feet)

We sold in mid 1984 for £39,000 and Zoopla suggests a value today of £350,000. Should have bought in London !

Peter1B1
Posts: 22
Joined: November 17th, 2016, 5:12 pm
Has thanked: 14 times
Been thanked: 4 times

Re: Scottish Mortgage and the Eighth Wonder

#222575

Postby Peter1B1 » May 17th, 2019, 9:38 pm

What a difference 13.5% CAGR makes compared to 8.1%, yet even the laggard returned so much more than cash on deposit.

Irrespective of one's starting point or the cards dealt through life, the principles behind L'Uni's investment approach will I hope continue to hold true over the long term.

Patience, allowing time to do its work, learning the job, selective diversification, gardening the pf (getting rid of weeds, planting new shrubs, pruning, propagating winners), all contribute to the growth path. I don't apply L'Uni's approach to everyday funds but for the specific purpose of long term capital growth and wealth creation (starting from a zero base), it works for me.

Thank you L'Uni, good to see you back. Peter1B1

Dod101
Lemon Quarter
Posts: 2880
Joined: October 10th, 2017, 11:33 am
Has thanked: 524 times
Been thanked: 1024 times

Re: Scottish Mortgage and the Eighth Wonder

#222579

Postby Dod101 » May 17th, 2019, 10:16 pm

Well, apart from hard cash, I am living where I am because I bought the most expensive house I could find in my village (on a mortgage) in 1987 and sold in 2006 for about 7 times what I paid for it. Is that luck or just RPI? The mortgage was long paid off.

Universal's personal circumstances are a side issue. He is illustrating the benefits of long term investment in the likes of Scottish Mortgage which has of course been one of the recent wonders of the investment world. I hold it and it has now become my second biggest investment (after Unilever) and one which (like Unilever) I should trim. I do find that very difficult though in the belief that one should let winners run.

Unlike Lootman, I have not the slightest concern about Luni's personal situation. Good luck to him I'd say.

Dod

Itsallaguess
Lemon Quarter
Posts: 3378
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1067 times
Been thanked: 2049 times

Re: Scottish Mortgage and the Eighth Wonder

#222606

Postby Itsallaguess » May 18th, 2019, 5:42 am

Peter1B1 wrote:
What a difference 13.5% CAGR makes compared to 8.1%, yet even the laggard returned so much more than cash on deposit.

Irrespective of one's starting point or the cards dealt through life, the principles behind Luni's investment approach will I hope continue to hold true over the long term


In case it wasn't 100% clear from Luni's opening post - this particular Scottish Mortgage thread is a rear-view mirror, hindsight 'review', taken from a current vantage point of 'knowing' that it's already historically been one of the best performing trusts....

Still an interesting exercise, and as Dod has already pointed out, some investors will of course hold the trust from many years ago, but do be aware that Luni carries out some of his reviews using 100% hindsight, and others from a proper 'starting position, and then measuring forward from that point' with an 'opening portfolio', and it's very important to remember which type we're reading sometimes...

Cheers,

Itsallaguess

Lootman
Lemon Half
Posts: 5373
Joined: November 4th, 2016, 3:58 pm
Has thanked: 28 times
Been thanked: 872 times

Re: Scottish Mortgage and the Eighth Wonder

#222613

Postby Lootman » May 18th, 2019, 7:01 am

Hariseldon58 wrote:I was interested in Lootman's housing experience, impressive growth . . Should have bought in London !

To be fair I do not still own that London house that cost 44K in 1983. However its current value is quoted at around 1.25 million.

To really compare that to a share or fund investment one should probably factor in the rent you could have received from it (i.e. the dividends). Or else applied a value to having a place to live. There is also the fact that a house is usually a geared investment, via a mortgage, whereas most people would not borrow to buy a fund.

But as others have pointed out, all this is with the benefit of hindsight.

Itsallaguess wrote:In case it wasn't 100% clear from Luni's opening post - this particular Scottish Mortgage thread is a rear-view mirror, hindsight 'review', taken from a current vantage point of 'knowing' that it's already historically been one of the best performing trusts....

Still an interesting exercise, and as Dod has already pointed out, some investors will of course hold the trust from many years ago, but do be aware that Luni carries out some of his reviews using 100% hindsight, and others from a proper 'starting position, and then measuring forward from that point' with an 'opening portfolio', and it's very important to remember which type we're reading sometimes...

Yes, Luni has always put a lot of store in these retrospective studies, with all the resultant survivorship bias implied. Some ITs that would have been considered comparable to SMT at the time, like Globe, Industrial and General, and Scottish Eastern, no longer exist.

I've owned Scottish Mortgage a couple of times during that period, including for the last decade or so, but would never dream of suggesting either that I predicted its outperformance nor that I would have given it the huge weighting that Luni is implying. I think he is on sounder ground with his baskets of ITs as that is closer to what most people would do, except we'd probably just call it a portfolio of ITs :D

DavidM13
Lemon Pip
Posts: 81
Joined: October 12th, 2018, 5:01 pm
Has thanked: 9 times
Been thanked: 83 times

Re: Scottish Mortgage and the Eighth Wonder

#222773

Postby DavidM13 » May 18th, 2019, 3:27 pm

Thanks for the analysis. A truly phenomenal return. I thought there must have been some sort of error with the 5:1 stock split as to return 100 fold is pretty amazing but you have already clarified it was an adjusted starting value so it is true and Morningstar data confirms same!

I was 5 in 1983 so didn't even have 37p but nontheless it was an interesting read.

Dod101
Lemon Quarter
Posts: 2880
Joined: October 10th, 2017, 11:33 am
Has thanked: 524 times
Been thanked: 1024 times

Re: Scottish Mortgage and the Eighth Wonder

#222805

Postby Dod101 » May 18th, 2019, 5:21 pm

DavidM13 wrote:Thanks for the analysis. A truly phenomenal return. I thought there must have been some sort of error with the 5:1 stock split as to return 100 fold is pretty amazing but you have already clarified it was an adjusted starting value so it is true and Morningstar data confirms same


I think it was a 4 for 1 share split, but I cannot find the record to confirm that.

Dod

monabri
Lemon Quarter
Posts: 2556
Joined: January 7th, 2017, 9:56 am
Has thanked: 256 times
Been thanked: 607 times

Re: Scottish Mortgage and the Eighth Wonder

#222807

Postby monabri » May 18th, 2019, 5:34 pm

5 for 1 June 2014.

https://www.dividenddata.co.uk/dividend ... y?epic=SMT

The page shows the adjusted dividend ( all rebased) - there is also an option to view the unadjusted dividends if one is interested.

Dod101
Lemon Quarter
Posts: 2880
Joined: October 10th, 2017, 11:33 am
Has thanked: 524 times
Been thanked: 1024 times

Re: Scottish Mortgage and the Eighth Wonder

#222835

Postby Dod101 » May 18th, 2019, 7:42 pm

Thanks monabri. Very interesting link you posted as well. I am interested to see under dividend yields that they calculate the dividend as I do, the current share price against the dividends received in the last 12 months. That seems to me to be the only meaningful way to do it.

Dod

monabri
Lemon Quarter
Posts: 2556
Joined: January 7th, 2017, 9:56 am
Has thanked: 256 times
Been thanked: 607 times

Re: Scottish Mortgage and the Eighth Wonder

#223088

Postby monabri » May 20th, 2019, 9:30 am

Luniversal wrote:For after 35 years, Scottish Mortgage would have expanded from an initial 375,561 shares bought at 9.64p equivalent in Apr. 1983 to 712,780 shares worth 512p apiece at Mar. 31, 2019: total value £3,649,431, almost a 100x increase.


And an annual dividend of £22k to boot (based on 712780 shares at 3.13p annual dividend).

(I'm not sure why the number of shares has only increased from 375,561 to 712,780 bearing in mind the 5 for 1 split in year 2014 ?).

Lootman
Lemon Half
Posts: 5373
Joined: November 4th, 2016, 3:58 pm
Has thanked: 28 times
Been thanked: 872 times

Re: Scottish Mortgage and the Eighth Wonder

#223093

Postby Lootman » May 20th, 2019, 9:44 am

monabri wrote:
Luniversal wrote:For after 35 years, Scottish Mortgage would have expanded from an initial 375,561 shares bought at 9.64p equivalent in Apr. 1983 to 712,780 shares worth 512p apiece at Mar. 31, 2019: total value £3,649,431, almost a 100x increase.

And an annual dividend of £22k to boot (based on 712780 shares at 3.13p annual dividend).

(I'm not sure why the number of shares has only increased from 375,561 to 712,780 bearing in mind the 5 for 1 split in year 2014 ?).

Luni was reinvesting those dividends and so taking them into account. That is the point of that "eighth wonder" part. So you can't double count them. He said:

"Would reinvesting dividends from these supposed stalwarts produce in time a worthwhile pot for retiral? Think of it as a simple, lowish-risk, method of tapping what has been called the eighth wonder of the world, compounding: the snowball effect which (one hopes) results in accelerating gains as the finish line nears."

No idea if his maths is correct, of course, and the discrepancy with the number of shares is a concern. But yes, if you start off in the year of the beginning of a massive bull market AND with an improbably large lump sum AND then just happen to choose the best-performing IT of the next 35 years, then you will have done quite well. :D


Return to “Investment Trusts and Unit Trusts”

Who is online

Users browsing this forum: No registered users and 4 guests