Which is the better investment to hold, one that returned 17 per cent last year or one that returned 110 per cent?
That’s a no brainer, isn’t it? Of course, you’d take the one that more than doubled your money.
It’s not a theoretical question though; it’s one based on the 2020 tale of two popular real life investment trusts – Ruffer and Scottish Mortgage.
The tortoise and the hare: There is a big difference between Ruffer's all-weather investing and Scottish Mortgage's growth portfolio but both investment trusts have strong conviction
Over the past week, Ruffer’s year-end report landed in my inbox from manager Duncan MacInnes, and I had the good fortune to interview Tom Slater, joint manager, of Scottish Mortgage.
There’s a contrast between how these two trusts are perceived – the former is seen as a trust that aims not to lose money and then make returns, while the latter is characterised as a buccaneering cutting-edge global growth investment – but dig deeper and there is a clear similarity: conviction.
Both also provide some important things to think about as we weigh up a year ahead where the consensus is that stock markets should go swimmingly, but the potential for derailment looms large.
And in the interests of full disclosure, I should state that I hold both these trusts in my investment portfolio.
Scottish Mortgage’s 110.5 per cent share price return in 2020 was astonishing.
This is an £18billion global investment trust that dates back to 1909 and has annual charges of just 0.36 per cent - not some fly-by-night Aim rollercoaster share or beaten-down value stock that rebounded hard.
The trust reaped these big profits from being in the right place at the right time, as its growth company portfolio rode the remarkable bounce back from the coronavirus crash.
But Scottish Mortgage worked hard to get into that right place over many years before, carefully building a portfolio of what it sees as the world’s best growth companies.
It has big holdings in Tesla and Amazon and Chinese stars Tencent and Alibaba, but also perhaps not quite so recognisable names, such as biotech Illumina, Chinese electric car challenger Nio, chipmaker ASML, and luxury goods brand group Kering.
Below the top ten you’ll find names including Spotify, Netflix, Zoom, Wayfair, Ferrari, ByteDance and Stripe.
Scottish Mortgage's return over last year was an astonishing 110% as the tech-influenced companies that it holds across a variety of sectors saw their shares soar
It seems obvious now that an investment trust holding those companies and a long tail of other digital world-enhanced growth firms would have been a great investment for 2020.
Yet, it’s important to remember that this wasn’t guaranteed. When stock markets fell off a cliff in February and March last year, the expectation was that overvalued tech-influenced company shares were going to get their comeuppance.
So did Scottish Mortgage consider changing tack as the coronavirus crash hit? Will it switch things up in the expectation of a vaccine-led value rally this year? The answer to both those questions was ‘no’.
You can watch the interview in full here to see what Tom had to say, but many of his answers came back to the same thing he had said last time we spoke – in November 2019, before coronavirus turned the world upside down.
To paraphrase: Scottish Mortgage is a patient long-term investor looking to hold companies that can grow to a multiple of their current size over the next five to ten years and once it has invested with conviction it aims to stick with those companies and trust them to do the job.
When that growth investment outlook changes, then it seems Scottish Mortgage may sell out or sell down some shares, as it did by exiting holdings in Facebook and Google-parent Alphabet this year.
This is a very different reason for holding some of the portfolio’s red hot companies than that of the stereotypical momentum-chasing Fomo rally investor who might have many of those same shares in their online trading account.
And motivation is an important thing to consider if you plan to invest in blue-sky growth companies: are you there because you really belief in the five to ten-year case or because you fancy some of the share price gains those other people have bagged?
It’s also important to consider whether you have spread your risk and can stomach the falls along the way, because as the warnings say investments can go down as well as up.
Scottish Mortgage has a diversified portfolio, yet plummeted almost 30 per cent in less than a month from late February to late March.
If an investment in it was a big chunk of your wealth, would you have held your nerve as the bottom dropped out?
Which brings us back to Ruffer. It too takes some bold decisions on what it holds: this is a defensive investment trust that has positions in Ocado, cyclical value shares and bitcoin.
Neither of those three are investments for the faint-hearted, but the trust also seeks to protect against market storms with what it calls an all-weather portfolio.
Alongside its report, manager Duncan MacInnes said he was pleased with its 17 per cent return in 2020, ‘however, just as importantly, at the peak of the crisis in March we were not losing money’.
Ruffer's share price slipped 9 per cent from a February peak to a March low, before rapidly rebounding as protective investments kicked in. In fact, Ruffer’s portfolio rose 4.2 per cent in March and in the first three months of 2020 it was down just 0.7 per cent.
There would have been much less temptation to panic and rush for the exit here, so perhaps many might have been better off with the investment with the 17 per cent annual return.
Ruffer has an all-weather approach to investing and aims to avoid losing money and then make a return for its investors: It climbed 17% in 2020, rebounding after a dip as markets crashed
Look under the bonnet of Ruffer though and there are questions to be asked in the same way as there are with Scottish Mortgage’s highly-valued growth portfolio of listed and unlisted companies.
The firms Scottish Mortgage invests in are pioneering, yet most people could probably get their head round their opportunities and business models.
In contrast, some of Ruffer’s investments are highly complicated – and unlikely to pass the only invest in what you can understand test.
Hamish outlines in Ruffer’s 2020 report why the trust believes it’s not enough to simply hold a balanced portfolio of bonds and equities anymore.
In a world of ultra-low and negative yielding bonds, Ruffer’s all-weather outlook involves gold and index-linked bonds but also includes what it describes as a ‘a history of using unconventional protections in our portfolio’, these include credit and option protection and now bitcoin.
If you invest in Ruffer you have to have conviction in what it does and trust that it will deliver long-term on avoiding losing money and making a positive return – and really come into its own when the chips are down.
The same thing is true of Scottish Mortgage’s very different strategy; you’re backing the manager’s long-term aim of picking companies that can profit as they change the world.
The philosophy behind both investment trusts should mean that if you had money in either or both then you wouldn’t have bailed out as the Covid crash hit.
Nor would you do so if things don’t turn out as widely expected in the year ahead.
The point of backing a conviction-based trust or fund is that you also maintain your conviction when the going gets tough.
Ruffer on bitcoin and risks ahead
On buying bitcoin: 'One notable addition to the portfolio during November was bitcoin exposure.
'We gained our bitcoin exposure via the Ruffer Multi Strategies Fund and two proxy equities in Microstrategy and Galaxy Digital. At the period end the combined exposure of these was just over 3 per cent.
' In the short period since investing both stocks are up more than 100 per cent and bitcoin is up 90 per cent.
'Our rationale has been well publicised but briefly, we have a history of using unconventional protections in our portfolio. This is another example, a small allocation to an idiosyncratic asset class which we think brings something significantly different to the portfolio.
'Due to zero interest rates the investment world is desperate for new safe-havens and uncorrelated assets. We think we are relatively early to this, at the foothills of a long trend of institutional adoption and financialisation of bitcoin.
'Think of bitcoin’s bad reputation as a risk premium – as we move through the process of normalisation, regulation, and institutionalisation, the compression of this premium can have a dramatic effect on the price.
'If we are wrong, bitcoin will return to the shadows and we will lose money – this explains why we have kept the position size small but meaningful.'
Investment outlook (and risks ahead): 'As we enter 2021 there is near consensus in financial markets on four things –
1. Covid-19 will be conquered by the vaccine
2. Central banks will keep printing money without limit
3. Governments will keep spending without limit
4. Valuations no longer matter because the winners and losers have been settled
'But coming into 2020 there was near universal consensus that global growth would accelerate. The one thing that mattered in 2020, coronavirus, was on few people’s radar.
'Most did not see it coming and markets were complacent to the risk. As Daniel Kahneman put it: “the correct lesson to learn from surprises is that the world is surprising”.
'Given the unique blow to the economy and the co-ordinated shock-and-awe global response, it seems fair to conclude that the distribution of possible outcomes from here is wider than it has ever been. This makes a genuinely all-weather portfolio even more important.'