Amazon’s transformation, like Tesla’s, is a clue as to why Scottish Mortgage itself has worked so well. Shares have gone from 246p to 907p over the past five years.
Here’s a depressing fact about the fund’s makeup though: Exposure to UK companies is only 1.7%, which largely includes just one unlisted company – Transferwise, a money transfer service. In other words, a well-resourced UK fund manager scouring the world for potential world champions cannot find many candidates in their own backyard.
Dominance of US and Chinese companies might be to be expected given that it’s easier to add scale to a new business in one of the world’s two largest economies. But Scottish Mortgage co-manager James Anderson has always cited another factor: a British company and city culture “greedy in the short term, dumb in the long term” that sells out early and does not seek to multiply the market. growth through investment.
He’s right, and it’s worth remembering that investors are wondering, for the first time in months, whether the surge in tech valuations has gotten too hot. Whatever the weather, the UK’s short- and long-term recovery prospects would be significantly improved if we had local tech giants. Amazon adding 10,000 UK jobs is not the same thing.
Not a good time for automotive and aerospace? Time will tell us
Was Melrose’s hostile takeover of GKN of £ 8bn in 2018 the least timely major UK deal in recent years? Well, the luckiest part of the timing maybe. Two years before a global pandemic, it was a bad time to bet big on auto and aerospace companies. Melrose’s share price has fallen by about half since March.
But, amid the £ 685million pre-tax loss announced Thursday for the first half of 2020, it was possible for shareholders to dream that the GKN adventure could still unfold happily.
The evidence was obviously not the overall profit figure, which was destroyed by asset write-downs and restructuring costs. Nor was it the 27% drop in revenue to £ 4.1 billion, reflecting lower demand from Airbus and Boeing as well as temporary shutdowns of auto parts manufacturing plants.
Rather, Melrose was successful in its effort to prioritize cash over profit during the emergency. It paid off £ 93million of debt during the period, which is impressive. Better, the general manager, Simon Peckham, who inspects operations for signs of permanent damage, does not see much to fear.
The long-term target for aerospace profit margins has been reduced from 12% to 10%, but automobiles remain at the original 10%. “Above all, we have good companies with significant improvement opportunities,” he concluded.
One of those opportunities is greater cost reduction, which is less welcome news for employees (an unspecified number of jobs are at risk), but Peckham clearly isn’t overestimating the optimism. He’s darker than most when he sees no recovery in the aerospace industry in 2021.
The underlying trust has yet to be turned into reality. More travel restrictions would cool the mood. But, in theory, some consolidations should in any case emerge. If the civil aerospace industry stops launching new models, everyone should save on development costs.
Stocks recovered some of their losses from the pandemic, increasing 12.5%. Melrose’s mantra is “buy, improve, sell” and the second part of the exercise will clearly take longer than expected. But hope is alive.