GOLD MEDAL

Scottish Mortgage (SMT) £11.34

Market Cap: £13.83 billion

Discount to NAV: 10.7%

The UK’s biggest investment trust, Baillie Gifford-managed Scottish Mortgage, is the clear winner over 20 years, generating a total share price return of 1,978%, equivalent to an annualised return of 16.4% a year.

The bulk of the gains (76%) have come from capital gains, with just 24% coming from reinvested dividends, whereas the average split across the illustrious group of dividend heroes is 60% from income and 40% from capital.

This split isn’t too surprising given SMT’s investment philosophy, which is to own ‘the world’s most exceptional growth companies’.

These types of companies tend to be leaders in their fields and at the cutting edge of new industries, meaning they prioritise investing in growth over paying out dividends.

Fund managers Tom Slater and Lawrence Burns believe share prices follow business fundamentals over the long-term, while short-term price movements are overwhelmingly driven by other factors.

During 2022, rising interest rates impacted growth companies disproportionately, leading to underperformance of the trust, but the managers believe part of their edge is the ability to look through such ‘noise’ and focus on long-term business performance.

Arguably, the trust’s long-term success reflects the managers’ good judgement in backing the best growth companies which is then reflected in higher share prices.

Looking outside the publicly-quoted holdings, around a quarter of the fund is invested in private companies.

Scottish Mortgage owns stakes in half the world’s top 10 unicorns (private companies valued at more than $1 billion), including SpaceX, the fund’s largest position, Chinese social media group and Tik-Tok owner ByteDance, online payment processing group Stripe and video games maker Epic Games.

Some of the private companies the trust originally invested in have become publicly traded and still remain in the fund, such as music streaming firm Spotify (SPOT:NYSE) and Chinese shopping platform Meituan (3690:HKG).

The top 30 positions in the fund represent 79% of the portfolio and three have been held for more than a decade, including Amazon (AMZN:NASDAQ), Tesla (TLSA:NASDAQ) and Dutch semiconductor equipment maker ASML (ASML:AMS).

Over the last decade, the trust’s top five performing holdings have contributed nearly 60% of the fund’s total returns, with Amazon contributing the most in terms of absolute percentage points, while AI darling Nvidia (NVDA:NASDAQ) is the fund’s best performing holding, rising an incredible 10,188% over that timeframe.

Looking forward, it seems a fair bet the proven investment skills of Slater and Burns should continue to deliver strong investment returns, although, as they themselves acknowledge, returns are often accompanied by high volatility. [MG]https://datawrapper.dwcdn.net/vEGri/1/

SILVER MEDAL

F&C Investment Trust (FCIT) £11.91

Market cap: £5.74 billion

Discount to NAV: 6%

Launched back in 1868, F&C (FCIT) has the distinction of being the world’s oldest collective investment trust.

Although it is a Dividend Hero, with more than 50 years of consecutive increases, it has always focused more on growth investing than income.

In the late 19th century, it owned government bonds in countries which today we might think of as emerging markets like Brazil, Egypt and Turkey, as well as US railroad company bonds just as investment in the railways boomed.

In the 1920s, the trust diversified into stocks, and since the early 2000s it has invested in private equity, both as a way of diversifying risk and creating potential for large capital gains.

Until 2013, much of the trust’s equity holdings were in UK-listed companies, but since then it has renewed its original focus of investing overseas and today less than 10% of its assets are in UK-listed stocks.

A look at the top holdings shows the focus on growth and foreign markets, with the six of the ‘Magnificent Seven’ in the top six positions by weight.

Speaking to the AIC (Association of Investment Companies) in December on the outlook for markets in 2025, manager Paul Niven said he was ‘relatively constructive on equities,’ in particular US tech stocks, where he argued earnings growth outweighed any valuation concerns.

‘Valuations are high, though this tends to be concentrated in the US and in the obvious names such as the Magnificent Seven. Although the premium levels of growth which are expected from this area look set to diminish, their earnings delivery should still comfortably outstrip that of the wider market. While numerous other areas and markets are trading at lower levels of valuation, growth prospects in these areas typically still appear far more fragile or anaemic.’

However, it would be wrong to assume US tech stocks have driven the trust’s performance – if we rewind to 2014, the 10-year total return was 173%, yet there was just one tech stock in the top 10 holdings, Alphabet (GOOG:NASDAQ), or Google as it was called back then, while the rest were mainly US and European health care companies plus BP (BP.A) and HSBC (HSBA).

There are a number of stocks in the portfolio today which were in the portfolio 20 years ago, including Shell (SHEL), which was one of the trust’s first ever equity purchases in 1925, and has returned around 300% over the past 20 years.

Other names which the trust owned 20 years ago, and which are still in the portfolio today, include AstraZeneca (AZN) (total return 1,110%), Elevance Health (ELV:NYSE) (1,080%), RELX (REL) (1,200%), SAP (SAP:ETR) (1,370%) and TSMC (2330:TPE) (7,000%).

BRONZE MEDAL

BlackRock Smaller Companies (BRSC) £13.07

Market Cap: £585 million

Discount to NAV: 13%

Less well-known than the other podium-placed names in our list of dividend heroes measured by 20-year total return, BlackRock Smaller Companies has found the going a little more tough in recent times.

This, and the trust’s near 13% discount to net asset value, is a reflection of the relatively weak sentiment towards the small-cap space.

Nonetheless, it’s not a huge surprise to see a smaller companies trust score well over the long term given small-caps have more scope to grow than their larger listed counterparts.

Run by Roland Arnold for nearly seven of the past 20 years, the trust is almost exclusively UK-focused and as its strong total return record would imply it has consistently beaten the benchmark.

These are ‘smaller’ rather than small companies – the top 10 holdings have an average market cap of roughly £950 million.

Some names have been in the portfolio for some time: flexible office space provider Workspace (WKP), for example, was a holding 10 years ago.

Other names in the top 10 are publishing outfit Bloomsbury (BMY), engineering and infrastructure firm Hill & Smith (HILS) and mobile payments company Boku (BOKU:AIM).

House broker Shore Capital outlines the trust’s investment process: ‘Through bottom-up stock selection, the manager seeks quality companies with the potential to grow significantly. Typical attributes include competent management teams, attractive growth prospects irrespective of market conditions, good cash generation and strong balance sheets.

To identify these opportunities, the BlackRock team spends a considerable amount of time with company management teams, often attending  over 700 company meetings a year.

As Shore notes, the focus is on capital appreciation but it is the bias towards cash-generative companies which has supported the trust’s ability to keep raising the dividend for 21 years and counting.

The financial discipline required to pay a regular dividend can be a good marker of quality in a universe where corporate failures are more commonplace.

In his most recent commentary on the trust’s performance, manager Arnold notes the valuation of UK small- and mid-cap companies is ‘attractive on an historic basis’.

‘As we move through this near-term noise, the opportunity presented by UK small- and mid-caps will present itself, and maybe we will finally see investors looking to allocate back to what has historically been a profitable asset class,’ adds Arnold.

The ongoing charge is 0.8%, which is fairly competitive compared with other trusts in the Association of Investment Companies UK Smaller Companies sector.